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No more boatload of money
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Gov.-elect Tim Pawlenty says state government needs to learn to live within its means. (MPR Photo/Laura McCallum)
When the 2003 Legislature convenes Jan. 7, the main task facing lawmakers and Gov.-elect Tim Pawlenty is how to deal with a $4.5 billion budget deficit. The financial squeeze will affect almost every decision they make in the next few months. Yet just a couple of years ago, state officials were swimming in a sea of cash. What happened?

St. Paul, Minn. — Three years ago, then-Finance Commissioner Pam Wheelock told reporters the state had a "boatload of money", when she announced a $1.6 billion projected surplus.

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Image Former Finance Commissioner Pam Wheelock predicted a boatload of money

A year later, Wheelock said the projected surplus had ballooned to $3 billion. "Today I'm here to tell you that we're busting at the seams, and the challenge for the stewards of this ship is to make sure she continues to be seaworthy," Wheelock said then.

Even then, finance officials were sounding a note of caution.

"This forecast is risky," said state economist Tom Stinson. Stinson said at the time that the state's revenue forecast included very optimistic predictions of economic growth. He said any downturn in the economy would reduce the surplus. All it would take, Stinson said, is for the good times to not be as good. Less than a year later, terrorists flew planes into the World Trade Center and the Pentagon - and the nation's economy plummeted.

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Image State economist Tom Stinson says Minnesota's economy could get worse

"Who could have predicted Sept. 11?" Wheelock said. She said no one could have anticipated the dramatic downturn after the terrorist attacks. Wheelock says Minnesota relies heavily on income and sales taxes, the areas that are most affected by changes in the economy.

"So as the economy weakens, people lose their jobs, their hours get cut back, they don't get the bonuses that they expected, which is turning out to be a much more significant factor today than even, you know, five or six years ago, and their capital gains is diminished," Wheelock said.

State economist Stinson says Minnesotans' capital gains plunged from $9 billion in the year 2000 to $4 billion in 2001. While much of Minnesota's deficit stems from lower tax collections, part of the problem is higher spending by the state, particularly on education and human services. Half of the education increase is from the property tax reforms of last year, and much of the human service spending comes from rising demand for state-funded health care programs. Republican Gov.-elect Tim Pawlenty says the trends demonstrate Minnesota has a spending problem.

"This idea that spending's going to go up in the next biennium 14 percent, which is what's projected, 14 percent, when the money coming in the door is only going up six or seven percent, the math just doesn't work," Pawlenty said. "And somebody needs to get in there, and it's going to be me, and say, we need to learn to live within our means and that means resetting priorities."

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Image House Speaker Steve Sviggum, R-Kenyon, says he doesn't know how Pawlenty will do it

Pawlenty says the state's first priority is public safety, followed by public education. Another top priority for Pawlenty is Minnesota's job climate. Pawlenty says anything that's not on his priority list could be cut.

"If you're into things like, you know, advisory councils for this or that or feel-good programs, they're definitely going to be on the table," Pawlenty said. "And we're going to have to go through that program by program, no one of which is going to solve the deficit, but you know, you start adding a million here, and a million there, and pretty soon you got some real money."

Pawlenty says he stands by his campaign pledge to balance the budget without raising taxes. House Speaker Steve Sviggum, R-Kenyon, says his caucus stands behind Pawlenty. But even Sviggum, who didn't make the tax pledge, isn't sure how Pawlenty will do it. Sviggum says Pawlenty could tap into the state's tobacco endowments, currently valued at around $900 million. Pawlenty says he probably won't use all of the endowment money, because some of it is the state's cash-flow account. Pawlenty could also sell the future proceeds from the state's tobacco settlement to get cash up-front, in what's called securitization. Pawlenty says that could bring at least $1 billion. Sviggum says Pawlenty could make cuts in local government aid, which is about 10 percent of the state budget, and cut other smaller programs.

"State Planning Agency elimination, Highway Helper program, you know there's a number of programs you can nickel and dime it going at, and then you have the more significant numbers that include things like GAMC, General Assistance Medical Care," Sviggum said. "And even at that, I get to $2 billion. You know, I don't know how to get to the $4.5 billion."

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Image Senate Majority Leader John Hottinger, DFL-St. Peter, says Pawlenty's budget will harm important services

Sviggum says he thinks Pawlenty has to stick to his "no tax increase" pledge. Sviggum would support an increase in the gas tax, since the tax is dedicated to roads and bridges. But Pawlenty says his pledge extends to the gas tax as well.

DFL leaders say Pawlenty may avoid a state tax increase, but his budget will likely result in more taxes at the local level. Senate Majority Leader John Hottinger, DFL-St. Peter, says Democrats were skeptical of Pawlenty's pledge even during the campaign.

"I can't conceive how it can be done without doing an unacceptable level of harm to Minnesotans across the board," Hottinger said. "Closing state parks, dramatically increasing tuition at our universities, not getting any of the transportation work that's necessary to get done in order to relieve congestion, make our roads safe and build our economy don't seem to be outcomes Minnesotans want."

Hottinger says his caucus will wait and see what Pawlenty proposes, and then point out the consequences of Pawlenty's budget. Democrats acknowledge they don't have the votes to pass a tax increase or override a Pawlenty veto. House Minority Leader Matt Entenza, DFL-St. Paul, says his caucus' biggest concern is K-12 education. K-12 is the biggest single item in the state budget, at about 40 percent of state spending. Pawlenty says he'll try to hold K-12 education harmless, and protect classroom spending in particular. Entenza says all K-12 spending affects the classroom.

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Image House Minority Leader Matt Entenza, DFL-St. Paul, says his caucus worries about K-12 funding

"The overwhelming majority of the money goes in the classroom. And the money that doesn't is often going to special ed kids, kids with high needs or disabilities, or it's going to charter schools or it's paying for transportation to parochial schools," Entenza said. "And anyone who says well, I'll protect the classroom and hurt other areas isn't being straightforward with taxpayers. There is not a slush fund for administrators out there."

Entenza is also worried that the state's budget situation could get even worse, and lead to deeper cuts by the Pawlenty administration. The latest revenue forecast released earlier this month included a cautionary note. State economist Tom Stinson says the February forecast could show a larger deficit, depending on international events.

"Global Insight, our national consultant, does not have war with Iraq in the forecast, and they are very frank in saying war with Iraq will cause the forecast to be reduced," Stinson said.

The Pawlenty administration is already faced with cutting about 14 percent of the state budget, and that's without taking into account inflation, a factor included in previous budget forecasts. If an inflation factor had been included, the deficit grows to closer to 20 percent of the budget. Senate Minority Leader Dick Day, R-Owatonna, says every cut that's proposed has a constituency, and their voices will be loud in the upcoming session.

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Image Senate Minority Leader Dick Day, R-Owatonna, says the wagons will circle the Legislature

"It's going to be all the human services, you know, the roads are going to hell, you're not going to be able to get a fishing license or a driver's license, and you aren't going to get vaccinated and your schools aren't going to have books and the local city isn't going to be able to pay for the fire," Day said.

Day, who like Speaker Sviggum, did not sign the no-tax-increase pledge, says he's not sure if the 45 percent of the electorate that voted for Pawlenty will stand by him as he makes major changes in Minnesota state government.

"If they're still there at the end of the day, that will carry it," Day said. "If that crumbles, well, I don't know."

While no one's quite sure what the budget will look like when all is said and done, Sviggum may speak for a lot of lawmakers when says he doesn't expect to have any friends by the time the Legislature adjourns in May.

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