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UPDATE: New budget deficit set at $1.2 billion

Gov. Tim Pawlenty says the $1.2 billion deficit reported Wednesday in the current two-year state budget can be solved. He said he wants to work on it with lawmakers, but prefers to plug the gap with budget cuts. -- photo by Don Davis/Minnesota Capitol Bureau

ST. PAUL -- Minnesota's state budget will be $1.2 billion in deficit if lawmakers and Gov. Tim Pawlenty don't take action, state leaders learned today.

And the state faces a $5.4 billion deficit in 2012 and 2013.

The current budget deficit is 3.7 percent of the state budget.

State Finance Commissioner Tom Hanson blamed a weak economy and said the recovery will be long.

Pawlenty said he will work with legislators to fix the deficit, but he wants to plug the financial hole by cutting state programs.

"The projected deficit certainly is significant," he said, "but it is solvable."

The governor said all states other than North Dakota and Montana are facing similar problems.

"We will do everything we can to make sure Minnesota grows out of this crisis quickly," he added.

Pawlenty said he might reduce spending on local aid that cities and counties are expecting from the state later this month. He said he has not decided if he will trim the $400 million in spending, but he did that last year when the state also faced a deficit.

"Whether we do it al all is yet to be decided," he said.

If he cuts state payments to cities, Executive Jim Miller of the League of Minnesota Cities said that the consequences will be dire.

"We certainly have been called upon for more than our share," Miller said.

The governor was upset that school districts appear to be giving raises after he asked them to freeze salaries. He said he will investigate.

The biggest problem finance officials reported was a $1 billion drop in revenues, mostly due to lower individual income tax collections. Sales and corporate taxes were about what they expected earlier in the year.

Pawlenty this summer cut $2.7 billion out of the two-year budget that began on July 1, leaving the state to spend $32 billion. The new projections mean the budget will have to be trimmed further or taxes raised, or a combination of the two.

The estimates set up a new battle between the Democratic-Farmer-Labor Party-controlled Legislature and Republican Pawlenty when the next legislative session begins on Feb. 4. Pawlenty refuses to raise taxes, something most Democrats say should be part of the deficit solution. Going into today's budget report, both sides agreed that more program cuts may be needed to balance the budget, as the state constitution requires.

Pawlenty has said he expects the Legislature to take budget-balancing action next year, an indication that he will not make immediate unilateral cuts as he did during the summer.

While today's budget report is important, the one that will get even more attention will come about a month after the 2010 legislative session begins. That will be the report lawmakers and Pawlenty use when they work on budget changes.

Reaction began even before the deficit number was released.

A leader of one of the state's major labor unions, the Minnesota Association of Professional Employees, said there are ways to trim the state budget that have not been tackled.

"Last May, MAPE outlined millions of dollars in waste that included out-of-state travel, uncollected revenue and the Pawlenty administration's bloated management," union Executive Director Jim Monroe said. "The result of MAPE shining the light on certain administration practices was $10 million trimmed from out-of-state travel and the Department of Revenue stepping up collection efforts on money owed to our state. These are positive steps, but more action is needed to cut waste to preserve vital services for Minnesotans."

Monroe asked that Pawlenty "put your presidential aspirations on hold, focus on the job you were elected to perform, sit down with us and work together to resolve the state's ongoing economic crisis."

Former U.S. Sen. Mark Dayton, one of a crowd of Democratic governor candidates, said the deficit is proof the state is in crisis.

"Partly, it is caused by the national economic crisis, which President Obama inherited," Dayton said. "However, Minnesota's crisis is also the result of failed state policies."

Dayton calls for raising taxes on the richest 10 percent of the state's residents to help solve the problem.

State economist Tom Stinson said the economy could start to turn around next year,.

For one thing, Stinson said, the federal government will hire census workers. Also, he predicted that construction work will increase, especially with more homes being built.

But until spring, things do not look good, Stinson said.

Don Davis
Don Davis has been the Forum Communications Minnesota Capitol Bureau chief since 2001, covering state government and politics for two dozen newspapers in the state. Don also blogs at Capital Chatter on Areavoices.