With the national recession deepening, Gov. Tim Pawlenty said Wednesday that he now expects the state's projected deficit to rise to $6 billion or even $7 billion when the next economic forecast is released in early March.

That would be equal to nearly 20 percent of the state's overall budget and a sharp rise from the $4.8 billion deficit that was projected in November.

"It's not clear when this economic collapse is going to bottom out," Pawlenty told a gathering of the Minnesota Association of Townships at St. Paul's Kelly Inn. "I don't want to discourage you further, but the signs are the economy's getting worse, not better. We'll get through this, but not without some pretty tough bumps in the road."

Pawlenty's comments came just as the Federal Reserve Bank of Minneapolis issued a regional forecast for the Upper Midwest that projects higher unemployment for the remainder of 2009.

Minnesota is expected to post the second-highest unemployment rate in the region, Fed officials said -- 7.8 percent. That would be a nearly 1 percentage point jump from the current 6.9 percent and would put further pressure on a rapidly dwindling unemployment insurance fund.

Steve Hine, director of labor market research for the state Department of Employment and Economic Development, said Minnesota has not seen a jobless rate that high since the deep recession of the early 1980s, when unemployment peaked at 8 percent.

Stimulus coming

One factor that could allay some pain and create jobs is the massive federal stimulus package moving through Congress. An agreement Wednesday among House and Senate leaders produced a slightly shrunken though still eye-popping $789 billion bill that could send $3.5 billion to $4.5 billion Minnesota's way in the coming weeks.

Pawlenty said the state will take the money, but was less than happy about it, calling the package "a big mess" that lacked a focused, disciplined approach to the nation's fiscal woes.

The package is intended to jump-start the nation's economy with a combination of tax cuts and spending, much of it aimed directly at states. The money, however, is parsed into dozens of finely defined categories -- everything from childhood immunization and highway projects to vocational rehab training and Medicaid.

Tom Hanson, the state's commissioner of management and budget, said that Wednesday's agreement was swift enough that Minnesota will be able to build the federal stimulus into the March forecast, tamping down the effects of one of the state's most punishing recessions.

Hanson said the state's economic trend lines have worsened dramatically since November's projection of a nearly $5 billion deficit. "Our revenue is falling fast," Hanson said, noting that the state is already $133 million below projection just in the last two months. Based on recent figures, he said, "It is altogether possible that we go to $6 or $7 billion."

The stimulus package, he said, will provide a one-time shot of money available between now and 2011. What it doesn't do, he said, is provide funds for any needs beyond that.

Senate Taxes Chairman Tom Bakk, DFL-Cook, said the package provides an immediate lifeline. "But to the extent that this money makes it harder to make cuts, it's problematic, because we've got a serious long-term problem here too. I just hope this doesn't make our problems worse in years to come."

Rammed through

Pawlenty said Wednesday that with every round of negotiations, the amount devoted to tax cuts and "bread-and-butter infrastructure" has fallen, lessening the bill's effectiveness. The final agreement pares back on fiscal stabilization funds for states, money for new school construction and tax incentives for home and car buyers.

"I think they have not done a good job of putting together a good stimulus package that's targeted and timely," Pawlenty said. "I've expressed our concerns about it, but they're obviously ramming this thing through without much concern for how the Republicans feel, with the exception of a few in the [U.S.] Senate."

With the exception of three moderate GOP senators, Republican legislators have withheld support for the bill, saying it tilts too heavily toward spending.

But DFLers say the federal money will provide a badly needed means of holding together a safety net for the thousands of Minnesotans who are losing jobs and health insurance daily.

According to Hine, every 1 percent uptick in unemployment equals 28,000 more jobless Minnesotans.

Pawlenty has particular reservations about the money earmarked for health and human services. The stimulus bill prevents states from big reductions in health care eligibility, requiring a "maintenance of effort" to qualify for the federal funds. Part of Pawlenty's budget balancing plan relies on such eligibility reductions, which would preclude an estimated 113,000 Minnesotans from getting subsidized care.

Hanson said that Pawlenty will have to undo some of those cuts in order to qualify for the stimulus funding. "Right now our estimates show we have to undo $89 million" in health care cuts, he said. One immediate impact: Thousands of parents enrolled in MinnesotaCare, along with their children, likely will be allowed to remain on the program, which provides low-cost health insurance to working families.

DFLers are cheering that prospect, but Pawlenty said it only puts off the day of reckoning, when the state can no longer afford the generous provisions it offers.

"Minnesota is in danger of becoming one big welfare and social service agency," Pawlenty said Wednesday, adding that "regardless of whether the Republicans or Democrats are in charge out there [Washington], they seem to have no concern for even attempting to balance the budget, which is sad."

Patricia Lopez • 651-222-1288