CHICAGO – Minnesota projected a $188 million deficit in its two-year budget and a possible $586 million shortfall in the next biennium, citing an expected slowdown in economic growth, higher spending and tax relief, and a halt in federal funds for children’s health insurance.

The two-year budget approved by lawmakers last spring that included more than $800 million in additional spending and a $657 million Republican sponsored tax relief package “is what’s causing the deficit,” Minnesota Management and Budget Commissioner Myron Frans said Tuesday during a news conference to discuss the state’s annual November forecast.

In addition, the federal government has yet to renew more than $170 million in funding under the Children’s Health Insurance Program and the state and national economy are projected to continue growing but at a slower pace than previously expected.

The $188 million figure rises to $302 million if the department adds in the legislative appropriation vetoed by Gov. Mark Dayton earlier this year. Dayton- a member of the Democrat-Farmer-Labor Party – vetoed the appropriation in an attempt to pressure the GOP leaders to return to the bargaining table over the size of the tax cuts.

Dayton says the state can’t afford the cuts the long-term without threatening fiscal stability. Republicans believe they are affordable given the $1.6 surplus from prior economic forecasts. The GOP leaders challenged the veto but the Minnesota Supreme Court recently upheld Dayton’s power to take such action. Lawmakers are expected to approve an appropriation when their session resumes in February.

Minnesota Management and Budget Commissioner Myron Frans
Minnesota Management and Budget Commissioner Myron Frans said the state has time to consider its options to erase a new spending gap.

No action to close the gap is expected until after release of the February forecast, which will come in early March. “My counsel is to wait,” Frans said. Federal tax policy changes could be resolved by then removing some future uncertainty while other risks will “persist.”

Other risks to the state’s health include inflation and the possibility that the nine-year-long slow-growth recovery will run out of steam.

The state could trim spending, scale back tax relief, or dip into reserves that total about $2 billion with $1.6 billion in a rainy day fund and $350 million in a cash account.

Frans cautioned against using reserves, saying they could be needed if the economy turns sour. Ratings agencies are watching to see how the state handles its red ink, he said.

“This is more of a mist than a downpour….but it is significant,” Frans said. “We need to be cautious about when we use our reserves.”

Dayton later said he agrees with his commissioner. He wants to wait for the February forecast before taking action, and prefers tweaks to the state’s $46 billion budget over dipping into reserves.

The deficit projection marks an end to several years of rosier surplus forecasts. The latest figures show a $163 million reduction in the fiscal 2017 previously forecast balance of $1.65 billion. While the state had an opening balance to help balance the books in the new biennium, the revised figures would leave the state with a structural budget imbalance of more than $1 billion as the revenue forecast was cut by $559 million to $44.4 billion while planned spending raised by $398 million to nearly $46 billion.

The state lost its triple-A marks as it turned for years to one-shots – such as reserve use, tobacco borrowing, and delays in school aid distribution – to erase billions in red ink during times of divided leadership.

Dayton won an income tax increase on top earners in 2013 to wipe out a deficit and move toward structural balance when he enjoyed a DFL majority.

Minnesota won back one of its triple-A ratings last year when Fitch Ratings raised its ratingfrom AA-plus. Moody's Investors Service and S&P Global Ratings rate the credit at the Aa1/AA-plus level.

S&P said a dispute over the legislative appropriation that has entangled repayment of some lease appropriation Senate building debt introduced an element of political risk into the state's credit profile.

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