Nearly 85,000 working Minnesotans would lose their health care, while cities, counties, colleges and universities would see funding cuts in the first proposal in a generation to make year-to-year reductions in the state's budget.

The spartan 2010-11 budget proposed Tuesday by Gov. Tim Pawlenty would erase a $4.8 billion projected deficit and cut business taxes, but at a heavy cost to some Minnesotans.

To stanch the flow of red ink, Pawlenty would slash projected spending by $2.4 billion, employ nearly $1.3 billion in accounting shifts and, in an unexpected move, sell bonds that wring a one-time cash infusion from the state's yearly tobacco settlement funds.

The bonds, if they could be sold in today's flat-lined market, would bring in nearly $1 billion in revenue to help patch the state through what's expected to be a rough couple of years.

"This is a set of circumstances that I think is going to linger," Pawlenty said during his official budget release. But, he said, the state must do more than balance the bottom line in hard times. "This debate is not about where Minnesota is currently. It's about where Minnesota is headed."

To that end, Pawlenty said he will insist on halving the state's business taxes -- a move that will cost state coffers $287 million in the short run but which Pawlenty said will spark job growth.

Pawlenty is also counting on at least $920 million in federal stimulus funds to help the state out of its deficit hole. The figure is actually expected to be much higher -- about $3 billion or more -- but Pawlenty pointed out that fully half that money may go to "shovel-ready" projects that will benefit the state's economy, but not its budget. Whatever additional money comes in, he said, could serve as a cushion against the deeper declines expected in coming months.

The proposed budget is 2.2 percent smaller than the budget for the current biennium. The last time the state faced an actual year-to-year reduction in the budget -- as opposed to a reduction from projected levels -- was 1986, amid a recession that hit Minnesota's economy hard. The 2.2 percent reduction is more than the 1.5 percent reduction of 1986, but nowhere near as steep as the 17 percent year-to-year hit in 1983.

Tuesday's proposal -- which got a chilly reception from the DFL-controlled Legislature -- includes larger goals of Pawlenty's that he has attempted before without success centering on performance-based funding. K-12 schools, for instance, could tap an extra $300 per pupil if they move to Pawlenty's pay-for-performance structure known as Q Comp.

As promised, Pawlenty delivered a hard blow to counties, cities and townships -- a 10 to 15 percent reduction in projected subsidies known as local government aid. For some local governments, the aid supplies more than half their revenue. Mayors gathered in St. Paul on Tuesday called the proposed reductions "devastating" to already-reeling cities.

DFL leaders, who, unlike GOP leaders, were not given an advance briefing on the budget, were left groping for details on a plan that few had been able to review. "The devil's in the details, and we have no details," said House Majority Leader Tony Sertich, DFL-Chisholm.

Senate Majority Leader Larry Pogemiller, DFL-Minneapolis, said the Senate would "work with the governor's budget as seriously as we can," but said that throwing people off health care in a severe recession was "probably not a smart or nice thing to do."

Pawlenty said that he was not without empathy and that he had faced similar challenges. "My mom passed away when I was in high school," he said. "Not too long after that my dad lost his job for a while, and we as a family had a very upfront and personal look at what it means to face economic challenge and economic anxiety." The answer to hard times, Pawlenty said, was to balance the budget and prepare for the future.

Critics said that not everyone will share in the pain.

Minnesota AFL-CIO President Ray Waldron called Pawlenty's proposal "the most cynical budget ever. This guy sounds so good that you almost forget his budget kicks struggling Minnesotans while they are down."

Pawlenty has ruled out tax increases, saying that a higher income tax would yield too little and risk driving away capital while higher business taxes would make the state even more uncompetitive.

The budget-balancing task is complicated by two unknowns: the exact size and scope of the federal bailout that should come together in the next few weeks, and a state economic forecast coming March 3 that is almost certain to show another big drop in projected revenues.

Tuesday's proposal will be the first salvo in what is expected to be a contentious legislative session, as the Republican governor tussles with the DFL-controlled Legislature, where leaders argue that revenue increases should be in the mix.

Staff writer Mark Brunswick contributed to this report. Patricia Lopez • 651-222-1288