Weather Forecast


Funding for government lapses as short-term spending bill stalls in the Senate

State economic outlook somber in weakening economy

ST. PAUL -- The state is sitting on nearly $500 million in unexpected tax revenue, but will have to use that to offset a weakening economy and to soften a looming budget deficit that likely will top $1 billion.

The state's existing $34 billion budget is sound, with enough cash on hand to pay for programs and $449 million more in tax receipts collected than was predicted for the current budget cycle, Minnesota finance officials said Friday.

But the outlook is dimming, state Economist Tom Stinson said. A deficit for the next two-year budget period already is predicted, and Stinson said the state economy only is expected to grow slightly during the last half of 2008 and could decline during the early part of 2009.

"The change has been pretty dramatic," he said, of how economic growth predictions have been lowered or erased.

The Friday announcement was a quarterly economic update. A comprehensive report on the state economy and a budget forecast will be released in early December. That forecast will help guide Gov. Tim Pawlenty and lawmakers early next year as they begin working on a new two-year state budget.

Finance Commissioner Tom Hanson said the state predicts a nearly $1 billion deficit for the next budget period, from July 2009 to June 2011. The deficit doubles to just shy of $2 billion if inflation is included, he said.

That will make it difficult for lawmakers to start new programs, he said.

"We will be challenged to pay for the spending we're already doing," said Hanson. "Any new initiatives or new spending will probably have to be rethought, or find a way to pay for them."

Minnesota's economy is affected by the national economic problems. If federal efforts to stabilize the financial markets work, only a three-month economic downturn next year may be expected, Stinson said. However, he added that if the congressional and treasury efforts do not calm the markets, "we could have a very severe economic downturn."

There are signs of a slowdown even in Minnesota's health care industry, which has been the state's best-performing economic sector, Stinson said. In the agricultural sector, commodity prices still are good, but input costs, such as for fertilizer, have increased.

Slumping market conditions are influencing state finance decisions. The state had planned to sell more than $400 million in bonds to finance highway, construction and other projects this month. But a poor bond market led the state to wait until early next year to sell the bonds, Assistant Finance Commissioner Kathy Kardell said.

However, that will not delay any projects because the state can use existing funds until it sells more bonds, Kardell said.