Debt panel's failure could benefit Minn., analysts say

The finger-pointing in the nation's capital continues over which political party is to blame over the failure of the deficit-reducing supercommittee.

When Republican and Democratic members of the committee failed to reach an agreement on at least $1.2 trillion in savings over a decade, they triggered automatic spending cuts next year.

But some budget analysts say that Minnesota may fare better than other states under the across-the-board spending cuts that could now take place next year compared to how the state would have been treated by a budget agreement.

State Economist Tom Stinson is watching what's happening in Washington, but so far he's not ready to alter his projections of slower growth for Minnesota's budget and economy.

"It adds a considerable amount of uncertainty to the future but it doesn't really change the budget picture directly," Stinson said.

A big reason why Minnesota's financial status is unlikely to change much is that the largest portion of the money that the state of Minnesota receives from the federal government goes to Medicaid, the health insurance program for the poor.

The program is exempt from the automatic budget cuts that are scheduled to take effect Jan. 1, 2013.

So are Social Security, Children's Health Insurance and a bunch of other social net programs.

Still, as Stinson said, uncertainty is the new watchword because no one really knows whether Congress will prevent the cuts from taking place, shift some of the reductions to other parts of the budget, or make even deeper cuts.

But even if automatic budget cuts take place and federal spending falls by a scheduled $110 billion next year, the state's economy may weather the storm better than places with lots of military facilities, said Art Rolnick, an economist at the University of Minnesota's Humphrey School of Public Affairs.

"Clearly if a major part of the cuts are coming in defense, our job market will be less vulnerable," he said.

The federal government also buys fewer goods and services from Minnesota than it does elsewhere, Stinson said. That would be good news, relatively speaking, for businesses in the state if the budget cuts kick in.

"If a major part of the cuts are coming in defense, our job market will be less vulnerable."

"We're one of the lower-ranked states in terms of the amount of money we get per capita in private contracts and procurement," Stinson said.

But not everyone would be spared. Communities across Minnesota would likely feel a budgetary pinch if scores of federal grant programs are reduced by the 8.8 percent budget sequester, said Scott Pattison, executive director of the National Association of State Budget Officers.

"While their dollars tend to be small, they tend to be things that a lot people care about," Pattison said. "They tend to be law enforcement or a drug rehabilitation program."

For example, in 2011 the state received $120 million for low-income heating assistance. Under the automatic cuts that sum could fall $10 million.

Rolnick said the across-the-board budget cutting process isn't really an ideal way to reduce spending.

"You want to do it program by program and cut your low-return programs and keep your high-return programs," he said. "Unfortunately, politically that may be the only way to get it done."

But all of these issues remain hypothetical since they may not happen for another year.

Instead, Stinson worries about the looming expiration of a temporary payroll tax cut and unemployment benefits for 100,000 Minnesotans.

"That's more of an immediate concern and it's a big enough concern that it could slow the economy fairly substantially if Congress doesn't agree to extend those," he said.

Those measures run out at the end of the year, and Congress now has just a month to decide whether they should be extended.

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