CHICAGO - One day after unveiling a 10-year, $11 billion transportation plan, Minnesota Gov. Mark Dayton laid out the second major piece of his legislative agenda Tuesday in a $42 billion, two-year budget proposal that would use the state's $1 billion surplus to increase education spending.

"Minnesota's future success - the health of our families, the vitality of our communities, and the prosperity of our state - will depend upon our making excellent educations available to all Minnesotans," Dayton said Tuesday. "That is exactly what my budget proposal aims to do."

The budget offers an additional $370 million for preschool, K-12, and higher education. The budget also earmarks additional funding for child-care initiatives and dependent care credits.

The budget is up from a $39.4 billion plan that covered fiscal 2014 and fiscal 2015 which closes June 30. Republicans are expected to press for the use of the surplus to lower taxes. The budget is based on the state's formal November revenue forecast. The Legislature will tweak the budget based on the February forecast that is released in early March.

The budget's release follows Dayton's announcement of an $11 billion, 10-year transportation package that would rely on raising Minnesota's wholesale gas tax, vehicle registration fees, and a regional sales tax to generate $11 billion to maintain and improve the state's highways, bridges, and public transit systems.

The plan would finance or replace 2,200 miles of roads and 330 bridges, invest in freight routes, fund 20 new transit ways, and expand bus service. Dayton said it would create 119,000 jobs.

"Inadequate transportation clogs our lives with worse traffic congestion, longer commutes, more dangerous travel conditions. Those deficiencies restrict our future economic growth and detract from our quality of life," said Governor Dayton. "If we continue to avoid these problems, they will only get worse. It's time to begin to solve them."

The plan relies on a 6.5% increase in the state's gross receipts tax on wholesale gasoline sales which translates into a 16 cents per gallon hike at the pump. The current state tax is 28.5 cents. The percentage would rise in tandem with gasoline prices.

Proceeds of the gross receipts tax and higher registration fees would provide $5.38 billion for highway projects, including $3.8 billion in new pay-as-you-go revenue and $2 billion to repay trunk highway borrowing. Another $2.4 billion would go directly to local cities, counties, and townships.

A half-cent sales tax hike in the seven-county area around the Twin Cities would generate $2.8 billion for transit projects with another $120 million coming from the state general fund to support projects in a broader area.

The plan provides for another $75 million over the coming decade for bike and pedestrian infrastructure and safe routes to schools. The funding would come from the state's general fund and the proposed half-cent sales tax increase in the seven-county metropolitan region.

Like many other states across the country Minnesota faces dwindling gas tax revenues and stagnant federal aid. A state transportation panel warned several years ago of the need for $6 billion in new funding to keep the state's roads and bridges in a state of good repair.

The state's budget has stabilized and coffers are flush thanks to an improving economy and income tax hike on top earners. The state's most recent fiscal forecast shows a surplus of $1.037 billion available for the upcoming 2016-2017 budgetary biennium, although Dayton's operating budget uses much of the funds that remain after a required portion goes into reserves.

It is unclear how any of Dayton's plans will fare in Minnesota's divided government.

Dayton's Democratic-Farmer-Labor Party lost control of the state House in November; the DFL continues to hold the Senate.

Republicans slammed the transportation plan saying there are other means to bolster funding that don't rely on a tax hike. They previously floated a four-year $750 million plan that relied on the budget surplus and transportation department spending cuts to fund projects. Senate DFLers have proposed a plan similar to Dayton's that would raise the sales tax even more.

Ahead of Minnesota's last new money sale in the summer, Fitch Ratings affirmed the state's AA-plus rating, Moody's Investors Service affirmed its Aa1, and Standard & Poor's affirmed its AA-plus. All assign a stable outlook. The ratings impact $6 billion of GO debt.

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