Tomorrow morning, Minnesota Governor Tim Pawlenty will put on a show that might best be described as a fiscal version of same. Pawlenty will attempt to explain how Minnesota will conform to state law by balancing its general fund budget during the 2010-11 biennium. A plummeting state economy has already generated forecasts of a real-dollar deficit in the neighborhood of $5.5 billion during that time period, and there are credible rumors that next month’s forecast could ratchet that number up to $7 billion in red ink. No matter. With derring-do that would make Houdini proud, Pawlenty will explain how he intends to increase funding for the largest portion of the budgetary pie, K-12 education, while not only spurning state tax increases but proposing cuts to corporate income taxes of more than 50 percent over the next six years.

Like Houdini, Pawlenty is well-versed in the tricks of his trade. There will be fees, delayed payments in promised aid to schools, back-loaded funding “tails” on various programs, and myriad other accounting sleights of hand. One-time aid from the federal government will be gratefully accepted even as the state whacks local government aid to cities and counties and promotes other policies that are sure to result in higher local property taxes. Pots of money specifically earmarked for non-general-fund purposes will be raided. And on the expenditure side of the ledger, the governor will pretend that inflation doesn’t exist.

Unlike Houdini, Pawlenty is playing a role that can’t end painlessly. People will lose their health insurance, their childcare subsidies, their affordable nursing homes. Be it taxes, fees, or the withdrawing of  government support, the bang for your buck in state tax dollars is almost certain to diminish significantly.

The severe global recession ensured that this would be a rocky time, with tough decisions facing Pawlenty and Minnesota legislators at the State Capitol. But the lack of structural integrity in the state budget process over the past decade has worsened the situation. Pawlenty’s Houdini impersonation in the midst of such dire circumstances is a sign that the shenanigans won’t be ending anytime soon.

For decades, Minnesota lawmakers sought to make sure that revenues (taxes) and expenditures were in balance heading into the next biennial budget. That began to change in 1999, when Minnesota lawmakers were beguiled by billions of dollars of surplus in the state coffers, and began slashing taxes, increasing spending, and handing out rebates. They kept at it a year later, cutting local property taxes and taking on the lion’s share of responsibility for K-12 education spending. “It was like a perfect summer day,” says former finance commissioner Jay Kiedrowski, the co-chair of the bipartisan State Budget Trends Commission, whose 15 members were equally appointed by Pawlenty, the House, and the Senate. “But those surpluses were like a Trojan horse. They looked attractive and innocent but they were trouble, because we were at our economic peak.”

Just as these sunny-day decisions clicked into place, the dot-com bubble burst, throwing the economy into recession. Then-Governor Jesse Ventura proposed a series of tax increases and spending cuts to cope with the looming deficit. “But that was when the Majority Leader of the Senate [Roger Moe] and the Majority Leader of the House [Tim Pawlenty] were running against each other for governor,” Kiedrowski notes. “They convinced their caucuses to reject what for Jesse was a remarkable act of responsibility.”

Using accounting gimmicks to postpone the reckoning, legislators returned the next year to confront a whopping $4.4 billion deficit and a newly elected Gov. Pawlenty who had signed a pledge not to raise state taxes. The structural integrity of the state budget has been out of whack ever since. Cost shifts, accounting gimmicks, pass-the-burden financial policies and raids of funds mandated for tobacco use prevention and access to health care have held sway in times of deficit. During the less-frequent  times of state budget surplus, legislators have used short-term (even one-time) monies to justify long-term spending decisions.

“Even this year, if the economy were not in recession, we would still be facing a billion-dollar deficit--$1.7 billion if you add inflation,” Kiedrowski says. “That’s the way [Pawlenty and legislators] left it last year.”

It is not hyperbolic to say that the situation has reached crisis proportions. Pawlenty was forced to spend the entire budget reserve on the funding gap in the current 2008-09 biennium, and still had to unallot (meaning cut) $271 million from ongoing programs. If state receipts continue to lag, he will have to hack out another $100-$200 million worth of  services that are supposed to be rendered between now and the end of June. Then he’s got to figure out how to make $7 billion worth of deficits disappear in the operation of state government during the 2010-11 biennium that begins July 1.

John Gunyou, the state’s former finance commissioner under Republican Gov. Arne Carlson and currently the city manager of Minnetonka, breaks down exactly how nasty the situation has become: “Forecasted expenditures for the next biennium are in the range of $37 billion. The governor has said we should not look at revenue [tax] increases. He says he’s not only planning to protect education, which is $14 billion, but add more [money to programs]. He says he’ll protect vets and public safety, which is about $1.9 billion. Our debt service is about $1.1 billion. That leaves you about $20 billion [from which to cut]. How do you get $7 billion out of that? Even if you just take a billion from higher education or local government aid, that’s about a third [of their scheduled allotment]. I know he plans to whack health and human services, which is $11.5 billion, but how deeply can he cut? And all the other agencies, like DNR and PCA, only add up to about $1.8 billion.

“You have to consider the magnitude of this. I hear people say we have to be more efficient. Well, efficiency isn’t going to get you $7 billion.

“Turn to the tax side of this,” Gunyou continues. “All the individual income tax revenue in the coming biennium is projected to raise $15.6 billion. Sales taxes are $8.7 billion. Remember, the shortfall is $7 billion. You could double the tobacco tax and only get [an additional] $400 million. You could double all the fees and charges that go to the general fund and only get [an additional] $800 million. If you think the solution is pushing it on to the local property taxes, well, the total [property taxes] for all the local governments in the state-- except school districts, which are supposed to be protected--is about $10 billion.”

The State Budget Trends Commission doesn’t expect the structural integrity of the process to be realigned in the midst of such economic carnage. For example, their recommendation that ongoing programs be funded with long-term revenue sources instead of one-time monies (which they recommended be put in a budget reserve) doesn’t mean everyone won’t welcome the infusion of one-time federal bail-out aid, rumored to be as high as $3 billion, to help fund ongoing programs in the coming biennium. But the commission is asking the Legislature to enact future disciplinary measures, such as a long-range planning agency to highlight demographic trends that will affect future revenues and expenses.

But that begs the question: When does the free pass due to crisis management blink off and genuine fiscal accountability set in? In his recent State of the State address, Pawlenty spoke of cutting the corporate income tax rate (which currently is projecting to reap about $1.4 billion in the next biennium) from 9.8 percent to 4.8 percent over the next six years. “He sounded like he would phase it in over a five or six year period, and that is exactly what, from what I understand, our commission is saying not to do,” Kiedrowski claims. "Okay, you are paying 20 or 30 percent of the cost of it this biennium, but when the whole 100 percent kicks in five years from now, you are constricting your options down the road. That’s exactly how our state has gotten into this trouble.”

This lack of structural integrity combined with future demographic trends in the state points to huge fiscal problems down the road. If and when Pawlenty and the legislators finally wrestle the 2010-11 biennial budget into balance, the latest state forecasts show another real-dollar deficit of $6 billion looming in the 2012-13 budget. “It used to be that we could expect to bounce back from recession in Minnesota,” Kiedrowski says. “But right now the future is not our friend.”

Indeed, the State Budget Trends Commission calibrated the demographic data and projected that an aging population and lack of immigration to the state will result in state budget expenditures growing by 5.4 percent in the quarter century from 2008-33, while corresponding revenues are expected to increase by only 3.9 percent. “That was the biggest surprise to me, that difference in growth between revenues and expenditures,” says Kevin Goodno, a former legislator--and Pawlenty’s former commissioner of health and human services--who co-chaired the Budget Trends Commission with Kiedrowski. “It shows that legislators will have to be more disciplined in the future in accounting for what they do.”

That future begins tomorrow, with Governor Pawlenty’s proposed budget.