Budget deficit is actually bigger once the fancy accounting is added in.
For eight of the past 11 years, deficits riddled Minnesota's budget and lawmakers responded with spending cuts, fee hikes, drawn-down reserves and other Scotch-tape solutions that momentarily balanced the books.
A projected $1.1 billion shortfall is the official problem this year, but the figure swells to more than twice that once the IOUs and fancy accounting of the past are considered. The Legislature isn't required to repair the past fixes, and probably won't. But Democrats now in charge of the full state government say they want to craft a more durable solution this time — and avoid the temptation to paper over the problem.
The process begins Tuesday when Gov. Mark Dayton unveils his two-year budget proposal.
"There's a couple things that people need to accept: We are not going to pass a budget that relies on continued borrowing. We're not going to pass a budget that has accounting gimmicks in it," said Senate Majority Leader Tom Bakk of Cook. "We're going to have an honest conversation with Minnesotans about the challenges we face as a state."
Even though the deficit isn't as daunting as in the recent past, there is sure to be an intense debate over how much should come from new spending cuts or higher taxes. Minnesota Management and Budget Commissioner Jim Schowalter reminded lawmakers that 88 percent of the state's spending comes in four areas that many are reluctant to scale back: K-12 education, health and welfare programs, local government aid and higher education allowances.
"It has gotten better but we are still looking at a fairly significant challenge," he said.
How bad is it?
As with almost everything at the Capitol, that's debatable.
The $1.1 billion projected deficit accounts for the mismatch between expected revenue and spending obligations. If lawmakers adopted a carbon-copy budget to the one in place now, the state would be on the hook for about $36.9 billion in spending over the next two years. Yet it's only due to take in $35.8 in taxes.
But it's not that simple. Years ago, the Legislature ordered state finance officials to eliminate inflation from spending estimates but allowed them to keep figuring it in to revenue calculations. So even though it costs more to heat public buildings, buy supplies and do other functions, those natural price increases are not part of the equation. If they were, another $890 million would be added to the deficit figure. (Backers of the current accounting system say including inflation would create a government-on-auto-pilot mentality rather than demand regular scrutiny of programs.)
Some of the increased spending demands are tied to past budget repairs. Since 2009, the state has delayed payments to public schools, an accounting tool used to temporarily make the state deficit disappear but that sometimes forced school districts to borrow money to pay their bills. At its depth, the school payment shift meant schools received only 60 cents of every dollar on time and the rest came later. As economic conditions have improved, state law put schools first to get IOUs repaid. But the state still owes them $1.1 billion in deferred aid.
Other patches cause problems in the future, too. In 2011, lawmakers mortgaged Minnesota's annual tobacco lawsuit settlement payments to get an upfront $640 million to plug a budget gap that year. It will take until 2030 to pay off the tobacco bonds, tying up tens of millions of dollars each year that would have gone for other things.
Then there are the rainy day reserves. For years Minnesota has worked to restock reserves that lawmakers tapped into during leaner times. As of December, the main reserve fund stood at $644 million, a hair below what has been the statutory maximum of $653 million that hasn't budged since 2002.
State finance officials are openly nervous about the size of the account, saying it is an increasingly smaller fraction of the state's spending obligations. In a memo last week, Schowalter warned lawmakers that the reserve is "well below what rating agencies believe to be consistent with sound financial practice." Trouble is, lawmakers typically are hard-pressed to put money away for an emergency when they barely have enough to spread around for present-day needs.
Republicans chafe at the idea they left a mess for the Democrats, who assumed control of both chambers after November's election. Assistant Senate Minority Leader Dave Thompson of Lakeville said some Republicans were willing to cut spending further but resorted to the accounting shifts and other temporary fixes to assuage Dayton, who had pushed for higher taxes. Still, he said the state has mostly dug out from the $5 billion hole it was in back in 2011.
"The idea we are not in better shape now than we were at this point two years ago is laughable," Thompson said, adding that Democrats have an incentive to "make things look worse than they are so you look better when it is fixed."
Bakk, the Senate leader, said it would take up to four years to unwind the past budget decisions. Coincidentally, that's how long senators sworn in earlier this month will serve before their next election.
Dayton and the House face voters again in 2014, giving them less time to produce a budget turnaround to campaign on. House Tax Committee Chairwoman Ann Lenczewski is among those trying to contain expectations.
"I'm not of the belief we need to climb up to the heavens and are going to fix everything in one session. That's unrealistic. That's not what the electorate said," she said. "We don't have to do it all in a minute."