PROVIDENCE –– On paper, the State of Rhode Island has a balanced budget.

But just 27 days into the budget year, there are signs that bureaucratic delays and a recent rebellion by rank-and-file union members may knock the state’s 2008-09 spending plan out of whack, further weakening Rhode Island’s economic health.

It was no secret that the budget passed before the state’s part-time General Assembly recessed last month was based on rosy scenarios.

To be balanced, it required the aggressive implementation of unprecedented changes to the state’s health-care system. It assumed the state’s economy wouldn’t sink further into recession. And it required state government’s unionized work force to voluntarily concede tens of millions of dollars in salary and benefit reductions.

All three are now in question.

Most notably, Rhode Island’s largest state employee union announced last week it had rejected a contract that would have saved the state more than $10 million this year by delaying pay raises and increasing employee health-care contributions. The savings are included in the state budget.

“I certainly think that we have problems,” said Stephen Alves, chairman of the Senate Finance Committee, referring to recent no votes by three independent unions and Council 94, American Federation of State, County & Municipal Employees. “However, I have great faith that the heads of those unions, along with the governor, will come to terms to achieve those savings and realize the situation we’re in.”

While Alves is optimistic, the adoption of a new labor agreement in the next four days (the time frame needed to meet budget projections) faces major challenges.

First, Governor Carcieri is digging in his heels. He has refused to discuss the situation publicly, but issued a statement Friday declaring that he’s done negotiating with Council 94, the union that represents roughly one-third of state government’s work force.

Second, Council 94 members are just as entrenched. While its leaders want to negotiate, last week’s vote was not close. Nearly 94 percent of rank-and-file members rejected the four-year deal brokered by Carcieri’s office and key labor union leaders.

And third, all unions with state contracts have a “parity clause” that ensures they have equal deals. There are 13 independent unions aside from Council 94. At least seven of them have already voted to ratify the same four-year contract.

If Council 94 receives a better deal, the other unions –– even those who have already voted yes –– get a better deal as well, something that would jeopardize millions of dollars more in budgeted savings.

The parity clause “makes it a little more challenging,” acknowledged Council 94 executive director Dennis Grilli. “Any union … would be eligible to receive any greater wages or benefits that we negotiate.”

The Council 94 no vote has thrust into public view a division among organized labor, which generally draws its strength through solidarity. Some state workers have a deal, while others do not. And Council 94 members shot down a deal that was worked out by key labor leaders generally thought to speak for the labor movement.

The Carcieri administration crafted the deal with Grilli, National Education executive director Robert A. Walsh, and AFL-CIO secretary-treasurer George Nee.

“The results of this vote can lead me to only one or two conclusions,” Carcieri said in Friday’s statement. “Either the representatives of Council 94 who were part of this agreement have not been negotiating in good faith, or that there is an internal power struggle between the union heads within Council 94 that undercut the vote. In either case, there is no basis for further discussions.”

CARCIERI’S NEXT move is unclear.

He said he’ll announce a course of action this week, but there are few options that would immediately address the budgetary implications of the labor dispute.

The governor’s chief legal counsel, Kernan F. King, said last week that Carcieri can act unilaterally to force changes on the unions that rejected the deal. King wouldn’t say what action the governor may take, and Carcieri’s office has refused to answer specific questions.

But any unilateral move to cut benefits or lay off staff would certainly bring legal action by Council 94.

Grilli and Council 94 President Michael Downey disagree on the fairness of the contract proposal, but both said they wouldn’t hesitate to fight unilateral action in court.

In fact, Council 94 already plans to file an unfair labor practice with the state Labor Relations Board next week, simply for Carcieri’s refusal to negotiate, according to Grilli.

The union argues that Carcieri is compelled by law to negotiate. Labor leaders say that previous rounds of closed-door bargaining constitute “discussions,” not formal negotiations.

King said, however, that the governor isn’t compelled to do anything. In what was believed to be an unprecedented move, the administration issued contract termination letters last month to state unions, like Council 94, whose contracts expired July 1.

In King’s view, that means Council 94 and the smaller unions that voted no are currently working without a contract. Therefore, the governor isn’t bound by traditional bargaining rules, according to King.

But state law outlines a process for contract disputes.

Should the governor and a union fail to reach an agreement after 30 days of negotiations, either side may request nonbinding mediation. Should mediation fail to produce a result, they could then move to arbitration, which is non-binding on issues related to salary and benefits.

“We may argue with the governor’s office about what the next step is … but it will be a continuation of the process under the statutory language,” said Walsh of the NEA. “I don’t want any of our folks to be losing sleep over the weekend based on what they hear or read. I understand that tensions are running high and people are nervous.”

CHERYL LASSY was among the handful of Council 94 members who voted for the new deal.

“This contract wasn’t the greatest but it’s better than not having a contract at all, because we have jobs and a lot of people out there don’t have jobs at all,” said Lassy, an assistant administrative officer at the Department of Transportation and an 18-year veteran of state service. “Look, you’re not going to get any better than this with the governor that we have.”

Lassy is confused about whether she currently has a contract and wonders whether her job is in jeopardy.

Ronald Bonsante is also confused about his status, but says there was no job security in the new contract anyway. He heads the Department of Children, Youth and Families union, Local 2876, one of 24 local unions that make up Council 94.

As part of the deal, the governor agreed to rescind layoff notices for hundreds of workers he sought to replace with private contractors.

“What’s to stop him from sending out new notices?” Bonsante said. “He’s been balancing the budget off our backs since he got into office.”

The agreement also gave the governor more flexibility to replace state workers with private contractors by weakening the state’s “privatization” law.

Other highlights include: pay raises of zero, 2.5 percent, 3 percent and 3 percent during each of the next four years; a one-day pay reduction in the current year that employees can recoup as a paid leave day; and escalating increases in the percentage of the premium the employees will be required to pay for their health insurance.

The shift in health-care costs outraged many Council 94 members who are among the lower-paid workers –– janitors, laborers and clerical staff –– in the state’s work force. Council 94 President Downey is opposed to requiring members to pay a percentage of premium, as opposed to a percentage of salary, for health care.

Neither Downey, nor the presidents of Council 94’s local unions, were part of the negotiating team that worked out the agreement with the governor’s office. Only Grilli, the council’s executive director, was on the team.

“As soon as I heard what their final product was I told the union and everybody I came into contact with that I didn’t agree. I’m president of the council,” Downey said. “I’ve said to my own people and the AFL-CIO, I would never sign this.”

Walsh, who was among labor’s three main negotiators, said they did the best they could.

“I’m pretty up front with my folks. No one was jumping up and down saying this was a great deal. We said it was the best deal we could get in these economic times. I hope I’m wrong. That would be terrific,” he said.

Meanwhile, the governor’s statements and the state’s weakening economy suggest that Carcieri won’t sweeten the deal by choice.

Rhode Island’s unemployment rate grew to 7.5 percent last month –– 2 points above the national average. And the Ocean State is among 11 states in the country — and the only one in New England — that economists say is officially in a recession.

Further, state leaders are struggling to implement sweeping Medicaid changes in time to save $67 million this year, as outlined in the state budget. The state has yet to submit the plan to federal regulators, although it’s supposed to be in place by Oct. 1.

“The state’s financial status is not improving,” Carcieri said. “In fact, there are signs that the national economic slowdown, with high energy prices, may prolong the weak economy in Rhode Island. As governor, I am obligated by law to balance our state’s budget and will do so.”

With reports from Journal staff writer Cynthia Needham

speoples@projo.com