January 3, 2005
St. Paul, Minn. — As deficits go, it could be much worse. Projected to reach $700 million, the current problem is only a fraction of the multi-billion dollar deficit of two years ago. But it's also the fourth straight projected shortfall. In each of the past three years, lawmakers or the governor or both patched the budget and appeared to right the financial ship, only to see it list again by the next forecast.
Former Finance Commissioner John Gunyou says there's a simple explanation for the recurring headache. "Minnesota should not be facing yet another budget deficit. This has nothing to do with the economy. It has everything to do with the irresponsible financial decisions that have been made over the last three years," according to Gunyou. Gunyou served under Republican Gov. Arne Carlson and he says the deficits have reappeared like clockwork because, rather than deal with the underlying cause, policymakers have repeatedly made payments from accounts that, once depleted, don't automatically replenish. So, for example, rather than make revenues match expenditures, lawmakers two years ago used the state's billion dollar tobacco endowment to cover the difference. That paid the bills but did nothing to resolve the mismatch between taxes and spending. Now that the endowment has run dry, the old problem has simply reemerged.
Jay Kiedrowski, who led the Finance Department under DFL Gov. Rudy Perpich, says there's only one way to solve the problem once and for all.
"No more smoke-and-mirror gimmicks," said Kiedrowski. "They have to simply either raise the revenue or cut the expenditures as necessary."
Current Finance Commissioner Peggy Ingison says there's some truth to the argument that today's deficit is, in part, yesterday's problem come home to roost. But she says the current deficit is also exacerbated by runaway health care costs that are straining resources independently of past decisions.
"Health and human services is growing 20 percent from one biennium to the next," said Ingison. "We don't have any revenues growing at that rate. And that's a large portion of our budget. And so that's an unsustainable kind of growth in a spending program."
Combined, the ballooning health care costs and the deferment of previous shortfalls have built into a $700 million deficit projected for the next two years. But that might be, literally, only half the problem.
"Anyone who says there's a $700 million deficit is lying," said Rep. Matt Entenza, DFL-St. Paul. Entenza leads the Democrats in the House and picked up enough seats in last year's elections to be within striking distance of taking the majority. Entenza notes that if inflation is included in the budget, state officials predict the shortfall will double to roughly $1.4 billion.
"There is not a $700 million deficit," Entenza said. "That's a paper figure that excludes the reality of inflation. And so when we figure out how we're going to deal with budget cuts, we have to have the whole picture."
And there's more. Gov. Tim Pawlenty and virtually all lawmakers say it's time to give K-12 schools at least a modest boost in funding, say, two percent a year. That will add roughly $350 million to state spending and, consequently, to the shortfall. More money for nursing homes, public safety, and a public works investment package would swell the deficit even more. As it inches towards $2 billion, the most pressing question is how to cover the gap.
Pawlenty has taken one option - raising taxes - off the table.
"For people who say 'what you need to do is generate more tax revenues,' please know that our tax revenues are growing," said Pawlenty. "Our overall tax revenues are scheduled to grow 8 percent. And if most Minnesotans knew that, I think they'd look at that and say, 'you know, that's pretty good growth, that's nice growth. It's faster than most people's paychecks are growing.'"
A chorus of interest groups has called for new taxes that could range from an income tax surcharge to new levies on cigarettes. Pawlenty, however, says those are non-starters. And the ideas haven't gotten much traction among Democrats in the Legislature, either. Entenza has refrained from calling for new tax revenue and Senate Majority Leader Dean Johnson, DFL-Willmar, says he thinks the budget should be managed within existing revenues.
"The general knock on Democrats is we're tax and spenders," Johnson said. "Not if I'm majority leader we're not. We're prudent. And we're going to make prudent investments."
There is one tax option that even the governor is considering - preserving extra taxes on rental cars and liquor that are set to expire in 2006. Pawlenty says maintaining an existing tax - even one scheduled to disappear - doesn't necessarily violate his no-new-tax pledge. Together, the rental car and liquor revenues would bring in just over $100 million for the biennium.
The opposite side of the equation, of course, is to cut spending. Pawlenty has targeted health care costs, arguing he'd like to slow the growth in that area from a projected 27 percent to 20 percent. That would save roughly $360 million and would likely fall on the backs of able-bodied adults without children.
Lawmakers and the governor will also continue to discount inflation as part of the deficit. Some argue that's simply a back-door, across-the-board spending cut, but it does drastically reduce the shortfall, if only on paper.
Even so, those options don't quite close the gap. And other significant savings will be difficult to find. Lawmakers and the governor say they'll protect two of the largest sectors of the budget -- education and care for the elderly or disabled. House Speaker Steve Sviggum, R-Kenyon, says that's where gambling comes into play.
"You're going to have to maybe find some additional resources, and it's not going to be tax dollars," Sviggum said. "So, I would tell you, from my standpoint, the resources that we should approach - and I think also from the governor's standpoint - would be the fairness of the gaming dollar."
Sviggum and Pawlenty both favor tapping into the state's casino industry, currently controlled by the state's eleven Native American tribes. The governor has even suggested the tribes should contribute $700 million over a biennium to help defray state costs. That by itself would bring the state flush -- but the tribes have uniformly resisted the idea. Other gambling proposals remain, but they'd produce much less revenue.
That doesn't mean, however, that there aren't a few more rabbits left in the fiscal hat. The state could tap a $250 million surplus in the Health Care Access Fund, which supports MinnesotaCare. It could also continue an education accounting shift enacted two years ago as part of a past deficit-reduction package, netting just over $100 million. But Gunyou argues those options are more of the same one-time tricks that can't be repeated and aren't, in the long run, sustainable.
"The same people running the state today have been running the state over the last three years," Gunyou said. "At some time, someone has to take the responsibility and say 'I'm going to fix this right.'"
Gunyou says that means correcting the fundamental gap between revenues and expenditures. And that, he says, means cutting spending, raising taxes, or some combination of the two. Anything short, he says, will only plant the seeds for yet another deficit when the next budget is debated.