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State deficit shrinks to $994 million, down from $1.2 billion

ST. PAUL, Minn. (AP) -- Budget pressure eased slightly on Minnesota lawmakers Tuesday with a new economic report showing the state's projected deficit shrinking to $994 million.

That estimate released by state officials represents about a $200 million drop from a forecast produced a few months ago. It's the first time since February 2008 that lawmakers have been presented with a deficit projection below $1 billion.

"This is continued evidence our economy has bottomed out," said Minnesota Management and Budget Commissioner Tom Hanson. "We are in the long, slow road to recovery."

The deficit is for the budget that runs through the middle of next year. Republican Gov. Tim Pawlenty has proposed solving it mostly through spending cuts; Democrats in charge of the Legislature haven't released their own plans yet. They have until May to fix the shortfall.

But the outlook deteriorates again in the long term, with a deficit for the next budget period expected to swell to $5.8 billion. That projection for fiscal years 2012-13 had been $5.4 billion in December.

State economist Tom Stinson said the outlook could brighten if the job market perks up, people buy more goods subject to sales taxes and there are other changes outside lawmakers' control.

"This isn't weather forecasting, this is economic forecasting," Stinson reminded them. But he stressed that there was more reason to be optimistic than there was over the past year. "We think the economy is on the verge of turning up."

Minnesota has a current two-year budget of $31 billion. But its revenues lag far behind the expected costs.

Lawmakers had expected an economic improvement in the near term because of positive signals on the economy, including an improving employment picture and better-than-expected tax collections in January. State leaders learned recently they would get more federal help paying for Medicaid programs, reducing Minnesota's budget burden by more than $80 million.

The signals are more volatile in the long run. Payroll levels aren't expected to be restored to pre-recession levels until spring 2012, which costs Minnesota income taxes.

Pawlenty has urged legislators to ratify a series of budget cuts he made on his own last summer. Because he was using an executive cutting authority, spending levels for affected programs are due to bounce back after July 2011.

Adopting his cuts in law would bring down the future deficit as well as any additional permanent spending reductions the Legislature approves this year. If Pawlenty's budget plans were enacted without changes, the future deficit would be around $2 billion, Hanson said.

As it stands, the state must repay a portion of aid payments to schools that were delayed as part of Pawlenty's balancing plan. That accounts for $1.2 billion of the problem.

No matter what, the next governor is sure to face a deep budget hole from the outset. Pawlenty isn't running for a third term; his successor takes office in early January.