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Gov. Tim Pawlenty delivers his seventh State of the State address Thursday, including a long list of business tax breaks among his proposals. Behind him is House Speaker Margaret Anderson Kelliher.

Pawlenty cuts budget, Morris takes hit

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St. Paul Capitol Bureau

Morris Sun Tribune report

ST. PAUL - Local governments, health providers, colleges and pretty much every other group that depends on state money took a punch in the gut Tuesday when Gov. Tim Pawlenty released his proposed budget for the next two years.

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According to figures compiled by Morris City Manager Blaine Hill, the city is expected to lose 11 percent of its Local Government Aid, which amounts to reductions of almost $173,000 this year and about $385,000 in 2010.

This is on top of the $128,000 the city lost in December when Pawlenty used a budget tool known as "unallocation" to erase a $426 million budget deficit for the current biennium.

Hill said the proposed cuts probably represent the worst-case scenario for city budgeting -- he doesn't believe it's likely the Legislature will impose deeper cuts than Pawlenty has proposed -- but that larger equipment purchases on some projects likely will be shelved.

Hill criticized the governor's plan, saying that local governments anticipated aid cuts but asked that reductions be made fairly. However, the governor proposed just a 2 percent state budget reduction while hitting Morris with a cut five times as deep.

"When the state's cutting spending 2 percent and we're cutting 11 percent, something's wrong," Hill said.

The city will move ahead on plans -- at least in the near term -- on a major infrastructure renovations for the Highland Homes Addition in 2009. The project cost is estimated at $2.6 million, and the City Council approved going out for bids on the project, despite the precarious budget situation.

Hill noted that contractors are eager to find work and that might help the city get lower bids for the work, and that interest rates are very attractive for financing the project.

This perfect storm might not last, he said, with a federal economic stimulus package that is nearing approval focusing on infrastructure projects. The time is ripe to get bids in hand since contractors might be finding more work in coming months through the fed's package and that competition might wane, Hill said.

The Highland Homes water and sewer systems are failing regularly, problems that won't go away because of a budget crunch, he said.

"I think this is the best money we could be spending," Hill said.

Pawlenty's budget plan calls for $33.6 billion in spending, down 2 percent from the state's existing $34.4 billion budget. The announcement is the start of substantive budget discussions at the Capitol.

"The upcoming budget debate should not just be about where we are now. It should be about where we're headed," Pawlenty said. "That means looking forward, not back, and setting priorities that will deliver a better future. This is a plan that doesn't increase tax burdens on struggling families and job providers, lives within our means, and positions Minnesota for growth."

The Republican governor said public school education will be spared most of the budget-cutting pain as state government faces a deficit of near $5 billion that many in the Capitol expect to near or top $7 billion when all is said and done. He also said he will do whatever he can to keep funding for the military and public safety.

The governor proposes eliminating the deficit through $2.5 billion in spending reductions and by using funds including $3.2 billion the state expects to receive from a federal economic stimulus package.

Public schools could see funding increases. The governor proposes spending $41 million on his alternative teacher pay program, known as Q-Comp, and an additional $91 million on a new education funding initiative tied to student achievement.

Pawlenty plans to increase health and human services spending, although at a much lower rate than Democrats, in particular, want.

Most of the budget-balancing work will come via spending cuts. Among those cuts will be aid to local governments, programs Pawlenty long has said are needed but need to change so local officials do not rely so much on state aid.

Government reform is a theme in the proposal. Pawlenty wants counties and states to work together to provide more efficiency in human service programs.

County aid budget reductions will be lessened if counties comply with those reforms, Pawlenty said. Also, his proposal allows counties to opt out of some mandates.

While the governor proposes big budget cuts, he also wants to substantially chop business taxes, which would further reduce money available for the state to spend. He wants to cut the 9.8 percent business tax rate nearly in half over six years and provide a tax credit to small businesses.

Democratic legislative leaders say they will schedule hearings around the state to hear comments on Pawlenty's budget proposals.

On March 4, a new economic report is due that many in the Capitol say will show a deficit near or above $7 billion in the $30 billion-plus two-year budget that begins July 1.

Once the new deficit is announced, Pawlenty will retool his spending proposal, followed in later March or April by budget plans by Democrats who control the House and Senate.

The state constitution requires legislators to adjourn for the year by May 18, but some already are predicting a summer special session will be needed to finish the budget.

Most states face similar budget deficits, and many state officials hope a federal economic recovery bill making its way through Congress will help them get through what economists call the worst recession since World War II.

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