PROVIDENCE

When the General Assembly reopens for business Tuesday, lawmakers must confront a sour economy, a $357-million current-year budget shortfall and pressure to act on the Carcieri administration’s first-ever plan to overhaul Rhode Island’s Medicaid program.

The mood on Smith Hill is ominous.

“To be perfectly blunt, the world really did change since we left this building in June with the global financial meltdown,” said Senate Majority Leader-elect Daniel P. Connors. “This year will be absolutely dominated by budget discussions.”

After six months off, legislative leaders have pledged to act swiftly to address the deficit, making committee appointments and holding hearings this week.

But as they wait for Governor Carcieri to unveil his midyear budget repair plan in the next few days, lawmakers have yet to lay out specific ideas to close the shortfall, hinting instead at the possibility of slashing municipal aid and local education spending and maybe even raising taxes — a prospect no one dared propose during the 2008 election year.

“I think it’s pretty clear we are in a fiscal crisis and government is entering into survival mode,” said Connors.

Rhode Island is not alone in the hard choices it faces. Massachusetts Governor Patrick announced last week that he is prepared to make up to $1 billion in additional midyear budget cuts, potentially including aid to municipalities.

Carcieri would not speak to reporters about the upcoming session, but House Speaker William J. Murphy, in an extensive interview, said: “The time has finally come for Rhode Islanders to band together and make some difficult decisions that are going to alter the future of the state.” First, though, 23 new legislators must be sworn in and M. Teresa Paiva Weed, whom Senate Democrats have endorsed as their next president, must win an election to replace the defeated Joseph A. Montalbano. Murphy, too, must be reelected by his Republican and Democratic colleagues in a House chamber where political intrigue is a constant.

After that, lawmakers have less than two weeks to decide whether to approve the Carcieri administration’s proposal to rework its $1.7-billion Medicaid insurance system for the elderly, the disabled and the poor — a controversial agreement with the Bush administration to limit state Medicaid spending in exchange for unusual freedom in how Rhode Island administers the program. The move would allow the state to cover fewer medical services and steer the elderly away from nursing homes to less expensive alternatives such as in-home care.

But key lawmakers say they still have questions and concerns about how the change would affect the 180,000 Rhode Islanders covered by Medicaid programs — 1 out of every 10 people. Does the state have a sufficient network of home-based care, Paiva Weed wondered. How can it ensure it will provide adequate health care to “its most vulnerable citizens?” Murphy asked. And most pressing: Will the plan save the projected $67 million by June 30?

“I don’t think we are looking at any savings in ’09,” Paiva Weed said.

Legislators nonetheless have already booked the promised savings. To reject the proposal outright now would punch a gaping hole in this year’s spending plan.

The House Finance Committee will hold its first hearing on the plan Friday.

An assortment of other issues will no doubt surface as the six-month session gets under way, including illegal immigration, pensions and a host of the bills Carcieri vetoed on prison sentences and alternative energy.

The diminished Republican caucus won’t have much clout to push an agenda this year. Just 10 GOP lawmakers remain, 6 in the House and 4 in the Senate, with the senators locked in a protracted 2-2 leadership fight.

And while the bleak economy may foster consensus between Republicans and Democrats on some issues, tensions remain.

“Every year, the governor wants to point his finger at the General Assembly and say we spend too much,” Murphy said. “But already the departments have overspent their budget for FY ’09 by $80 million …That is not the General Assembly’s fault. That’s the administration’s fault.”

Here is a preview of some of the key issues up for debate:

Taxes

Leaders in both chambers will not commit to holding the line on taxes and fees. “We can’t make that promise right now, but we would hope that we could find a way not to raise taxes,” Murphy said. Added Majority Leader Gordon D. Fox: “That’s been our theme throughout: Last resort, not first resort.”

The business community and Republican lawmakers oppose any tax increase, even one that would reduce the sales tax rate from 7 percent to 5 percent by extending it to haircuts, car repairs and a variety of other goods and services.

“I can’t find a single economist who suggests that raising taxes is a good way to stimulate our economy,” said House Minority Whip John Loughlin, R-Tiverton.

“When the state’s economy is in a tailspin and unemployment is at record levels, it would be counterproductive to tinker with the tax code… [and] make it more expensive to live and do business in Rhode Island,” says Laurie White, president of the Greater Providence Chamber of Commerce.

Local aid and education

Legislators looking for big savings are already focusing on local aid: the $55 million in general revenue sharing that goes to communities and the almost $1 billion that goes to their school departments.

“We’re going to be looking at the whole package of municipal aid,” Paiva Weed said.

Local leaders fear the worst.

“The reality is, there will be some cuts and I think districts are preparing themselves for that,” said Tim Duffy, president of the Rhode Island Association of School Committees.

Dan Beardsley, executive director of the Rhode Island League of Cities and Towns, said communities are so sure they are going to lose all their revenue sharing that they asked him to propose a relief plan to Carcieri that would exempt them from a variety of costly regulations such as requiring minimum staffing levels in municipal departments.

Republicans have long suggested eliminating an array of mandates, including fire-safety measures and the hiring of school bus monitors. Now Democrats say they are willing to consider those ideas, to lessen the financial burden on local communities. In exchange, they say, municipalities and school departments must cut spending, potentially by entering into statewide purchasing contracts.

Cumberland Mayor Daniel McKee said it’s unreasonable to force local communities to absorb such large cuts. “That would make it physically impossible to balance our budgets without raising taxes, running deficits, or exceeding [tax] caps,” he said.

Pensions

In a brief interview last week, J. Michael Downey, president of the largest state employees union, said he has only a few overriding goals this session: “We want to protect our pensions.” And, “We would want to stop any more layoffs of state or municipal employees. I don’t think that helps the economy at all.”

Downey, the head of Council 94, American Federation of State, County & Municipal Employees, said he would prefer “the state try to get a little more money on the revenue side ... [with] some restructuring of taxes.”

But House leaders say they feel compelled to examine cash-payouts for unused sick time, the rehiring of pensioners and alternatives to the state’s defined-benefit pension plans.

“I think it’s going to be a lot of roll-up-the-sleeves grunt work, looking at pensions,” said Fox.

Twin River

On the brink of bankruptcy, Twin River has been trying for months to win undisclosed financial concessions from the Carcieri administration. Unlike many other gambling businesses across the country, it is still posting profits, but not enough to pay off its lenders.

Lawmakers say they have not been approached by Twin River’s owners since last June for help, but remain unwilling to reduce the state’s share of the slot revenue –– roughly 60 cents out of every dollar –– and are not interested in having the state take even temporary control of the operation.

Illegal immigration

Illegal immigration was one of the most emotionally charged issues of the 2008 session and is no less controversial as the new session begins.

Woonsocket Rep. Jon D. Brien has already said he will reintroduce his “E-Verify” legislation requiring private employers to check the immigration status of new hires. The legislation passed the House but died in the Senate last year.

Murphy promises that the bill would again make it to the House floor. But Paiva Weed and Connors say they still see legal problems with it.

Connors intends to introduce a proposal addressing what he calls the crux of the illegal immigrant hiring issue: The failure by some unscrupulous employers to pay taxes and insurance for their employees by mislabeling them as “independent contractors.”

kgregg@projo.com