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"Big honkin'" deficit expected
State finance officials release the latest revenue forecast today, and the news won't be good. The forecast is expected to show a budget deficit of at least $3 billion. A relatively small portion of that comes from the last two-year budget cycle, but the main challenge is balancing the budget for the next biennium. Gov.-elect Tim Pawlenty says he won't raise taxes to balance the budget, and he may be eyeing the state's tobacco endowments as part of his budget solution.

St. Paul, Minn. — State finance officials have warned for months that the budget deficit could top $3 billion. They haven't told Republican Governor-elect Tim Pawlenty the exact number, but Pawlenty, who described the last budget problem as a "big honkin' deficit", has no doubt that the budget hole is large.

"It's still big and it's still honkin'," Pawlenty said.

Pawlenty says he doesn't underestimate the magnitude of the problem, but says he will use the deficit as an opportunity to streamline state government.

"I got elected on the understanding that the budget deficit was going to be big, and I got elected on the premise that we want leaders who are going to tackle that without raising taxes and are going to be about government reform and change, and that's what we're going to continue to be about," Pawlenty said.

Pawlenty must use this forecast to develop his two-year budget to submit to the Legislature. His finance commissioner, Dan McElroy, says the one thing that won't be included in that budget is a tax increase.

"My marching orders are to find a plan that will balance the budget without raising taxes, and if humanly possible, preserve the AAA rating," McElroy said.

Minnesota is one of only seven states with a AAA bond rating. The coveted top ranking affects the interest rate the state pays when it borrows money. Bond agencies recently downgraded the credit rating of several states, including Wisconsin. Wisconsin faces a $2.6 billion deficit, and has already sold the future proceeds from its tobacco settlement to get cash up-front, in what's called securitization.

McElroy says it's possible Pawlenty's budget would recommend either securitization, or using a portion of Minnesota's tobacco endowments. "The only thing that's not on the table is raising taxes. Everything else will be looked at seriously, including both of those options," he said.

Anti-smoking groups are already worried about the fate of the tobacco endowments. Interest from the roughly $1 billion endowments funds smoking prevention, medical education and research, and the University of Minnesota's Academic Health Center.

Doctor Blanton Bessinger, past president of the Minnesota Medical Association, joined other anti-smoking advocates at the Capitol to urge Pawlenty and legislators not to raid the tobacco endowments. He says the endowments help reduce future health care costs.

"I do believe, they've got the look of robbing Peter to pay Paul theory here," Bessinger said. "They've got to look at saving money is just as an effective way of relieving tax burdens."

Pawlenty says he's more likely to protect the endowment used for the Academic Health Center, which is worth around $200 million, than the one used for smoking prevention, valued at about $450 million.

Pawlenty has also said he won't cut funding for K-12 education, which makes up nearly 40 percent of the state budget. That means spending cuts will be spread across the rest of state government.

Former Republican governor Arne Carlson, who also came into office during a time of deficits in the early 90s, says he would never have signed the "no tax increase" pledge as Pawlenty did. He predicts the deficit will be in the $3.5 billion range. He blames the income and property tax cuts pushed by Governor Ventura and House Republicans. He says they ignored the early signals that Minnesota's economy was spiraling down.

"The truth is, we were in recession. And there was a failure on the part of the administration to acknowledge that," Carlson said. "And the result is, you'll find that Minnesota's numbers will stick out like a sore thumb when compared to other states on a per-capita basis."

Two-thirds of states are experiencing deficits, according to the National Conference of State Legislatures.

Former Senate Finance chairman Gene Merriam says the reason Minnesota's budget revenues are more volatile than many states' is its tax structure. He says the state is highly dependent on a progressive income tax, which suffers during a recession, and a sales tax that doesn't include food and clothing.

Merriam says he doesn't think the last forecast released in February predicted how much those categories would decline. "I don't think that they were forecasting the depth to which the stock market has fallen off," he said. "We've seen a recovery on Main Street, but actually the situation's worsened on Wall Street."

Stock market losses affect the amount of capital gains tax collected by the state. Merriam predicts the deficit could be as large as $4 billion. He says Pawlenty faces a significant challenge to cut about 10 percent of the state budget, particularly if items such as education are taken off the table.

Pawlenty has just over two months to craft his budget before the legislative deadline of February 18.

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