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Gov. Mark Dayton and legislative leaders have brokered a deal to call a special legislative session in late August to approve tax breaks and new spending for statewide construction and transportation projects.

There are still significant outstanding issues — including the controversial light-rail line from Minneapolis to Eden Prairie — and a compromise deal is far from certain as leaders seek broader support from rank-and-file legislators.

The agreement would bring tax breaks to farmers, business property owners, smokers and builders of St. Paul's professional soccer stadium. It also would entail money for roads, bridges, university buildings, water pipes and other infrastructure projects.

But negotiations will be delicate as all sides look toward the November election, when all 201 legislative seats will be on the ballot.

The DFL governor and legislative leaders announced the tentative agreement for a special session after meeting for more than two hours Friday in St. Paul.

"Where there's a will, there's a way, and I think there's a will," Dayton said.

Legislators are considering returning to work after the governor vetoed a tax-cut package, which had passed with overwhelming bipartisan support, because of a drafting error that Dayton said would have cost the state $100 million.

A $1 billion borrowing package for transportation and infrastructure collapsed on the final night of the session, giving legislators little to show for their 11-week effort that ended May 23.

The public-works projects would be financed with bonds.

Borrowing to pay for state projects — a common financing tool, especially during election years — requires a three-fifths majority of both chambers to pass. That means any agreement would need votes from both parties.

Only Dayton can call legislators back to St. Paul for a special session. He has been intermittently negotiating with lawmakers since they adjourned in May.

Despite the apparent breakthrough, Dayton and legislators still have not resolved the contentious issue of how to fund the Southwest light-rail line, which has become a focus of disagreement between the DFL and its metro base and the more suburban and rural GOP.

Light-rail backers increasingly have looked to a locals-only solution to find the $135 million in state money needed to unlock nearly $900 million in matching funds from the Federal Transit Administration, on the way to completion of the $1.79 billion project.

Adam Duininck, chairman of the Metropolitan Council, said it was "a good sign that leaders are talking about a solution for Southwest." He declined to speculate how the light-rail project might be funded through local sources other than the state. The Met Council plans and operates transit projects in the metro area.

"What we need is certainty, and we don't have it at this hour, but hopefully we'll have more sometime next week," Duininck said. "Where there has been an impasse, it seems now that there's a crack we can break through."

Dayton and House Republicans, who have been deadlocked over how much to spend during the special session and how to spend it, both said they had made progress on that front.

House Speaker Kurt Daudt, R-Crown, said the GOP would reshuffle its major infrastructure package to include more of Dayton's projects. The governor has been insisting on money for a University of Minnesota science building and other maintenance and upgrades at the state's colleges and universities, plus money to improve security at the state psychiatric hospital in St. Peter.

In exchange for those concessions, Dayton has dropped his demand for nearly a quarter-billion dollars in new spending.

Senate Majority Leader Tom Bakk, DFL-Cook, said legislators could address several other issues during a special session, including a vetoed pension bill, some vetoed environmental projects and insurance coverage for treatment of children diagnosed as autistic. Bakk applauded the progress and said agreement is in sight.

Lt. Gov. Tina Smith reminded assembled reporters at a news conference that any deal would require the assent of House Minority Leader Paul Thissen, DFL-Minneapolis, and Senate Minority Leader David Hann, R-Eden Prairie, neither of whom attended the Friday meeting.

Thissen said he was hopeful they could get to a special session. But he cautioned that a complex issue like finding a local source of funding for Southwest light rail and future light-rail lines could take months, not weeks, to resolve.

While some of the state's political class — including Dayton and Daudt — travel to their respective national political conventions, legislative committees will meet to begin putting ideas to paper.

Daudt credited Dayton for the latest progress. Dayton called the speaker's cellphone July 4 and invited him to the governor's residence the next day for lunch, Daudt said.

Over bacon, lettuce and tomato sandwiches, they negotiated the framework of a deal.

patrick.coolican@startribune.com 651-925-5042

janet.moore@startribune.com 612-673-7752

At stake in a special session:

At least $250 million in tax cuts for Minnesotans with college debt, working parents, farmers, businesses that own property, developers of the professional soccer stadium in St. Paul, among others.

About $1 billion in public-works spending for dozens of projects on roads and bridges, water infrastructure, university facilities, a new health sciences building at the University of Minnesota.

Money for improved safety at the Minnesota Security Hospital in St. Peter.

Legislation to shore up public employee pensions.

Coverage of treatment for children diagnosed as autistic.