CHICAGO - The Minnesota Legislature adjourned just before its Monday deadline after reaching a bipartisan agreement with Gov. Tim Pawlenty to eliminate a nearly $1 billion budget deficit, primarily by cutting spending and by dipping into reserves.

The state will use about $500 million from its budget reserve and cut $355 million in spending. The remainder of the projected $936 million of red ink in the current two-year budget that runs through June 30, 2009 would come from revenue raised relative to a change in how foreign-operated companies are taxed.

The deal also included a supplemental $105 million bonding authorization that provides $70 million in state aid for a $900 million light-rail extension project to connect St. Paul and Minneapolis. The bill also provides funds for a new state park and the addition of a health care facility at a veterans' home in Minneapolis.

The budget deal also included several property tax measures that combined will provide about $460 million in relief over the next three years. One limits local government increases in property tax levies to 3.9% annually for the next three years.

The agreement was announced by the governor and legislative leaders on Sunday and both the House and Senate then passed the bills. The governor is a Republican and the House and Senate are controlled by Democrats. The governor and Republicans won efforts to include property tax relief, while the Democrats succeeded in winning additional health care spending and support for the additional capital projects.

"Minnesotans deserve tax relief and a state government that lives within its means," Pawlenty said in a statement. "This agreement delivers both. I want to thank legislative leaders from both parties for their hard work and willingness to seek out solutions. The result is a balanced budget, a strong property tax cap, additional tax relief, reduced government spending, no additional taxes, health care reform, a new state park, and new facilities at the Minneapolis Veterans Home."

The praise lawmakers and the governor had for one another in announcing the agreement capped a session of clashes over spending during which even some members of the governor's party joined with Democrats to help override his veto of a $6.6 billion transportation package.

The transportation package relied on an increase in the state's gasoline tax by 5.5 cents this year with room to phase in an additional three-cent increase until $2.2 billion of state-backed trunk highway bonds are paid off. License renewal fees for some vehicles also were raised.

Pawlenty objected to the plan because of the increased taxes, while its supporters said the infusion of funding was needed to speed up road and bridge projects and to energize the state's struggling economy.

Pawlenty earlier this year trimmed $200 million from the $935 million capital bill using his line-item veto power, warning that the level of new general obligation borrowing sent to him by the Legislature exceeded the state's long-observed debt cap. The cap limits debt service to 3% of general fund revenues. The line-item vetoes lowered the total size of the capital bill to $717 million, although he said Sunday the state had room to include the supplemental bond package without hitting the cap.

Minnesota's $4 billion of GOs are rated AAA by Fitch Ratings and Standard & Poor's and Aa1 with a positive outlook by Moody's Investors Service. The state's trunk highway bonds are included in the figure as they carry a GO pledge, though the state taps revenue in its road fund to repay the bonds.

Praise aside, the Legislature and governor will still face a deficit when as they craft a two-year budget next year. The Minnesota Department of Finance last February projected a $1.1 billion deficit in the next budget cycle in addition to the $934 million deficit in the current $34 billion budget due to declining revenues.

By dipping into reserves - a one-time action - to help close the current hole, the state only adds to its structural deficit problems going into the next cycle.The state currently has a $653 million budget reserve and maintains $350 million in a cash flow reserve account.


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