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Minnesota State Economist Tom Stinson, center, addresses media Tuesday at the Capitol in St. Paul as he announces a budget deficit of $4.57 billion. Also pictured are State Budget Director James Schowalter, left, and Budget Commissioner Tom Hanson. AP Photo/ Craig Lassig

Sinking budget gets brief life raft

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ST. PAUL -- Federal money may have saved Minnesota's budget this year, but state leaders warn that economic problems are far from over.

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Economic stimulus funds approved last month by Congress and President Obama lowered Minnesota's projected 2010-2011 budget deficit from $4.8 billion to $4.6 billion.

But the 2012-2013 deficit is expected to be even larger.

On the other hand, federal funds mean no deficit is expected in the current budget, with four months remaining.

Much of the federal help in the next two years goes to Minnesota's health care programs for the poor. Beyond that $1.8 billion, Gov. Tim Pawlenty said, up to $800 million more could be used elsewhere in state government.

"Federal stimulus health money, I want to emphasize, is one-time money," Commissioner Tom Hanson of Minnesota Management and Budget said. "It is not a permanent solution."

Tuesday's budget forecast was the real beginning of discussion about the two-year budget that begins July 1.

The next step in what now is predicted to be a $36.9 billion budget comes within two weeks, when Pawlenty promises to release an adjustment to the budget proposal he released in late January.

Even before Pawlenty presents his updated budget, Democrats who control the Legislature promise to begin crafting their own budget plan. From there, legislative committees will go through the budget proposals in depth.

The Legislature must adjourn by May 18, but some lawmakers already are saying a special summer session will be needed to finish budget work after that.

Before the Tuesday budget announcement, many in the know -- including Pawlenty -- predicted a deficit of $6 billion to $7 billion. The deficit would have been $6.4 billion if not for federal money.

State Economist Tom Stinson offered little hope for a quick recovery.

"We are in the worst recession of the post (World War II) era," he said. "But it will come to an end. It may take another stimulus package, but it will come to an end."

Until that turnaround happens, Stinson and Hanson said, revenues will continue to fall.

Individual income taxes are expected to drop $701 million in 2010-11, with corporate taxes down $230 million and sales taxes off $203 million.

Spending is not expected to rise much in any category other than state-funded health care.

Federal money used to help the state budget is just part of that coming to Minnesota. All told, about $9 billion is expected to flow to the state, mostly in the form of individual tax breaks.

About $4.6 billion in federal money will be given to state and local governments, but much of that is targeted for specific programs and cannot be used to reduce the deficit. State and federal officials still are trying to figure out what strings are attached to the money and are not sure how Minnesota can spend some of it.

Reaction to Tuesday's budget announcement was predictable -- Republican Pawlenty said now is not the time to raise taxes, Democratic legislative leaders hinted at tax increases and labor leaders said now is the time to spend money to keep their members working.

"This is a challenging (budget) forecast, but it reflects a challenging economy," Pawlenty said.

While Pawlenty repeated his opposition to what he considered an overly large federal spending package, he expressed no hesitation to accept the funds. He said the package could save or create 55,000 Minnesota jobs.

The Republican said that if his budget proposal passes, it will be the first time in state history that one budget is smaller than the one it replaces.

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