CHICAGO — The Democratic leaders of the Minnesota Legislature advanced a plan yesterday that relies on a mix of cuts, delaying school aid payments, and more tax revenue from the state’s top earners to erase a looming $3 billion deficit.

The legislation sets the stage for another in a series of clashes over fiscal issues between the leaders of the Democratic-Farmer-Labor Party that controls the Senate and House and retiring Republican Gov. Tim Pawlenty, who has vetoed past attempts by Democrats to raise revenue through tax hikes.

Under the proposal, the Legislature would sign off on most of the $2.5 billion in so-called unallotment cuts Pawlenty made to the two-year $57 billion budget he received from lawmakers last year. They included a reduction of $300 million in local government aid and $1.8 billion in delayed grants to schools.

The Minnesota Supreme Court last week issued a ruling that raised questions over the legality of the cuts. Before the ruling, the state was grappling with a $500 million deficit based on the state’s February revenue forecast.

The Democratic plan creates a new tax bracket for the state’s top earners in a move that would raise an additional $435 million annually. The higher bracket would be reversed in years when the state’s general fund reserves hit at least $500 million.

The increase would establish a new bracket for couples that make more than $200,000 after credits and deductions.

 “We feel this is the balanced approach that Minnesotans have always respected,” House Majority Leader Tony Sertich said in announcing the plan.

Democratic leaders unveiled the legislation early yesterday and moved it first to the Senate floor, where it was narrowly approved in a 34-to-33 vote. The chamber is split between 46 Democrats and 21 Republicans. The legislation moved to the House, where a vote was still pending as of press time. Republicans blasted the tax increase and sought a delay in voting.

“Lets not pretend this bill is going to get us any further in those conversations,” said Julianne Ortman, R-Chanhassen, speaking of the likely veto by the governor of any plan that includes a tax hike.

Democrats countered that with an adjournment date of May 17 looming, quick action was needed. Republicans blasted the tax increase, given the still-struggling condition of the state’s economy, while Democrats defended it as a better alternative to additional cuts of school and social services spending.

Pushing lawmakers to formally approve the unallotment cuts, Pawlenty on Friday issued an executive order calling for emergency cash management actions that direct state departments to prioritize spending. The order warns that Minnesota “faces an imminent and severe cash-flow crisis as a result of the potential restoration of previously reduced allotments.”

In a split ruling, the state’s high court upheld a Ramsey County District Court decision that favored six residents who challenged the governor’s $5.4 million cut to a special state nutrition program for the elderly and disabled.

The Supreme Court found that the special diet program’s cuts were “unlawful and void,” setting the stage for potential challenges to all $2.5 billion in cuts. It ruled that the unallotment statutes give the executive branch authority to address an unanticipated deficit that arises after the legislative and executive branches have enacted a balanced budget.

“The statute does not shift to the executive branch a broad budget-making authority allowing the executive branch to address a deficit that remains after a legislative session because the legislative and executive branches have not resolved their differences,” the ruling said.

The state has top ratings from Fitch Ratings and Standard & Poor’s. It is rated Aa1 by Moody’s Investors Service.

If the Legislature adjourns before a plan can be enacted that is supported by Pawlenty, he would likely call a special session. Past attempts to override the governor’s vetoes have failed. Lawmakers face re-election this November, but Pawlenty is not seeking a third term.

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