Pawlenty warns of state deficit

Talk about it

The worsening economy may cause Gov. Tim Pawlenty to start slicing state spending sooner rather than later.

“I anticipate a deficit in the current biennium,” Pawlenty told Minnesota reporters Tuesday afternoon in a telephone news conference from Philadelphia where the nation’s governors met with President-elect Barack Obama.

Most observers predict that Thursday’s state budget forecast will show a budget deficit in the state’s next two-year budget of $4 billion to $5 billion without factoring in inflation. But now they say that a deficit of $800 million to $1 billion may also hit the current year, which ends June 30.

“I’m just speculating, but it won’t be anywhere the magnitude the deficit that’s going to appear for the following biennium that begins next summer,” Pawlenty said.

He wants to get handle on that right away, and will ask legislative leaders for their ideas in a few weeks, or he could do it himself by year’s end by unalloting scheduled spending.

“It’s basically seven months,” he said of the time remaining to trim the current budget. “Before the economic collapse, our monthly projections were running ahead of the February forecast.”

But he fears that $300 million cushion has evaporated. “As the revenues are now collapsing, is that cushion going to be big enough to get through the rest of the biennium without opening up the current biennium deficit? In my opinion, the answer to that question is no, that the cushion that had been built up prior to the collapse will not now be sufficient.”

The deficit shouldn’t be “unmanageably large,” he said, “but it will be noteworthy.”

The state is now three-quarters through the current biennium, making timing of the essence, Pawlenty said. “Every day that goes by, every week that goes by, more money goes out the door and as that time compression sets in, either the Legislature or the governor through unallotment has fewer and fewer options.”

Pawlenty plans to consult “immediately” with legislative leaders after the Thursday budget forecast, hoping to seek a commitment from them to solve the deficit by early January. “If they are unwilling or unable to come to some agreement in that regard… we’ll move forward with the unallotment.”

As to the larger, looming deficit for the next biennium, Pawlenty wouldn’t comment on whether he’d allow tax hikes to be placed on the negotiating table. “But I think you know my views on tax increases,” he said.

Leery of aid

President-elect Obama told assembled governors in Philadelphia that he wants to sign an economic stimulus package as soon as he’s sworn into office, and wants to work with the governors.

More than 40 states have already announced budget deficits, and Obama wants to provide infrastructure aid to public works projects ready to go and may offer funding aid in other areas, such as human services.

But Pawlenty said he’s concerned with the run-up on the federal credit card and is leery of any strings that might be attached to that aid.

“We need to put a limit on the nation’s credit card, or better yet, tear it up,” Minnesota’s Republican governor said. “I’m concerned that the federal government is spending so much money so fast into such a deep deficit hole that this could really impair the nation’s fiscal responsibilities, not to mention the impact on our economy in the intermediate and in the long term in the form of inflation or devaluation of the dollar.”

Pawlenty said the federal government is broke. “All this money that people are asking for from the federal government or money that they send out is money they don’t have.”

Obama acknowledged that increasing the federal deficit “is a significant concern,” Pawlenty said, but that it is necessary in the short term to combat deflation, economic stagnation or worse. Obama said he was committed in the long term to cutting the deficit, “but he didn’t say in what way,”

Before the economic collapse, there was about a $10 trillion national debt, Pawlenty said. The effect of economic stimulus from the federal government is already at $7 trillion.

“In the past three months or so, the federal government has approached doubling that national deficit,” he said. “At $10 trillion, that would be $35,000 for every man, woman and child in the country of debt. If you add another $7 (trillion) or $8 trillion, that would be approximately another $25,000 of debt for every man, woman and child.”

Pawlenty also said that if strings come with economic stimulus, Minnesota might decline the aid.

As an example, he said the last time the state was in deep budget trouble, 2003, the federal government gave Minnesota $200 million or $300 million to help an under-funded Medicaid but restricted the funding to current eligibility rules. That didn’t allow Minnesota to provide structural reform to a $4 billion a year program.

“We don’t know what they’re offering us, it’s not on the table yet,” Pawlenty said. “But hypothetically, if they give us a couple hundred million dollars, that doesn’t come close to solving the problem. … We want to reserve judgment to see what they’re proposing.”

But one prerequisite will be aid without strings. “It is not a good deal for states who are going to have to slow down or peel back some of these programs in dramatic fashion, to have their hands tied by a offer of a small amount of money from the federal government. It will avoid or delay needed reforms. And the magnitude of the help may be so small that the strings that come attached to it, it may not be worth it.”

Pawlenty, who had a short meeting with Obama on energy policy, said he welcomed the meeting which he called historic.

“This is an unprecedented meeting,” Pawlenty said, as National Governors Association records show no other meeting between governors and an incoming president. “We are thankful and grateful for President-elect Obama’s invitation to meet with him, to discuss the nation’s economy and its impact on states.”

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