CHICAGO - Minnesota Gov. Tim Pawlenty on Friday announced plans to cut spending and dip into reserves to eliminate a projected $935 million shortfall in the state's current two-budget cycle and called for a sales tax cut that would actually add to the deficit.

The plan to address the budget shortfall calls for $341 million in spending cuts, using $250 million from the state's $653 million budget reserve known as the rainy day fund and another $250 million from a fund balance in the health care access fund that would go directly to cover health care related costs for the poor. That fund is made up of taxes paid by medical providers and health plans. The plan also relies on an additional $102 million being collected by eliminating some corporate tax loopholes.

Aid to local governments and funding levels for kindergarten through 12th grade public education would be exempt from spending cuts of 4% to most agency budgets. "Minnesotans are concerned about the economy, rising costs and government's seemingly endless demands on their wallets," Pawlenty said in a statement. "This plan balances our budget without adding to the burden facing Minnesotans. We'll tackle this deficit by holding government accountable, tightening our belts and using available resources, not by raising taxes."

In releasing his plan to balance the budget as required under law, the state also would cut the sales tax it collects by one-eighth of one percent at a cost to the state of $77 million in the current budget cycle that runs through June 30, 2009. That measure is aimed at offsetting the impact of recent tax increases the state Legislature adopted as part of a $6.6 billion transportation budget. The plan relies on increased gasoline and other transportation related fees and gives counties around the Twin Cities the ability to raise their sales tax.

Minnesota's finance department in its annual February forecast predicted the $935 million deficit in the $34 billion budget and another $1.1 billion shortfall going into the next biennium due to declining tax collections. The state's $4 billion of general obligation bonds are rated AAA by Fitch Ratings and Standard & Poor's, with Moody's Investors Service assigning a Aa1 with a positive outlook.

Reaction from the Democrat-controlled Legislature was not immediately available. Pawlenty is a Republican.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.