2008 session recap: Pawlenty, legislators make peace by creating budgetary crisis for next year

Now that we’ve watched Minnesota’s legislators emerge from their late-night rubber-stamping of closed-door policy negotiations with broad grins and hearty backslaps on a job well done, it’s important to remember that the last day of the session marks the first day of the campaign season. Everybody is pleased as punch. And they should be — so long as we all ignore the real-dollar deficit of more than $2 billion that will be staring lawmakers in the face when they return to the Capitol next year to enact the 2010-11 biennial budget.

First, the good news. Goaded by the spectacular tragedy of the bridge collapse, legislators passed a substantial transportation package (and delivered the first-ever override of a Tim Pawlenty veto) to address road and bridge construction and maintenance and mass transit. They also passed other permanent societal cornerstones — a new state park on the north shore, monies to ensure rapid and complete construction of a new biomedical complex at the U of M, a new veterans’ home, and a light rail line along the Central Corridor that will leverage more than $6 in federal money for every $1 spent by the state. Initial steps toward radical reform of our health care system were enacted even as measures were made to provide 12,000 more Minnesotans with health insurance. Considering that it was a “non-budget” year (the state’s biennial budgets are set in odd-year sessions at the Capitol), that’s an auspicious list of accomplishments.

But in financial terms, 2008 will also go down as the great forestalling session. It was reminiscent of  2002, when then-legislative leaders Tim Pawlenty and Roger Moe were both running for governor and, in a thoroughly bipartisan and self-serving manner, proceeded to ignore then-Governor Jesse Ventura’s proposal for both tax increases and budget cuts to solve the state’s deficit. When they returned in 2003, $4.3 billion worth of red ink was staring them in the face.

Nobody is running for governor this year, but political motives nonetheless abounded for both parties to postpone, and in some cases exacerbate, the state’s mounting budget woes. Just a few months from hosting the Republican National Convention, where he is currently a favorite for the number two spot on the party’s presidential ticket, Pawlenty didn’t want any more tax increases or veto overrides to besmirch his standing among the party faithful. Meanwhile, the DFL believes that a number of factors – public opinion trends regarding the war and the economy, high turnout in a presidential election year, and the disproportionate number of Republican retirements in the Legislature — may conspire to give Democrats a shot at a veto-proof majority in the House to go along with their veto-proof majority in the Senate.

For all these reasons, both sides acted to diminish the chance that the next biennial budget can be balanced …

Continued: Click “Read More”(as required under state law) without enormously painful cuts or dramatic tax increases. Some of the hard-line positions Pawlenty adopted during this session’s negotiations will hurt, not help, the general fund balance sheet. Specifically, the state park and veterans home he pushed to create will operate with general fund dollars, and the property tax caps and relief he gained closes off one of the safety valves used to relieve the pressure on general fund spending. At the same time, it will be harder to slash money for local government aid if local governments are limited in what they can levy.

A detailed look at the numbers presents a sobering picture. Even in this non-budget session, legislators spent nearly half of the $1 billion in its rainy day funds. Approximately $350 million of the half-billion that remains is in the “cash flow account” rather than the budget reserve. As the name implies, these funds are set aside to regulate fluctuations in the cash flow so the state’s checks don’t bounce. Unless the straits are really dire, it’s effectively untouchable for budget-mending purposes except as a last resort. As for the remaining $150 million or so, it is not even certain that sum will be enough to help the state through its 2008-09 budget cycle, let alone ease the pain of the huge deficits projected in 2010-11.

For months now, state economist Tom Stinson has been warning us of this possibility, albeit in the purposefully bland, understated manner economists usually adopt. In general terms, Stinson has agreed with the trends forecast by the state of Minnesota’s national economic consultant, Global Insight, in that the state and national economy will get a two-quarter boost from the federal stimulus package but will be challenged to sustain significant growth early in 2009.

But Stinson has consistently, and correctly, disagreed with Global Insight over their low-balling of oil prices. Back in February, Global Insight claimed that oil would average $87 a barrel in the first quarter of 2008 and $78 in the second quarter, and Stinson flatly told reporters he didn’t believe that would occur. (For the record, this is the third straight year that Global Insight has underestimated oil prices.) When I spoke to Stinson nearly three weeks ago, he said Global Insight had revised its projections for oil up to $102 a barrel for the second quarter, $95 in the third quarter, and $88 in the fourth quarter. When the Strib’s Lori Sturdevant interviewed him last week for a piece that appears in today’s paper [http://www.startribu...], Stinson said Global Insight had again upped the ante on oil, to “$112/barrel this quarter, falling to $100/barrel by 2009.”

Why is this significant? Because as Stinson has told me, Sturdevant, and anyone else who asks, every $10 a barrel increase in the cost of oil knocks .2 to .3 percent off the real growth of gross domestic product in the national (and, by extension, the state) economy. And the Global Insight projections contained in Stinson’s February forecast already foretold a slowing of GDP growth to just  .7 percent in the first quarter of 2009. Of course those numbers were based on Global Insight’s low-balling of oil prices. So if they were forecasting $80 a barrel oil for 2009 and it is instead $120 a barrel (it was $127 a barrel on Friday), and every $10 a barrel increase costs us .2 to .3 percent in growth, it is entirely possible that the economy in early 2009 will actually be contracting.

Stinson refuses to explicitly predict this will happen, but has continually warned of the danger. In today’s Strib, he says, “We’re in a particularly fragile time right now economically. In a lot of ways, we are in uncharted territory.”

The 2008-09 biennial budget cycle runs out at the end of June 2009. If the state is indeed mired in recession early in 2009, then, as Stinson says in the Strib, “If we don’t have a significant reserve left, we’ve got no flexibility at all. You can’t raise taxes fast enough. You can’t even do shifts, because you’re almost out of money to shift” due to the fact the state budget cycle is ending. If the $500 million in the budget reserve and cash flow accounts aren’t enough, the only alternative is nasty, short-term cuts just to keep government running.

And then you are looking at a multi-billion real-dollar deficit with no reserves on hand. According to the February forecast, the general fund is projected to face a $1.086 billion operating shortfall for the 2010-11 biennium. Factoring in inflation adds another $1.04 billion to the deficit, meaning that the state would be required to come up with an additional $2.126 billion just to maintain the same level of purchasing power for its general fund services.

So, enjoy this era of bipartisan goodwill while it lasts. Because budgetary pain and strife are on the horizon.