Gov. Tim Pawlenty’s latest attempt to rid Minnesota of a $1.2 billion deficit would further squeeze city and county budgets.

Aid to cities, counties and health and human services took the deepest cuts in Pawlenty’s proposal unveiled Monday. His plan would force state employee layoffs, eliminate or reduce benefits to as many as 40,000 people on state health programs and cut funding to local governments.

Currently facing $300 million in LGA unallotment proposed last summer, local governments would lose another $250 million.

As part of the earlier unallotment, Austin lost about $875,000 in Local Government Aid (LGA), while funding to Mower County was also slashed.

The new LGA cuts are more sweeping, and Austin would lose another $970,000 this year alone. Further reductions would be made in 2011 and 2012.

For the first time, LGA cuts would also touch cities with fewer than 1,000 residents.

“Difficult decisions are being made to handle the deficit,” said Rep. Jeanne Poppe, DFL-Austin. “It is unfortunate that cities may bear the brunt of this.”

Jim Miller, executive director of the League of Minnesota Cities, predicted a difficult fallout for Minnesota cities such as Austin.

“Either property taxes go up or services get cut or a combination of the two,” Miller said, warning that local governments would be forced to cut back on public safety and public works. “Minnesota cities have already shouldered a disproportionate burden of the state’s budget cuts over the past couple of years.”

Poppe echoed a similar sentiment.

“There will be a potential for increased taxes and/or job loss locally,” she said. “Citizens may be faced with fewer services, and that can be distressing.”

Poppe listed public safety, library services, street maintenance, and waste water services and jobs among those that could be at risk.

Pawlenty said he would press lawmakers to fortify already installed property tax limits though he described his cuts as “dramatic.”

His proposal relies on erasing the deficit by heavily limiting spending, without increasing state taxes.

The governor’s proposal includes a 20 percent reduction in the corporate tax rate, which would cost the state $10 million through next year and $150 million in the following two years. A 20 percent reduction in small business taxes would cost the state $118 million in fiscal years 2012 and 2013.

The Republican Party of Minnesota said in a written statement Monday: “Pawlenty’s budget sets the right priorities for Minnesota and ensures that state government will live within its means… Pawlenty and Republican legislators are committed to creating a more business friendly climate through tax relief which spurs job creation, while continuing to stand strong against Democrat tax increases which kill jobs.”

The state has faced red ink for much of Pawlenty’s two terms, and his final budget proposal directs additional cuts on programs targeted before.

In addition to $250 million from aid to local units of government, the proposal cuts $347 million from health and human service programs; $181 million from state agencies and other programs; and $47 million from higher education funding.

Pawlenty said he wanted to cut more from higher education but was restricted by federal requirements.

Budget areas spared from cuts include K-12 schools, military and veterans aid programs and state troopers.

“We are not out of balance in terms of the qualities of our amenities — our arts, our culture, our education and many other measurements,” Pawlenty said. “We are definitely out of balance when it comes to our tax climate, our business climate and our job climate.”

As for his own administration, Pawlenty said state agencies would face an average 6 percent budget cut and layoffs would be unavoidable.

“It’s not realistic to think that there aren’t going to be any layoffs. And there should be. If everyone else is going to have to manage with those parameters, government should do the same.”

The governors proposal will not go down as the final word.

Lawmakers will have a chance to reshape it and the deficit projection will change in coming weeks. In early March, a new economic forecast will be issued.

Pawlenty is currently fighting in the Minnesota Supreme Court to maintain cuts he imposed during last summer’s unallotment. If the court rules against Pawlenty, the governor and lawmakers be could left to trim another $2.7 billion.