As the U.S. Congress continues with bailout after bailout and deficit spending bills reaching into the trillions of dollars, we should all be thankful that our State Constitution in Minnesota requires state lawmakers to balance our state budget every two years.  The State Constitution does allow long term debt, but only for the purpose of paying for capital projects, i.e. state buildings, the purchase of land or improvements to land and buildings.  So when state legislators convene for the 2009 Session, they will have a huge financial challenge waiting for them.

With a projected state budget shortfall of at $5.2 billion, getting to a balanced budget for the 2010-2011 biennium will be a very difficult task.  State lawmakers confronted a similarly large deficit a mere six years ago in 2003 during the last recession.  However, the circumstances this time around appear to be even more daunting.

Looking back to 2002, I remember all too well when the December state budget forecast sent shock waves through the State Capitol when it was announced that the State was facing a whopping $4 billion shortfall for the 2004-2005 budget.  By March, the shortfall grew to $4.5 billion.  This enormous budget problem, representing 15% of General Fund expenditures, ranked only second to California’s budget woes in terms of percentage shortfall amount.  For newly elected Governor Tim Pawlenty, who campaigned on a “no new taxes” platform, the shortfall meant a significant challenge.

So what has changed in the last six years and how will the budget balancing debate differ in 2009 than that of 2003?

First, majority control of the House has changed.  While Governor Pawlenty certainly has more experience under his belt now than he did in 2003, he was significantly aided by having a large Republican majority willing to follow his lead.  Pawlenty took on the challenge of balancing that first budget in 2003, and with the help of Speaker Sviggum and eighty-one GOP House members, a balanced budget was passed without a tax increase.  What has changed is that the Democrats have a veto proof majority in the Minnesota Senate and will be within three votes of being able to override a gubernatorial veto in the House.  This shift in political power will greatly alter the budget debate from the beginning of the 2009 Session.  Without trying to be overly partisan, Democrats don’t exactly relish the idea of cutting government spending.   

Second, the starting point for legislators in 2009 will be very different from that of 2003.  During the 2002 session, legislators worked to balance the budget for the next biennium knowing that there was likely to be a shortfall the following year.  In 2008, the Legislature did just the opposite.  They increased spending and failed to balance the budget for the next biennium.  This meant that when legislators adjourned last May they knew there would be at least a $950 million deficit waiting for them at the beginning of the 2010-11 biennium.  But it was an election year; why should they worry about next year’s problem?

Third, the cupboard is bare.  To help balance the budget in 2003, legislators used over $1 billion from the Tobacco Endowment Fund, along with delayed payments to school districts and surplus dollars in the Health Care Access Fund.  The use of these funds in combination with over $2 billion in spending reductions helped close the $4.5 billion budget shortfall.  In 2009, legislators won’t have any Tobacco Endowment Funds, and fewer ways to shift payments into future years.  With little left in the budget reserve, 2009’s balancing act will need to entail even greater spending reductions than those made in 2003, if legislators can even dream of not raising taxes.

Fourth and lastly what’s different in 2009 compared to 2003:  taxes have already been increased by over $1 billion per year.  Prior to 2003, there were major reductions to income and property taxes between 1999 and 2002.  Heading into the recession this time, the Legislature regretfully has taken a very different track.  During the 2008 Session legislators passed tax increases of over $800 million.  This combined with the passage of the Constitutional Amendment to raise the sales tax for arts and outdoor recreation means taxes are scheduled to increase by over $1 billion a year as we head into what some predict could be the worst recession in over 30 years…and none of this new money is being used for education or health care obligations.

The best advice for legislators as they take on this difficult balancing act in the 2009 session would be, first, carefully consider the budget proposal from Governor Pawlenty because he has been through this before.  Second, there isn’t an economist alive that believes government can tax its way to prosperity.