State budget outlook expected to go from bad to worse

In November, finance officials projected a $373 million budget deficit -- a number that many said was manageable. Since then, the mortgage crisis has worsened, oil prices have increased and the state economist said Minnesota is in a recession. And now a once manageable budget problem has some preparing for deep budget cuts.

Gov. Pawlenty said the deficit could be $1 billion. He said he expects to present a budget plan that cuts spending and even includes a few tax cuts.

"We are going to have to exercise fiscal restraint," he said. "We're not going to be raising taxes in Minnesota to solve this deficit. We're going to expect the Democrats to get involved in cutting spending and reigning in their tax and spend behaviors."

"We're not going to be raising taxes in Minnesota to solve this deficit."

Pawlenty's resolve to avoid a tax increase grew even stronger after DFLers successfully overrode his veto of the transportation bill.

DFL legislative leaders appear to be willing to take the tax option off of the table. Senate Majority Leader Larry Pogemiller, DFL-Minneapolis, said it was unlikely that his caucus will push for tax hikes because Pawlenty vetoed several budget bills that relied on tax increases during last year's legislative session.

"I think the governor has been pretty firm that he does not support a general tax increase," he said. "I take him at his word. He showed that in terms of the transportation bill and I just think it would be unlikely that people could think that we could override a general tax increase."

Pogemiller said they could find some money from closing a so-called tax loophole on corporations that operate overseas, but that won't raise enough to cover $373 million.

DFL House Speaker Margaret Kelliher said her caucus is also preparing for spending cuts. She said cuts could be "painful" if the projected deficit is much larger than $373 million. But Kelliher said her caucus will work to protect funding for K-12 schools and subsidized health insurance for children.

"Although it's not going to be an enjoyable process for people," she said. "We are very interested in making sure that we meet our responsibilities and do it in a way that also helps keep commitments to Minnesotans particularly young people and students around the state."

But the chair of the Senate Taxes Committee said it may be difficult to cut spending without looking at education and health care. Sen. Tom Bakk, DFL-Cook, said he wants to protect funding for schools and nursing homes, but those areas account for about half of the budget. Bakk said cuts to school funding, property tax relief, health care and college financial aid are all options. He expected many groups to fight to protect their budgets.

"As you start putting all of the pieces together, every area of the budget has some constituency, and depending on how bad the Thursday forecast is it will be pretty difficult," he said. "There will be some moderate pain today with the November numbers but it could be much more significant if our revenue goes south to the degree that some people think it may."

The already rocky relationship between DFL legislative leaders and Gov. Pawlenty could also get rockier just as the budget forecast is released. DFLers who control the Senate may take up Transportation Commissioner Carol Molnau's confirmation Thursday.

There are enough votes in the Senate to effectively fire her. Senate Minority Leader Dave Senjem, R-Rochester, said the timing is problematic, especially after the veto override earlier this week.

"This will taint the session in a negative sort of way if it's not off to a rocky start already," he said. "This will put boulders in the path of the legislative session as we proceed forward."

Senjem said he and other Senate Republicans will make the case that Molnau should not be fired but said it's no secret that the votes are there to refuse her confirmation.

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