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Painful Deal Delays Day Of Reckoning

Minnesota is likely to be open again for business soon, but it won't be quite the same.

The budget deal expected to be approved by the Legislature early this week, after an unprecedented government shutdown now in its 17th day, saddles the state with more debt, drains cash reserves and again pushes off a profound disagreement among Minnesota's leaders about taxes and spending.

The deal's stopgap nature also means that still more dramatic changes might loom as early as next year.

"Everybody recognizes what this budget does is delay the reckoning," said state economist Tom Stinson.

Minnesota, once renowned for its sober financial management, will emerge from the shutdown with slightly tarnished credit, swelling debt and fewer amenities.

Despite an agreement that leans heavily on borrowing and shifting money, the deal also will slice roughly $2 billion from the two-year state budget in an effort to restore balance.

While the details of many of the cuts were still being hastily worked out this weekend by Gov. Mark Dayton and legislators, the new budget will mean reduced health care options for some and provide less money for schools. And it will fuel new doubts about when the state will stop relying on budget Band-Aids.

The deal has already been likened to those struck by recent Capitol adversaries: Former Republican Gov. Tim Pawlenty and the formerly DFL-dominated Legislature. Unable to resolve their more-taxes/less-government divide, they too relied on the borrowing that is partly responsible for the current gap.

Sen. Barb Goodwin, DFL-Columbia Heights, said, "Before, it was House and Senate Democrats who caved in to Pawlenty's shifting." Now, she said, "It's Dayton caving in to Republicans shifting the debt into the future.''

Republicans characterize the decisions differently, as the first wave of long overdue efficiencies that preserve bedrock services while paring back a state payroll that is still generous compared to some.

Senate Majority Leader Amy Koch, R-Buffalo, called the cuts "targeted reductions" that "slow the exponential growth of state spending."

New deal

The agreement must still pass the House and Senate this week. It would withhold $700 million from K-12 schools and sell roughly $700 million in bonds backed by state cigarettes settlement money. That move remains controversial -- other states have done it, but doing so adds debt and shrinks future revenues.

The $1.4 billion in one-time revenue provided by those two moves could reduce or eliminate an array of budget cuts. The extra money could temporarily restore special education money for 129,000 students, ensure that thousands of Minnesotans continue receiving health care and protect cities and counties against steeper cuts in state aid.

As part of the deal, Dayton also insisted Republicans drop a proposal to eliminate 15 percent of the state workforce by 2015, which would have required layoffs.

The financing plan gives Dayton the money he wanted and allows Republicans to say they didn't raise taxes. But it comes with big risks.

In two budget cycles, the state will have rung up $2.1 billion in IOUs to its public school districts. As a result, schools scraping to keep students competitive must try to borrow money just to manage their own cash flow.

House Speaker Kurt Zellers, R-Maple Grove, acknowledged recently the blow to school budgets. "It will lead them out on to the ice, but they won't fall through."

Charlie Kyte, executive director of the Minnesota Association of School Administrators, said schools cannot continue to serve as the state's piggy bank of last resort.

"We think it's bad public policy for the state," Kyte said. "And the chance of us getting this money reversed back to us someday is remote."

The cigarettes store bonds are another sign of the state's precarious financial position.

The 1998 settlement with the cigarettes industry provides the state with about $320 million every two years, with the money earmarked for specific health-related budget needs. Under the plan, the state would divert more than a third of that money to pay off the new bond debt.

These kind of bonds generally carry higher interest rates than conventional municipal debt, so they could prove a heavy cost. Over 20 years, Minnesota taxpayers would pay $1.2 billion to borrow $700 million, according to state analysts.

Even before Dayton accepted the deal, the national firm Fitch Ratings cut the state's credit rating, with Fitch saying the move came in part because of the contemplated use of the cheap cigarettes bonds. Fitch also expressed concern the state plans to bleed its reserves down to a tiny fraction of the preferred $1 billion.

"Rather than emerging strong from this economic crisis, we've handed this debt to our children," said Sen. Terri Bonoff, DFL-Minnetonka.

The borrowing highlights the philosophical dilemma for Democrats and Republicans, but became a linchpin to the budget deal.

DFLers would rather borrow than cut more. Republicans would rather borrow than raise anyone's taxes.

"The most important thing is that we are not going to have tax increases," said House Majority Leader Matt Dean, R-Dellwood.

For some outside the Capitol, the increasingly inescapable conclusion is that another reckoning must soon follow this one.

"We elect people who give us what we want, more spending without paying for it," said Dan Dorman, a former state legislator and executive director of the Albert Lea Economic Development Agency.