Deficit fixes: bleak and bleaker

Legislative panel examines budget-cutting scenarios

No matter which way you slice it, Minnesota’s projected long-term budget deficit won’t get solved without substantial cuts, according to a new analysis that was presented to a House and Senate budget panel this week.

The Balanced Budget Subcommittee received financial projections from House and Senate fiscal staff that look at how much deficit reduction state lawmakers can get from permanent spending reductions.

Under one scenario, lawmakers would need to cut 15 percent of state spending to put the state’s budget into the black.

“Those are some very severe numbers,” said Senate Majority Leader Larry Pogemiller, DFL-Minneapolis.

The panel, which is chaired by Pogemiller and House Finance chair Lyndon Carlson, DFL-Crystal, is a subcommittee of the Legislative Commission on Planning and Fiscal Policy.

The projections used varying amounts of cuts to solve both the $1.2 billion general fund shortfall that was projected earlier this month in the November economic forecast and the $5.4 billion shortfall that is projected for the 2012-2013 biennium.

The most stark of the fiscal projections solves 100 percent of the shortfall with permanent spending cuts. In the 2011 fiscal year, that would entail cutting 7.6 percent of the budget to deal with the newly revealed $1.2 billion shortfall for 2010-2011, according to Senate fiscal analyst Matt Massman. Making permanent reductions to solve the current $1.2 billion shortfall in 2011 would balance the state’s books for the current two-year period.

And since those cuts would be permanent, they would solve roughly $2.4 billion of the problem that is currently projected for the following two-year budget period.

That would reduce the projected budget deficit for 2012-2013 to $3 billion from $5.4 billion. To erase the remaining shortfall through spending reductions alone, lawmakers would have to permanently cut an additional 8.9 percent.

“These are all very devastating numbers we are looking at,” said Sen. James Metzen, DFL-South St. Paul.

Massman noted that the projections neglect certain limitations the state faces due to federal law. For example, Massman said, federal maintenance of effort (MOE) rules in the 2009 stimulus bill limit cuts to higher education in the 2011 fiscal year to $46 million. If lawmakers were to close the deficit through uniform across-the-board spending cuts in 2011, they would need to cut $108 million from higher education.

The cuts are smaller in the scenarios that fix only a portion of the long-term shortfall through budget reductions. If lawmakers make fewer permanent cuts in the 2011 fiscal year, which begins July 1, they must make deeper cuts in the next biennium, according to the fiscal analysis.

If lawmakers only made 75 percent of the cuts permanent and 25 percent of the reductions on a one-time basis, the 2012-2013 deficit would increase from $3 billion to $3.6 billion.

The projections also examined two of Pawlenty’s policy items: this year’s unallotments and a constitutional amendment to hold down new spending.

What if Pawlenty’s unallotments were made permanent? The savings, according to what House fiscal analyst Bill Marx described as a “rough” estimate, would reduce the deficit by $507 million.

The constitutional amendment that Pawlenty proposed this fall would limit state general fund spending to the amount of revenue received in the previous biennium. If the amendment were adopted by voters, 7.6 percent would need to be cut in 2011 to deal with the $1.2 billion shortfall. Spending in 2012-2013, however, would need to be cut by 18.5 percent, or more than $8.6 billion, to satisfy the requirements of the proposed amendment.

Pogemiller noted that the numbers will change if lawmakers reduce tax expenditures, such as tax credits for business.

“It seems like we should be… looking at tax expenditures right now too. It looks like we’re going to have to do some stuff there,” Pogemiller said.