They held that the unallotment process was intended to fix unforseen shortfalls in revenue that cause an unbalanced budget. However, as Gov Pawlenty vetoed the revenue bill while signing the spending bill, there was never actually a balanced budget. In the absence of a balanced budget to start with, the unallotment statute does not come into play. Therefore, by taking it upon himself to cut $2bn of spending unilaterally, he was overstepping his bounds as executive. The legislature write the laws, he just signs or vetoes.
The unallotment statute provides the executive branch with authority to address an unanticipated deficit that arises after the legislative and executive branches have enacted a balanced budget. The statute does not shift to the executive branch a broad budget-making authority allowing the executive branch to address a deficit that remains after a legislative session because the legislative and executive branches have not resolved their differences.
I have to assume that Pawlenty will spin this as a liberal, activist court taking sides in a political issue. In reality, Pawlenty couldn't work with the legislature and took steps to balance the budget that were later judged to be beyond the scope of his powers. As far as politics goes, the important thing is that Pawlenty never raise taxes and that he cut spending as much as possible. He's got to be able to position himself as the fiscal conservative who's been there and done that on the state level. What he won't bring up is how his cuts to city and local funding caused them to raise property taxes to fix their own budget shortfalls. I've written about this before: Pawlenty's ideas on fiscal policy are divorced from reality.