CHICAGO - Minnesota Gov. Tim Pawlenty yesterday balanced the $57 billion fiscal 2010-11 budget by slashing or deferring $2.7 billion of funding for local government aid, health and human services, and education.

Pawlenty's action makes good on his pledge last month to balance the budget on his own, without a special session, after lawmakers adopted spending bills that lacked sufficient revenues to cover all of their proposed spending.

Budget negotiations aimed at achieving a balanced spending plan came down to the wire between the Republican governor and the Democratic-controlled Legislature but no agreement was reached before a mandated adjournment date in mid-May.

Democrats floated several tax increases but Pawlenty refused to consider them, while Democratic lawmakers rejected Pawlenty's proposal to raise revenue through the issuance of $1 billion of appropriation-backed bonds.

The bonds - to be repaid with tobacco settlement revenues - would have freed up general fund revenues earmarked for debt service payments and were part of Pawlenty's proposal to deal with a $4.6 billion budget hole.

"Families and businesses are battling their way through this prolonged economic downturn by re-examining their budgets, cutting expenses, and tightening their belts. State government must do the same," Pawlenty, who recently announced he would not seek a third term, said in a statement.

The budget-balancing plan cuts $300 million in local government aid, which will pressure cities and counties that already are dealing with their own declining revenue collections and a $110 million cut in state aid Pawlenty made late last year to deal with a budget shortfall in fiscal 2009.

Health and human service programs will lose $236 million in funds while $100 million was cut from higher education aid. The state would also defer $1.8 billion in payments owed to primary and secondary public schools.

The cuts and deferrals are permitted under Pawlenty's statutory "unallotment" powers allowing the governor to trim authorized spending in the next fiscal year when the state lacks sufficient revenues.

While lawmakers and the governor failed to find consensus on an operating budget, a small, off-year capital budget known as the bonding bill was approved. A legislative conference committee settled on a $295.5 million program, but Pawlenty used his line-item veto power to cut about $82 million.

On the debt management front, lawmakers approved several measures giving state fiscal managers more flexibility to navigate through the market turmoil and changes of the last year brought on by the credit crunch.

Beginning July 1, Minnesota can sell new-money and refunding general obligation debt via negotiation through June 30, 2011. Current statutes required all state GO debt be sold competitively.

The state has $4.65 billion of outstanding GOs that are rated Aa1 by Moody's Investors Service and AAA by Fitch Ratings and Standard & Poor's, although Fitch assigns a negative outlook. The state will issue new-money GOs later this summer, but the size has not yet been set.

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