Pawlenty's budget fix: Spend less and tax less

Staring down a nearly $1 billion projected deficit, Gov. Tim Pawlenty said Friday that the state must scale back health care and higher ed spending, dip into reserves and, in a surprise move, cut the state sales tax.

Pawlenty rebuked the DFL-controlled Legislature for overriding his veto of gasoline and metro sales tax increases, and said lowering the state sales tax by one-eighth of 1 percent would partly neutralize those increases.

The cut, he said, could also serve as "a modest stimulus" to the economy.

"The Minnesota economy is under great strain," Pawlenty said, noting that the housing collapse, credit crisis, skyrocketing oil prices, a grinding war and global economic changes have all taken their toll and may do so for years.

"It's important to recognize that the country and Minnesota face great challenges," he said.

Pawlenty's recommendations for the rest of the current two-year budget period would reduce the growth in state spending by $341 million.

They also would use one-time money and accounting shifts to plug the remainder of the state's anticipated $935 million budget gap.

Pawlenty said he deliberately did not make deeper cuts "because we wanted the proposal to be reasonable." He wanted the DFL-controlled Legislature to "genuinely and earnestly" consider his recommendations, he said.

Pawlenty also noted that tougher cuts may be unavoidable in the future, should economic conditions fail to improve.

Among those who will feel the pinch most are the University of Minnesota and the Minnesota State Colleges and Universities (MnSCU), both of which would be cut more than $26 million in 2008-09.

Richard Pfutzenreuter, chief financial officer for the University of Minnesota, called the proposed cuts "a significant momentum-stopper" that could result in increased tuition. MnSCU officials said they too may have to consider higher tuition.

Pawlenty said that both systems should be able to cope through judicious belt-tightening and use of their own reserves. The U, he noted, could start with cuts in its administration.

No one who has health care coverage right now would be cut, he said, but the state cannot afford extensions in coverage.

Confrontation coming

Reaction from DFL House and Senate leaders was muted Friday, but signs of the coming confrontation were emerging.

House Majority Leader Tony Sertich, DFL-Chisolm said Pawlenty was "pulling the rug out from under" months of joint efforts on health care reform. He also expressed deep skepticism that Pawlenty would follow through on some proposals, such as the tax cut.

Senate and House leaders have said they are opposed to fixing the budget with one-time funds or accounting shifts.

"We're not trying to pick a fight with the governor," Pogemiller said. "We're not trying to box the governor in." However, he said, "we do think all this rhetoric about cutting state government is starting to catch up."

Even once-ardent slashers of government appear to be in retreat. David Strom, president of the Minnesota Free Market Institute and one of Pawlenty's frequent critics, called the recommendations "about as good a package as you can expect."

Phil Krinkie, president of the Taxpayers League of Minnesota, which advocates lower taxes and smaller government, said of Pawlenty's sales tax cut that "I don't know if there is a lot of appetite around there to actually cut taxes."

Pawlenty said K-12 classrooms and local government aid would receive no cuts, but also no funding increases. State agencies would be cut, some by up to 4 percent.

In a measure long sought by DFLers, Pawlenty would close the loophole on foreign operating corporations, netting the state an additional $102 million in 2008-09.

Minnesota has slipped from a $1 billion surplus projected in February 2007 to a $935 million deficit projected last month, with revenues tumbling in every major tax category.

In recent weeks, the financial picture has worsened even more. Home foreclosures are reaching record heights, the price of oil has shot past the $100-per-barrel mark, consumer confidence is at record lows and job losses nationally are at their highest levels in five years.

Attempting to sound an optimistic note, Pawlenty said on Friday that Minnesota faces "a bit of an uphill climb, but we can do this."

State spending will still increase 9.2 percent over two years -- lower than the 10.6 percent authorized last year, he said, but considerably higher than the private economy.

State Finance Commissioner Tom Hanson defended the use of reserves and shifts to soften the blow of budget cuts. The state's reserves, he said, "are there to guard against variations in revenue collections and expenditures. It's there to make short-term budget cuts less painful and that's exactly what we did."