CHICAGO - Minnesota Gov. Tim Pawlenty yesterday unveiled a revised budget proposal for the next biennium that increases public school funding, restores some cuts to funding for state colleges and universities, and raises spending on health care programs.

The changes were made to reflect an additional $278 million available to spend in the budget from the federal stimulus that was not calculated in the original budget proposal unveiled in January. The funds were added to the formal revenue forecast released by the state's management and budget office earlier this month. The additional funds cut some red ink in the deficit, which now stands at $4.6 billion.

Total general fund spending in the proposed budget is $32.6 billion, down about 4% from general fund levels in the fiscal 2008-09 budget that runs through June 30.

"This budget is lean and focused," the governor said at a news conference. "In these tough economic times, we can't do everything, but we will do what's important to help get our state moving forward. For starters, government will live within its means and not pile a big tax increase on families and businesses who are already struggling."

The state will increase K-12 spending by about $424 million. Proposed cuts to aid for the University of Minnesota and the Minnesota State Colleges and Universities system would be restored. The governor also urged both systems to freeze tuition rates. Proposed eligibility reductions for medical coverage for some would be delayed until January 2011.

Pawlenty also wants to exempt the first $2,400 of unemployment insurance benefits from state income taxes for 2009 at the cost of $28 million and he recommended providing an additional $10 million for court operations.

The latest state economic forecast projected a further drop in state revenues but it is being offset by $1.3 billion in federal funds. Pawlenty's all-funds $57.6 billion budget eliminates the deficit and raises some fees to rebuild the state's reserve by cutting $2.5 billion in spending and by raising $3.1 billion in one-time infusions of revenue. That includes selling nearly $1 billion of bonds that would carry the state's appropriation pledge but be repaid with tobacco settlement funds.

The Republican governor is pressuring lawmakers not to turn to any major tax increases to balance the budget as they take up the spending plan. The Senate and House are controlled by Democrats and Senate Democrats have proposed spending an additional $2 billion that would come from tax increases on the state's top earners.

Separately, the Senate this week passed a $367 million capital bonding bill. The House is working on its own version. The governor has said he might support some limited borrowing to help leverage maximum federal stimulus dollars, but he has not set a size limit on any package.

Minnesota's $4.3 billion of general obligation bonds are rated AAA with a negative outlook by Fitch Ratings. Moody's Investors Service rates the state Aa1 with a stable outlook and Standard & Poor's rates it AAA with a stable outlook.

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