The ripples from the worsening financial crisis in the U.S. are likely to be felt in St. Paul come January— in the form of a ballooning state budget gap.
While state officials won’t have a clear picture of their looming deficit until the official revenue and budget forecast is issued by the Department of Finance in November, it’s becoming clear that the economic rebound predicted by the state’s economic forecaster earlier this year, is unlikely to materialize.
That forecaster, Global Insight, had predicted strong economic growth in the second half of 2008, followed by somewhat slower growth in early 2009 in its last official forecast for the state, issued in February. The company had also predicted oil prices would average $80 a barrel this year.
Neither prediction now appears likely to come true. Indeed, according to State Economist Tom Stinson, Global Insight has significantly adjusted its economic forecasts in recent weeks as the credit crunch and housing downturn has dragged on. “They now project a decline in GDP [gross domestic product] in the fourth quarter and the first quarter of 2009,” said Stinson. “And that was before the news about all the financial institutions failing.”
That leaves state officials increasingly worried about the November forecast. “Inside my head, there’s a big question mark when it comes to the November forecast,” said Stinson. While the February forecast had already predicted a $2 billion budget gap (including inflation) in the 2010-11 biennium, some are already speculating the state could face a deficit twice that size, or as much as $4 billion when the new forecast is released. That’s as much as the state faced in 2003, when the state imposed major cuts in programs across the board. “It’s possible,” said Rep. David Dill, DFL-Crane Lake, when asked about the prospects of a rerun of the 2003 experience. “I think we may well be positioned for a similar occurence. I hope not, but I fear it. I know how devastating that was.”
A $4 billion budget gap would likely be tougher to handle this time around. That’s because the state never restored many of the cuts imposed in 2003. And many one-time sources of funding, such as the $1 billion tobacco settlement fund, were already used to bridge the deficit five years ago. In addition, lawmakers and the governor drained much of the state’s rainy day fund to balance the books on the 2008-09 biennium.
On the plus side, the state’s revenue collections through July were slightly ahead of estimates. According to Stinson, state coffers saw $388 million more than expected during that period, money which could help cushion at least some of the potential state shortfall.
