On December 2, the state’s November Forecast will be released, and Minnesota’s new state leaders will get two very important budget numbers from the state’s financial experts: one telling them if they face a budget deficit for the remaining seven months of this budget cycle, the FY 2010-11 biennium, and one telling them just how big the deficit is for the upcoming FY 2012-13 biennium.
As we have reported earlier, there is reason to worry. Global Insight, the state’s national economic consultant, has lowered its expectations for national economic growth. That suggests the new governor and legislature could face new and growing deficits.
The FY 2010-11 biennium: Will a new deficit open?
The current biennium ends June 30, 2011. Governor Pawlenty and the legislature balanced the FY 2010-11 budget last spring based on the economic projections they had at the time. With no reserves on hand and thin cash flow margins, small changes could create a new deficits.
There is some good news. Minnesota Management and Budget says revenues for FY 2011 so far are $101 million above forecast, a 2.2 percent increase. However, that number could reflect the timing of tax payments and refunds, not actual changes in yearly revenue.
On the bleaker side, Global Insight, the state’s economic forecasters, now estimates U.S. Gross Domestic Product (GDP) growth at 2.6 percent in 2010; that’s down from its February forecast of 3.0 percent growth. Likewise, it now estimates 2011 GDP growth of 2.2 percent, down from its earlier projection of 2.8 percent. Slower economic growth than previously projected is likely to lead to lower state revenues.
The November forecast will give state leaders updated numbers on both projected revenue and spending. If a new deficit opens for the current biennium, state leaders will have to work fairly quickly. They are constitutionally required to balance the budget, and will only have seven months left to close the gap. There are several possible scenarios. Governor Pawlenty could choose to unallot (unilaterally cut spending) in December, before he leaves office. The new governor could unallot, or he could wait for the legislature to reconvene in January to jointly work on a solution.
The FY 2012-13 biennium: The only question is the size of the deficit
The second critical budget number will tell the new Governor and legislature how big a deficit they face in the FY 2012-13 biennium, which starts July 1, 2011. At the end of the 2010 Legislative Session, that deficit was estimated at $5.8 billion – and that is before counting inflation. That oft-quoted $5.8 billion figure will change in the November forecast. Global Insight has also lowered expectations for economic growth in FY 2012-13, which suggests the deficit could go up.
Whatever numbers emerge, the fundamental policy challenges remain the same. People are worried about finding and keeping jobs and getting the economy rolling again. A cuts-only approach to the revenue shortfall won’t get us there, or to long-term prosperity. Future generations of Minnesotans will pay the price if we don’t continue to invest in the things that have created a strong middle class – from public education and community colleges to infrastructure that allows for productivity. In order to ensure shared prosperity, we need adequate revenue, raised fairly, to continue critical investments.