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Continued: Dayton, GOP finally reach budget deal

After weeks of crippling political deadlock, DFL Gov. Mark Dayton and Republican legislative leaders emerged in the darkened Capitol on Thursday to announce they had brokered a budget deal to end the longest state government shutdown in U.S. history.

The deal raises the revenue Dayton sought -- $1.4 billion -- but without raising taxes, which Republicans opposed. Instead, it reaches back to an earlier GOP offer to rely primarily on more borrowing from schools and from the sale of tobacco bonds. The House and Senate could return in special session to vote on a final budget as early as Monday or Tuesday.

Dayton and legislators said they plan to work "around the clock" through the weekend to fine-tune details and call a special session. State government would be able to start back up as soon as bills are passed and signed.

Dayton acknowledged the deal "certainly doesn't put us in a better situation, but the real solution for Minnesota and the nation is for the state and national economy to improve and put more people to work and, therefore, paying taxes.

"No one is going to be happy with this, which is the essence of a real compromise," he said as the deal was announced.

Dayton shocked some Democrats and other supporters earlier in the day when he said he was dropping his push to raise taxes on high earners and instead would accept a June 30 GOP offer that featured a $700 million money shift from K-12 school spending and roughly $700 million in tobacco revenue bonds.

Dayton's move means the deepest cuts in services will be averted, but it abandoned his campaign goal of balancing the budget by raising taxes on high earners.

He will also be able to claim credit for preserving thousands of state jobs by forcing Republicans to drop a proposed 15 percent reduction in state workers and for a $500 million bonding proposal that will kick-start private sector jobs. Dayton further got Republicans to eliminate controversial social policies from spending bills.

For their part, Republicans can tell constituents they honored their campaign pledge to oppose tax increases. But they also will be saddled with responsibility for a plan that adds to the state's debt and a budget that breaks their "live within your means" goal.

'No one's happy with it'

"It's not a perfect scenario, but we are in an imperfect situation," said House Speaker Kurt Zellers, R-Maple Grove. "It was about making sure we could get a deal that we all can be disappointed in. ... None of us got exactly all of what we wanted."

Republican leaders will spend the coming days cobbling together a list of bonding projects that may win some otherwise reluctant legislative votes.

Grumbling among rank-and-file members was swift.

Assistant Senate Majority Leader Dave Thompson, R-Lakeville, said the loss of social policy language would cost GOP leaders his vote. "If there can't be any policy changes contained in any of the legislation, then no," he said. "I'm not a supporter."

Sen. Michael Jungbauer, R-East Bethel, said the deal is "a real non-starter for me," but conceded, "I don't want to see this shutdown."

On the DFL side, Golden Valley Rep. Ryan Winkler called it "the most irresponsible budget in our state's history." Borrowing money to balance the budget was wrong when Republican Gov. Tim Pawlenty did it, he said, and that pattern is being repeated. "Minnesota has steadily marched down a path toward a fiscal crisis, like we have seen in other dysfunctional states," Winkler said.

Sen. Barb Goodwin, DFL-Columbia Heights, said that "before, it was House and Senate Democrats who caved in to Pawlenty's shifting." Now, she said, "It's Dayton caving in to Republicans shifting the debt into the future.''

Some legislators were disappointed other options weren't explored.

"If we did Block E [casino] and racino together, that would be a $200 million shift," said Rep. John Kriesel, R-Cottage Grove. "That's much easier for Minnesotans to swallow."

Sen. John Howe, R-Red Wing, urged Republicans not to let bickering scuttle the deal.

"I don't think people should stand in the way of it because we do want to get Minnesota working again," he said. "Generally, no one's happy with it."

Terms of the offer

The $35.5 billion two-year budget deal would cause the state to double down on short-term financial shifts that could make it even more difficult for Minnesota to right its ledger in coming years.

For example, the state will end up owing a record $2.1 billion to K-12 schools with no method laid out yet for paying that money back.

Last week, the national firm Fitch Ratings downgraded the state's credit rating over the use of these types of stopgaps and warned against similar one-time accounting tricks.

Borrowing $700 million against future tobacco settlement revenue would involve repayment with significant interest. A bonding bill would add jobs but also add to the state's mounting debt service.

Dayton and the Republicans who dominate the Legislature have been at odds since January over how to resolve the state's $5 billion projected deficit.

When the session ended May 23, the fight rolled on, with Dayton vetoing every Republican budget bill save for agriculture.

When the state's two-year budget expired June 30, triggering the second government shutdown in seven years, the two sides continued to squabble.

The impasse rankled for two weeks, as state parks closed, racetracks closed, thousands of state employees began filing for unemployment and businesses began to feel effects of a government unable to so much as issue a permit or renew a license.

By Thursday, the two sides had not even met to talk for a week. That's when Dayton made one last try.

"Despite my serious reservations about your plan, I have concluded that continuing the state government shutdown would be even more destructive for too many Minnesotans," Dayton wrote to legislative leaders. "Therefore I am willing to agree to something I do not agree with -- your proposal -- in order to spare our citizens and our state from further damage."

Within hours, the stalemate was broken.

Staff writers Eric Roper and Bob Von Sternberg contributed to this report. Baird Helgeson • 651-222-1288

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