CHICAGO - Minnesota Gov. Tim Pawlenty yesterday unveiled a two-year, $57.6 billion budget that relies on a 2.2% cut in general fund spending and $3 billion in one-time infusions of revenue - including nearly $1 billion of tobacco bonds and $1 billion from the federal government - to remain in the black.

The $57 billion figure includes a general fund budget of $33.5 billion, which is about $750 million less than the current two-year budget in place. The broad budget cuts and other savings would trim about $2.5 billion in spending during fiscal 2010 and 2011. The majority - $2.36 billion - would come in the form of permanent spending cuts, while the other $153 million would come from a one-time transfer in funds in a health care account.

On the revenue side, the budget relies on an accounting shift that would delay a $1.3 billion school aid payment, $983 million of tobacco bonds, and $920 million from the federal stimulus to fully erase $4.8 billion of red ink while leaving $860 million available for new spending and to rebuild reserves.

The state would use $323 million to finance new spending initiatives, $287 million to cover the costs of tax cuts, and $250 million to make a deposit in its rainy-day reserve that was drained to cover a revenue shortfall last year in the fiscal 2008-09 budget.

Although it is unclear how much of the stimulus will come with restrictions attached, the state believes it is underestimating the amount that it can use to shore up the budget. The proposed tobacco bond issue would be the state's first. It would securitize about half of Minnesota's share of the 1998 national tobacco settlement.

"The upcoming budget debate should not just be about where we are now. It should be about where we're headed," Pawlenty said in a statement. "That means looking forward, not back, and setting priorities that will deliver a better future. This is a plan that doesn't increase tax burdens on struggling families and job providers, lives within our means, and positions Minnesota for growth."

Higher education would see an 8% cut and local government aid would be trimmed by 5%. Health care spending will grow, but at a sharply smaller rate than in the current budget. The areas that will receive new or increased spending include $41 million to expand a performance-based teacher pay program, and $91 million for a new program that links education funding increases to student achievement.

Under the recently announced Minnesota Jobs Recovery Act that the governor wants lawmakers to approve, the business tax rate would fall to 4.8% from 9.8 % over six years. The package also exempts company purchases of capital equipment from state sales taxes and provides tax credits to promote capital investment and job creation.

The Republican governor's plan is likely to face a tough road given that the Senate and House are controlled by Democrats who will face pressure from local governments, higher education, and health care officials to increase funding.

The state also likely faces further red ink when its annual February revenue forecast in released in early March. The governor traditionally crafts his budget on the November forecast and the Legislature adopts a final budget that reflects the February update.

The final spending plan also stands to affect the state's credit. Ahead of its recent general obligation sale of $400 million, Fitch Ratings revised the outlook to negative from stable on the state's AAA rating while Moody's Investors Service revised its outlook to stable from positive on its Aa1 rating. Standard & Poor's affirmed the state's $4.3 billion of GOs at AAA with a stable outlook.

Capital spending figures were not immediately available. The state typically does just a small bonding bill in the year it adopts an operating budget and a larger package the following year.

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