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State Economist Tom Stinson said Thursday predictions show Minnesota will be in recession through 2009. With him at a Capitol news conference is Finance Commissioner Tom Hanson. Photo by Scott Wente, St. Paul Capitol Bureau.

State faces historic $5.3 billion deficit

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St. Paul Capitol Bureau

ST. PAUL - Minnesota faces an historic $5.3 billion budget deficit.

The deficit for the two-year budget that begins July 1 will be $4.9 billion, with the remaining $426 million coming out of the budget in the next seven months, state officials announced this morning.

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Minnesota's two-year budget is $34 billion.

Most of the problem is from lower-than-expected revenue, State Finance Commissioner Tom Hanson said.

Two figures point out the problem: State revenues, such as taxes, are expected to drop 1.8 percent in the next two years compared to the current budget cycle. At the same time, spending is projected to rise 6.1 percent, with health care costs making up a big chuck of the increase, Hanson said.

While it is called a deficit, the state constitution requires lawmakers and the governor to balance the budget in next year's legislative session.

State Economist Tom Stinson offered little hope for improvement, saying predictions call for a 27-month recession.

"This recession could hold the record for the longest recession in the post-war period," Stinson said as state officials released the bad news this morning.

Hanson predicted that the next budget forecast, planned for late February or early March, will not be better, and maybe even worse.

For the current budget, that ends June 30, the new budget prediction shows income taxes falling $291 million and sales taxes down $145 million from earlier projections.

The news only gets worse for the two-year budget that begins July 1, which lawmakers are to write during the upcoming session.

Today's report shows income taxes will be down $1.7 billion more than earlier thought in the next two years, with sales taxes falling $826 million. Also, corporate income taxes are expected to drop $640 million.

"We are in uncharted territory," Stinson said.

"We don't know what the response of consumers will be," he said.

However, Stinson added, with more people near retirement than in any past recession, he would expect those in that situation to put more in retirement funds and spend less.

That and the general economy are affecting retailers, Stinson said. He said about 10,000 retail jobs will be lost in the next two years, along with 20,000 manufacturing jobs.

Stinson said the economy could be worse.

"This is not a good time, but because of the agriculture and mining sectors it is not as bad as in the 1980s," he said, noting that those two areas are among the best news for Minnesota.

When Gov. Tim Pawlenty took office in 2003, he faced a then-record nearly $4.6 billion deficit.

Pawlenty said he plans to meet with Democratic legislative leaders soon to see if they can work out a solution to the current budget problem. If not, he added, he will have to take action on his own.

The governor will outline his 2009-11 budget proposal in January. The Democrat-controlled Legislature, which returns to work Jan. 6, will offer its own budget plans, probably in March. Some lawmakers already are making budget-cutting proposals, including privatizing the Minneapolis-St. Paul International Airport.

A spending freeze in most state budget areas also has been floated. Pawlenty already has asked his agency chiefs to give him a spending plan lower than the current budget.

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