Deal is near at the Capitol, leaders say

Legislative leaders expressed renewed optimism Friday about reaching a deal to erase the state's $936 million budget deficit, predicting an end to the legislative session as early as today.

"We are as close as we have been throughout the negotiation," House Speaker Margaret Anderson Kelliher said Friday. "It is feeling like we are on the path to an end of session that would probably conclude most likely tomorrow."

Talks continued into Saturday morning, and outstanding pieces under discussion appeared to include property tax relief and health care reform.

Foreclosure deferment passes

Late Friday, the House passed a bill that would defer foreclosures on homes bought with subprime mortgages and reduce payments on those troubled loans during the deferment period. The period would last for up to one year in cases when lenders refused to negotiate.

DFLers supported the legislation as a lifeline to 12,000 beleaguered homeowners, but Republicans said it would increase the costs of mortgages for many more Minnesotans. "We're going to dry up credit in this state," said Rep. John Berns, R-Wayzata.

Rep. Jim Davnie, DFL-Minneapolis, a sponsor of the proposal, said it was in line with actions taken by the Legislature during previous foreclosure crises.

The House vote was 81-53, short of the margin needed to override a possible veto by Gov. Tim Pawlenty. The Senate already has approved the bill, also by less than a veto-proof margin.

The measure would establish a process allowing homeowners who hold a subprime mortgage to reduce payments by perhaps 35 percent. Homeowners would have to contact a foreclosure-prevention counselor, agree to use their services and make partial monthly payments during the deferment period, which would last for up to one year.

Education bill vetoed

In another late-night action, an education bill that would have sent an additional $44 million to Minnesota schools in 2008-09 drew a Pawlenty veto.

The governor had objected that much of the money was to come from the Q Comp program, a pet project of his designed to help school districts finance new ways to pay teachers.

But Pawlenty argued that the measure would derail a key reform. Q Comp money is distributed to districts to help them pay for teacher pay raises based on ability and student performance rather than years of experience and piling up college credits.

Property tax issues

On property taxes, DFLers agreed to limit increases to no more than 3.9 percent a year, a significant concession to Pawlenty, who has worried that failing to cap property taxes would result in large-scale government growth.

But DFLers were also holding out for more cash for local aid at a time when Pawlenty and other Republicans said the state is too cash-strapped. Kelliher said Friday that DFLers had agreed to $60 million in local government aid and $25 million in other funding to help support local services such as police and fire and to provide property tax relief to homeowners.

Speaking to reporters shortly before midnight, House Minority Leader Marty Seifert, R-Marshall, said the property tax cap would not apply to cities with fewer than 2,500 residents.

Seifert said, too, that Republicans were insistent that the levy cap go beyond one year. "One of the firm items on the property tax cap on our side is that it has to be for three years -- not for one year, nine months," he said. "It needs to be meaningful."

On the question of erasing the state's deficit, Pawlenty and legislative leaders have come close to agreement on gaining $109 million from tightening tax regulations on foreign operating corporations and using $355 million in cuts. But the specifics of those cuts are related to health care reform and remained elusive, Kelliher said.

mbrunswick@startribune.com • 651-222-1636