ST. PAUL -- Gov. Tim Pawlenty announced Minnesota's largest-ever budget cut Tuesday, reducing state aid to local governments, lowering health-care funding, trimming state college budgets and, in general, shrinking the size of state government.

Pawlenty's cuts equal nearly $736 million, which along with a

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$1.8 billion delay in state payments to schools make up most of the $2.7 billion he needed to balance the state budget.

The cuts were necessary because Pawlenty rejected a tax increase passed by the Democratic-controlled Legislature that would have balanced the budget.

The biggest portion of Tuesday's budget-balancing action was delaying $1.8 billion in state payments to school districts.

Typically the state pays for education up to 90 percent the first year of a school district's biennium and comes back with a 10 percent payment the following year, said Rob Soberg, legislative liaison for the Duluth school district. Now that formula will shift to 73 percent and 27 percent.

That results in a one-time savings of about $1.77 billion for the state.

Although it's not a true cut, the shift will have an impact on school districts' bottom lines, including Duluth's.

To make up for the temporary shortfall, districts will have to pay to borrow money from a bank or dip into reserve funds, which means that money isn't available for interest earnings.

That probably will translate into a loss of about $20 to $30 per pupil for school districts, Soberg said, or about $260,000 to $400,000 a year for Duluth for two years.

"Even though it's not a real cut for school districts, it still results in a real loss," Soberg said. "But it's not as bad as some other areas of state government are getting it."

Local government aid

Pawlenty plans to cut $300 million out of the $1 billion that local governments had planned to receive in state aid, a proposal city and county leaders say will force up local property taxes.

In St. Louis County, for example, state aid to reduce property taxes will be cut by $1.5 million next year and $3.2 million in 2011.

Over the two year budget cycle, the county will lose $4.7 million of an expected $25.2 million in general state aid.

"That's actually less than he proposed cutting in January. But it's still a big hit,'' said John Ongaro, the county's director of intergovernmental affairs. "And the cuts also are weighted more in the second year of the biennium, so that gives the Legislature and the governor another chance next year to reach a compromise to balance the budget and maybe find some new revenue sources.''

But Pawlenty also has unveiled major cuts to health and human service programs, including mental health grants, chemical dependency grants, child support enforcement, American Indian Child Welfare, emergency general assistance and more.

For example, Pawlenty announced $39.2 million in cuts over the next two years from a $67 million program aimed at allowing counties to focus spending where needed for various social service needs. Of that, St. Louis County will lose more than $2 million over two years.

"That program gave the county flexibility to aim the money where it would do the most good locally on seven different programs, everything from elderly care to chemical dependency to child abuse, the mentally ill, adult senior care,'' Ongaro said.

Health care

The governor also would trim $236 million from a variety of health programs. That comes from $9.3 billion the state planned to spend on health programs, mostly for poor Minnesotans.

Cuts to health and human services were fair, said Rocky Chapin, executive vice president of the hospital division for SMDC Health System.

The programs not cut were state payments to hospitals for Medicaid reimbursements, state payments for inpatient hospital services for 16 common procedures and money for medical education and research, Chapin said.

"We were worried that those would be cut, and they weren't," Chapin said.

Cuts came to General Assistance Medical Care, which funds hospitals to help treat the poor with chronic illnesses and diseases.

"This is a significant cut we will have to evaluate," Chapin said. He said without GAMC being rolled into a different program such as Minnesota Care, it could cost about $10 million per year for the hospital.

Lynn Devlin, marketing coordinator for St. Luke's, said the hospital will need to study the details to determine the impact the cuts will have on St. Luke's programs.

"We do know it will mean reduced payments for the care that we provide at a time when we are serving more uninsured people in our community and region," Devlin said.

Colleges and universities

Pawlenty's plan would slice $100 million from the $3 billion that state colleges and universities had expected.

While UMD had few details on how it would be affected, spokeswoman Susan Latto said the impact would be severe.

The reductions will hurt Lake Superior College, spokesman Gary Kruchowski said.

"Adjustments will need to be made," he said. "With a year to make them, it allows for some flexibility."

He estimated that the cuts will leave about a $1 million gap in the college's budget, if the $50 million unallotment is spread proportionately throughout the MnSCU system. He said the college expected a $70 million reduction to MnSCU, "so it's definitely not the worst-case scenario."

State agencies

Most state agencies would be cut another 2.25 percent, beyond a Legislature-passed 5 percent cut, which will force an unknown number of state workers out of their jobs.

The American Federation of State, County and Municipal Employees estimated that 3,400 workers at all levels of government would lose jobs.

Alan Netland, president of AFSCME Local 66 and president of the Duluth Central Labor Body, said Pawlenty had taken these actions because of "national ambitions."

"There are plenty of moderates -- the Arne Carlsons and others -- who believe this is not the right way to do things, pushing costs off to the future and the next generation," Netland said.

The actual cuts will not occur until the new budget begins on July 1. Pawlenty said he could make changes before taking final action.

Pawlenty repeated his oft-stated concept that since families are financially hurting and being forced to cut back, government should do the same during the current recession.

"The overall impact of these reductions will be to have state government live on about 96 or 97 percent of what it's living on right now," he said. "The impact will be felt, but we will get through this difficult economic period and position Minnesota for future growth by reining in government spending and keeping our state competitive."

News Tribune staff writers John Myers, Sarah Horner, Jana Hollingsworth, Peter Passi and Andy Greder contributed to this report.