ST. PAUL, Minn. - Minnesota lawmakers are dreading today's budget forecast.

"It's going to be very, very bad," said Sen. Dick Cohen, the St. Paul Democrat who heads his chamber's Finance Committee.

Cohen and other budget watchers are expecting a deficit in the $4 billion to $5 billion range, potentially sinking to a new low in the state's 150-year history. That's for the two-year budget cycle that runs through June 2011. Another, smaller shortfall is anticipated for the current budget that ends in June.

The bottom has dropped out of the economy since state finance officials predicted a "short, mild" recession nine months ago. The housing slump has deepened, stocks have plunged, workers are losing their jobs and there's no end in sight.

"Minnesota and almost every other state is going to have a major financial problem because the economy has gone through a historic slowdown and the revenues coming into government are going through a historic slowdown," Gov. Tim Pawlenty said this week.

Minnesota's worst deficits came in 2003 and the early 1980s, according to Minnesota Management and Budget. The $4.2 billion shortfall in the 2004-05 budget accounted for 13.6 percent of the state's general fund - a proportion that could be rivaled by today's anticipated deficit. The agency didn't have a comparable figure for the 1981 recession, when forecasting was done differently.

"It's going to be a very significant and difficult budget deficit, probably larger than things that we have seen in the past, and it's going to present us with some real challenges," said House Speaker Margaret Anderson Kelliher, DFL-Minneapolis.

Minnesota's constitution requires a balanced budget by the end of each two-year budget cycle.

That means the Republican governor and the Democrats who control the Legislature have to negotiate a solution despite their differences on taxes and spending. They don't have many options.

They drained most of the state's reserve earlier this year to fill a shortfall, leaving just $155 million that could be eaten up by the near-term deficit. There's a cash flow account with a $350 million balance, but some are reluctant to tap that when credit markets are tight.

That leaves spending cuts, higher taxes and the federal government.

Kelliher appealed to President-elect Barack Obama this week, asking for help paying for schools, health care, unemployment and infrastructure. Pawlenty said he's skeptical of federal help, saying such spending would compound the national deficit.

"That's going to come back to haunt us," he said.

Rep. Paul Kohls, R-Victoria, outlined another approach: Freezing state spending at current levels or predicted revenues, whichever are lower. He said the state should be able to pay for its priorities without raising taxes.

"The people paying the bills can't afford to pay more right now," Kohls said.

Meanwhile, Democrats said the pain of potential budget cuts makes a case for raising taxes.

Carving as much as $5 billion out of a $36 billion budget could result in padlocked state parks, an abbreviated school year, higher property taxes and fewer open days for public facilities like libraries, Cohen said. He said lawmakers will look at raising cigarette taxes, increasing income taxes for those making more than $250,000 a year and lowering the sales tax while expanding it to apply to more items.

"It's difficult to imagine we'd be able to get out of this without some additional revenue," Cohen said.

Except for a cigarette fee hike that closed a budget gap in 2005, Pawlenty has refused to consider tax increases. He has suggested that the budget crisis is an opportunity for "quantum change" in the way government provides services, but so far has released no details about his plans.

As he has in the past, the governor pointed out growth in government health care programs this week, saying those programs were "on a collision course with reality and math" even before the economy fell apart.

Cohen predicted that Pawlenty will go after roughly $200 million sitting in a dedicated health care account, which Democrats have protected for health initiatives and still consider off-limits.

Kelliher said Democrats are focused on ferreting out inefficiencies in existing state programs to save money and will take Pawlenty's budget, due in January, as a starting point for the task that faces them next year. The session begins Jan. 6.