ST. PAUL &045; Stunned state officials learned Wednesday that Minnesota faces a $4.56 billion projected deficit over the next 2 1/2 years, the biggest shortfall in state history and one far worse than the most dire predictions.

The figure, representing the difference between expected revenues and spending commitments, amounts to 13.6 percent of the state’s two-year budget. Minnesota’s budget problem is among the worst in the country, and solving it is likely to affect state spending on everything from state park operation to college aid to road construction.

A weak stock market, a slow economic recovery and higher-than-expected spending in some areas are to blame, forecasters said.

Despite the news, Gov.-elect Tim Pawlenty said he wouldn’t waver from a campaign promise to not raise taxes during his four-year term.

&uot;The situation does not call for tax increases. That is not on the table, but nearly everything else will be,&uot; he said, adding, &uot;Regardless of how we got here, I now recognize and fully accept that this is my problem and we intend to fix it.&uot;

Pawlenty, a Republican, and the Legislature must cover a $356 million deficit for the remaining seven months of this budget cycle and tackle a $4.2 billion problem for the two years after that.

Pawlenty will submit his fix in about 10 weeks. He has said his proposal will probably cut or freeze spending for programs, merge or abolish agencies, encourage early retirements or lay off state workers, farm some state functions out to nonprofits and redirect money from the state’s settlement with tobacco companies.

&uot;He said he could do it and we’re going to give him the opportunity to show how it can be done,&uot; said Senate Majority Leader John Hottinger, DFL-St. Peter.

House Speaker Steve Sviggum, R-Kenyon, supported Pawlenty, saying, &uot;At this point we are ruling tax increases out.&uot; Sviggum said nothing will be immune from cuts, but he added that education and nursing home funding would be considered last.

Albert Lea city manager Paul Sparks anticipates cuts in the local government aid (LGA) that Albert Lea and other cities and counties receive, but does not know the magnitude of such cuts yet. For Albert Lea the LGA is 54 percent of the city’s annual budget.

&uot;A large cut would be devastating to the city of Albert Lea,&uot; Sparks said. Published reports have speculated that the state could cut LGA in half and save almost $1 billion.

Sparks said that if a cut became that large the city would have to make cuts in areas that are considered public neccesities such as police and fire departments, and public works. He said the city would first look into cutting parks and recreation money, but that cutting to the bone would take away many services that the public enjoys and utilizes daily such as the library and city parks.

The city cannot anticipate what the cuts will be, but has levied up to its limit for the upcoming budget year in order to soften the blow a bit.

&uot;Cities like Albert Lea really need a formula they can look at so they know what they will get,&uot; said Dan Dorman, R-Albert Lea.

He said LGA will probably be cut, but said it’s not likely it would be by as much as half, or even 25 percent.

Dorman called the formula for determining LGA amounts antiquated, and said the legislature should consider changing it. Many cities who don’t neccesarily need LGA get large amounts of it, while cities like Albert Lea, who do need it, get less. The formula doesn’t take into account the needs to these cities, but mostly lets past LGA amounts dictate what they get, he said.

Budget-watchers had been bracing for a deficit above $3 billion and possibly approaching $4 billion. But the number was a jaw-dropper.

Sviggum termed it &uot;one megadeficit.&uot; Others called it &uot;mind-boggling&uot; and &uot;grim beyond anyone’s expectations.&uot;

Gov. Jesse Ventura said the problem wasn’t his fault, pointing out his proposal last year to balance the budget by raising taxes and cutting spending. The Legislature instead deferred much of the problem by draining state reserves and using accounting shifts.

&uot;This problem today does not have my fingerprints on it in any way, shape or form,&uot; Ventura said.

The forecast could have been $1 billion worse if economists figured in across-the-board inflation in spending as they have in the past. Lawmakers passed legislation last session &045; over a Ventura veto &045; prohibiting officials from assuming inflation in the forecast.

One troubling side note was that the forecast is based on strong economic growth &045; 2.6 percent in 2003, 4.1 percent in 2004 and 3.8 percent in 2005 &045; which means the economy would have to shoot through the roof to make a dent.

State economist Tom Stinson said while nearly all states are struggling with budget problems, Minnesota situation is among the most severe.

&uot;We are not going to grow our way out of this problem,&uot; Stinson said. And he warned that the situation is more likely to worsen than to suddenly improve, especially given the economic consequences that would come with a war with Iraq or another terrorist attack.

The deficit causes are many:

&045;Obligations for 2004-05 are projected to grow to $31 billion, 14.3 percent more than the current two-year budget. Exploding health care spending and added education costs, including $1 billion stemming from the 2001 property tax overhaul, lead the way.

&045;At the same time, revenues are expected to rise only by $1.6 billion, or 6.6 percent. Income tax collections are more sluggish than anticipated, primarily because a weak stock market sliced deeply into the amount of capital gains taxes people paid. About 40 percent of Minnesota’s revenue comes from the income tax.

&045;For the first time since wage patterns were tracked in 1958, Minnesota experienced no growth for a quarter. In fact, total wages around the state held steady for three out of four quarters last year.

&045;Job losses in Minnesota exceeded the national average. Minnesota has lost 2 percent of all jobs since February 2001 compared to 1.2 percent nationally. More than 80 percent of the manufacturing jobs gained during the booming ’90s disappeared.

Peggy Ingison, state budget director, said the situation is worse than the one Republican Gov. Arne Carlson faced when he took office in 1991. Then, the deficit projection equaled 7.8 percent of spending for 1992-93. But Carlson and legislators had $550 million in reserves to tap.

Last spring’s budget-balancing plan dried up the reserves, leaving only about $24 million.

The fall economic forecast is one of two done a year.

Sviggum said the House probably will wait until a new snapshot is taken before they get to work on the 2004-05 budget. Another forecast traditionally comes out in late February or early March.

Senate Finance Chairman Richard Cohen, DFL-St. Paul, anticipates a quicker timeline.

&uot;The February forecast isn’t going to get better,&uot; Cohen said. &uot;Anyone who thinks that is engaging in fanciful thinking bordering on delusional thinking.&uot;

Brian Bakst may be reached at bbakst(at)ap.org