Minnesota balances its budget; future gaps loom

Reuters News
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Posted: Dec 01, 2011 3:18 PM

By Karen Pierog

CHICAGO - (Reuters) - Minnesota will break a cycle of deficits with its current two-year budget, which is projected to have an $876 million balance, but the state still faces a significant structural budget imbalance in the future, officials said on Thursday.

A $526 million ending balance in fiscal 2011, which topped expectations, coupled with spending cuts in the fiscal 2012-2013 biennial budget, resulted in the projected balance, according to the state's revenue forecast.

But the balance is only a "brief respite from bad budget news," said Jim Schowalter, management and budget commissioner, noting that a shortfall is projected for the fiscal 2014-2015 biennial budget due to a flurry of nonrecurring measures used to balance the current budget.

The gap for the 2014-15 budget is forecast at $1.3 billion.

One-time measures used to close a $5 billion deficit in the current two-year budget of roughly $34.3 billion included delaying payments to school districts, tapping reserves, and raising cash through the sale of bonds backed by settlement dollars owed to Minnesota under an agreement with tobacco companies.

The solution came after a budget battle between the Republican-controlled legislature and Minnesota's Democratic governor led to a nearly three-week shutdown of many state operations in July.

Under current law, $621 million of the projected balance would be allocated to the budget reserve, bringing it to $648 million, and the remaining $255 million would be used to fully restore the cash-flow account to $350 million, according to the forecast.

A nagging structural budget imbalance and political strife contributed to the loss of Minnesota's last triple-A bond ratings. Minnesota's rating was cut to AA-plus by Fitch Ratings in July, followed by Standard & Poor's in September. In August, Moody's Investors Service revised its outlook on Minnesota's Aa1 rating to negative from stable.

Like most U.S. states, Minnesota began projecting budget deficits in 2007 as revenue eroded due to the economic recession, which officially ended in June 2009.

(Reporting by Karen Pierog; Editing by Leslie Adler)