ST. PAUL, Minn. (AP) — Minnesota Gov. Mark Dayton and lawmakers will have to eliminate a $1.1 billion state budget deficit when the session convenes in January, a smaller shortfall than in recent years, as Democrats prepare to take over the Legislature.

Minnesota Management and Budget released the updated forecast Wednesday. While officials called it good news and representative of a slowly improving economy, the forecast came with a large asterisk: The state’s economic fortunes could quickly plummet again unless Congress and President Barack Obama can resolve federal debt negotiations and avoid going over the so-called “fiscal cliff.”

Related: Officials: Fiscal Cliff Would Harm Minn. Economy

“We are making slow progress gaining jobs and economic momentum,” said Jim Schowalter, director of Minnesota Management and Budget. “But the trouble is it’s wrapped in a cloud of uncertainty due to the federal fiscal cliff.”

The fiscal cliff refers to a set of major federal spending cuts and income tax hikes set to take effect on Jan. 1 to reduce federal debt. Both Obama and congressional leaders have said they want to avoid that scenario, but differ on how to do so. State Economist Tom Stinson sketched a dire picture of consequences for Minnesota’s economy: 115,000 jobs lost in 2013-14, a drop in personal income of 4 percent by 2015 and a drop in state tax revenue of hundreds of millions of dollars.

“The fiscal cliff is ultimate gloom,” Stinson said.

Uncertainty over the federal situation cast a shadow over the forecast, which Dayton will use as a baseline for assembling his next budget proposal. Minnesota’s governor and lawmakers write and enact a new budget for the state every two years, and deficits arise when the amount of tax and other expected revenue isn’t enough to keep up with projected spending obligations on health and welfare programs, schools, courts and law enforcement, and other state services.

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.

Part of the way Pawlenty, then Dayton and lawmakers eliminated those deficits was to delay state aid payments to public school districts. State budget officials said a remaining 2013 budget surplus would allow them to repay $1.3 billion of that shift, leaving an additional $1.1 billion to be paid before the debt is completely eliminated.

Incoming House Speaker Paul Thissen, DFL-Minneapolis, said a chief goal of Democrats taking over both legislative chambers in January would be to restore stability to the state budget and end the chronic deficits of recent years.

“Our state budget has been on a roller-coaster of deficits for the last decade,” he said.

But Thissen and new Senate Majority Leader Tom Bakk were reluctant to discuss details of how Democrats would seek to erase the deficit, while finding money for goals that include reforming the tax system, reducing property tax rates and spending more on public schools. Dayton has long supported raising state income tax rates on upper-income earners, which Capitol Republicans said Wednesday should not be necessary.

“When a Democrat says tax reform, they mean tax increases,” said the new House Republican leader, Rep. Kurt Daudt of Crown.

Related: Dayton: Don’t Be Surprised If I Try To Tax Wealthy

Republicans, vanquished from legislative leadership in the November elections, said it was their two years of stewardship at the Capitol that helped clear the way for a lower deficit than recent years. Daudt and the new Senate Republican leader, Sen. David Hann of Eden Prairie, suggested that Democrats should consider tax cuts in an attempt to further stimulate the state’s economy.

Still, two major Democratic allies — the state chapter of the AFL-CIO and American Federation of State, County and Municipal Employees Council 5 — immediately called for new revenue to help pay for schools, transportation infrastructure, jobs and assistance programs.

“Middle class Minnesotans have been paying more than their fair share for the last decade,” state AFL-CIO President Shar Knutson said in a news release.

The director of AFSCME, Eliot Seide, suggested the state should raise $6 billion in new revenue.

(© Copyright 2012 The Associated Press. All Rights Reserved. This material may not be published, broadcast, rewritten or redistributed.)

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