Minnesota will have to balance about a $1.1 billion budget deficit next year.

The Minnesota Management and Budget office released its quarterly forecast Wednesday, calling for a $1.1 billion deficit in 2013. While state Legislators will have to find ways to balance the state’s biannual budget in the next legislative session starting in January, state officials say federal battles over the “fiscal cliff” coming soon could put the state into another recession if Congress and President Obama don’t come to an agreement when the U.S. House of Representatives and Senate reconvene in January.

Funds may be repaid to schools

Minnesota’s schools may soon recover part of the billions of dollars the state borrowed.

State finance officials released an updated budget forecast Wednesday. Minnesota Management and Budget officials said a surplus this year allows for repayment of $1.3 billion of a total of $2.4 billion owed to school districts around the state in delayed state aid.

“If there’s money on the table, the money first gets paid back to the school shift,” said Rep. Jeanne Poppe, DFL-Austin. “You have to fund our school so the kids get the quality education they deserve.”

Austin Public Schools Superintendent David Krenz stressed the money being paid to the schools was no bonus. It’s money allotted to schools the state borrowed for other purposes.

“That’s the critical component, that people understand this is not new money,” Krenz said. “We had to go out last year and borrow money to pay our bills.”

Director of Finance and Operations Mark Stotts said the district had to borrow $7 million last March, which was repaid in September, to meet expenses. Under the budget forecast, the school would receive 82 percent of its state budget, up from the 64.3 percent it has right now. That’s an additional $5-6 million.

“It doesn’t change our financial situation at all, it just speeds up our cash flow,” Stotts said.

School administrators said it was too early to tell whether borrowing would still be necessary going forward.

“It’s pretty early in our budget cycle to know that,” Krenz said. “We don’t think we’ll have to at this point.”

Apart from the issue of schools, much of the upcoming session will deal with the same budget questions the state tackles every two years.

“Is there a way to improve the revenue coming in, or a way to cut the costs we spend?” Poppe said. “The big picture is we have to be doing what we can to reduce that overall deficit.”

Also during the upcoming session, legislators hope to find a way to prevent future deficits and keep any that do occur under control.

“We need to try to figure out how we stabilize our funding and our resources so we don’t go through this as much every year,” Poppe said.

Gov. Mark Dayton will be coming up with a budget proposal with ideas for what the Legislature should consider. Budget finance committees will also look within their departments in search of opportunities for cuts.

“I think there will be a deeper discussion within what is actually necessary,” Poppe said.

Sen. Dan Sparks, DFL-Austin, said the Democrat-controlled Legislature holds a lot of potential.

“I think we need to get up there and lead,” Sparks said. “The economy is showing signs of recovery. We want to make sure we continue to move that forward.”

It’s still too early to tell how the state’s budget wrangling will affect cities, according to Austin Finance Director Tom Dankert.

There’s a chance the Legislature could cut Local Government Aid to cities in light of the projected deficit, but state officials had previously said LGA funding would largely remain untouched. Still, Dankert said, it’s too early for the city of Austin to react to potential LGA cuts, which would greatly affect Austin’s general fund.

“I’m not running out the door screaming ‘Fire!’ yet, because I think there’s still some things that need to be figured out,” Dankert said.

LGA makes up about 48 percent of the city’s general fund, and the city expects to receive about $7.1 million next year, the same amount given to Austin each year since 2010. If state officials take a serious look at LGA cuts, Dankert said, the Austin City Council could initially respond to potential LGA loss by freezing the city’s $150,000 contingency fund, which is used for unplanned and emergency spending, and the city’s $525,000 capital outlay fund, used for city equipment and infrastructure. That would mean the Park and Recreation Department may not get to upgrade restrooms at Todd Park, Austin Police may not get three marked squad cars and the Austin Public Library may not get to replace its carpet, all of which is planned for next year under the capital outlay budget.

“Based on past history, that’s one of the things we’ve done,” Dankert said.

Deficits have been common in Minnesota for much of the last decade. After the U.S. economy plummeted in 2008, deficits here ballooned: former Gov. Tim Pawlenty and lawmakers faced a $5.27 billion deficit in December 2008, and two years later incoming Gov. Dayton and a new Republican majority came into office looking at a $6.2 billion deficit.

In 2011, Dayton and Republicans fought for seven months over how to erase the deficit, with Dayton calling for a mix of cuts and upper-income tax increase, and Republicans demanding spending cuts only. The dispute stretched into the summer and precipitated a three-week state government shutdown before Dayton finally relented on tax hikes and agreed to bond money from a tobacco settlement and delays in school aid payments to soften the size of spending cuts.

Now Dayton has fellow Democrats to help figure out how to erase a much smaller deficit. In last month’s elections, the party took control of both legislative chambers for the first time since 1991. Dayton has signaled he would continue to support upper-income tax hikes, but incoming Democratic legislative leaders have been cautious around talk of tax increases.

State budget officials have said the forecast could quickly become obsolete unless Congress and President Barack Obama can resolve federal debt negotiations and avoid going over the so-called fiscal cliff.

— Herald reporter Trey Mewes and the Associated Press contributed to this report.

Correction: The headline of this article originally said the state faced a $6 billion deficit. The Herald regrets the error.