UPDATED 1:35 p.m.
ST. PAUL - Local governments, health providers, colleges and pretty much every other group that depends on state money took a punch in the gut today when Gov. Tim Pawlenty released his proposed budget for the next two years.
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 Min-nesota 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.
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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 spend-ing $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 pro-grams.
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 pro-posals.
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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.
