"This is not going to be easy. This is not work for the faint of heart. This is going to take sacrifice all around the table," said DFL House Speaker Margaret Anderson Kelliher. She was joined by Senate Majority Leader Larry Pogemiller, left, and House Majority Leader Tony Sertich. MPR Photo/Tim Nelson

Four days into December, state finance officials finally delivered their November economic forecast. Tom Hanson, commissioner of the Department of Management and Budget, presented the gloomy financial assessment that had been predicted for weeks.

"The economy, as is no secret to everyone, has body-slammed our state budget," said Hanson.

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Hanson says Minnesota is not alone. He knows of 41 other states facing similar red ink.

The current two-year budget cycle began 18 months ago, with state spending and revenues appearing to be balanced through 2011. But spending has been higher than expected, especially for health care. At the same time, revenues from all tax sources have declined.

With the housing market sagging, consumers not spending and jobs disappearing, state economist Tom Stinson described the economy as "just plain ugly."

"This will be the worst economy in 25 years. It could be the worst economy since World War II. It's certainly going to be the worst in most Minnesotans' recent memory," said Stinson.

In dollars, the deficit is the biggest the state has ever faced. But Stinson says shortfalls in the early 1980s represented a bigger share of the state budget.

Gov. Tim Pawlenty said Thursday he remains opposed to raising taxes to close the state's $4.27 billion budget shortfall. MPR Photo/Tim Nelson

State lawmakers say they'll begin working immediately to solve the the $426 million hole in the current budget year, which ends on June 30, 2009. Part of that solution could include the $155 million currently in the state budget reserve.

Work on the projected $4.8 billion deficit will dominate the 2009 Legislative session, which begins Jan. 6.

Gov. Pawlenty says Minnesota has overcome tough times before, and he's confident it will again.

"This is no doubt a big challenge, but it's also a big opportunity for reform, to streamline government and to change the way that state government delivers services in a way that's better and more efficient," said Pawlenty. "And we're going to do that without adding additional burdens to the hardworking families and taxpayers of Minnesota, by making sure we don't raise taxes as part of this process."

Pawlenty says there would be no deficit if state government simply lived within existing revenues.

Minnesota Management and Budget Commissioner Tom Hanson said the state's budget has been "body-slammed" by the poor economy. MPR Photo/Tim Nelson

The Republican governor says he'll present a budget proposal in late January that doesn't spend any more than the $32 billion in revenue that's expected in the next two years. That's some $2 billion less than what the state will have spent by the end of the current biennium.

Pawlenty says his proposal will prioritize military and veterans affairs, public safety and K-12 education.

Democrats in the House and Senate say they plan to set priorities too, and like the governor, they plan to build a new spending plan from the ground up.

DFL leaders blame the deficit in large part on lost jobs. And one of their targets for reform is the state agency that oversees job creation and economic development.

DFL House Speaker Margaret Anderson Kelliher says the state needs to work its way back to prosperity. She's also not ruling out tax increases.

"We plan on weathering this storm together. We plan on working with the governor as well," said Kelliher. "And we know that through that, we can actually make a better Minnesota."

Kelliher and DFL Senate Majority Leader Larry Pogemiller are scheduled to meet with the governor for a breakfast meeting Friday morning to begin working on a solution to the current budget shortfall of $426 million.

House and Senate budget committees will also meet soon to discuss the potential cuts.

If an agreement with legislators cannot be reached by next month, Gov. Pawlenty has said he will use his own emergency budget cutting authority to make the necessary spending cuts.