MONTPELIER- The Legislature and Governor James Douglas may be headed for a showdown over the state’s general fund budget.

Local representative Ann Manwaring says the governor is likely to veto the Legislature’s budget, passed last week. This week, the governor released his own version of the budget, a version that reflects his funding priorities.

Like most states, Vermont is facing a significant reduction in tax and other revenues over the next few budget cycles. Manwaring says she expects another downgrade in the revenue outlook this summer. “There’s just not enough revenue to cover the state’s expenses,” Manwaring says. “The governor and the Legislature have very different agendas on what needs to be done to bring it all together.”

Manwaring says the Legislature’s priority has been to protect programs that support the state’s residents. The governor’s budget proposal appears to set economic development, government reform, and education cost containment as top priorities.

Representative Rick Hube, of Londonderry, a Republican leader in the House, voted against the Legislature’s budget, but he says there’s plenty to be concerned about in both budget proposals. Hube is particularly concerned with what he says is the shifting of costs to taxpayers in the budget passed by the Democratic-controlled Legislature. Specifically, he points to an $18.4 million reduction in the annual transfer from the general fund to the education fund. Hube says the failure to transfer the money, as required by law, will have a direct impact on property tax payers. “Even if I liked everything else in the budget, I would have voted against it because of this,” Hube says.

But Hube says the $18.4 million cut in education funding isn’t the only thing that will have a broad impact. The Legislature’s budget would also underfund the state’s hospitals by more than $7 million.

Manwaring says the governor’s budget restores the education fund transfer that was eliminated in the Legislature’s budget, but his budget also obligates the education fund to pay $40 million in teachers’ retirement obligations, a figure that she says will balloon into an even larger obligation in the next few years. “That will be $59 million the following year, and it will be in the hundreds of millions over the next couple years,” she says. “That’s why the Legislature chose not to do it. It was never envisioned that that amount of money would flow through the property tax.”

The governor’s plan would also reduce Act 68’s income sensitivity cap from $90,000 to $75,000. Democratic leaders were quick to criticize the governor’s proposal. The chairs of the Senate and House appropriations committees, Senator Susan Bartlett and Representative Martha Heath released a statement suggesting that Douglas’ proposal would drastically affect property tax payers. “By reducing income sensitivity from $90,000 to $75,000, Governor Douglas is burdening an average $1,100 property tax increase on 13,000 middle income families. In fact, the actual impact on individual Vermont families could be as high as $8,000.”

The governor’s plan would, however, cut the statewide property tax rate by two cents, rather than the one cent in the Legislature’s budget. His proposal would freeze the state block grant for one year, rather than the Legislature’s two-year freeze. The governor also proposes to phase out the state’s small school grant to encourage consolidation.

Both budgets depend on federal stimulus money to make up a significant amount of the state’s revenue shortfall, and both the Legislature and the governor recognize that, beyond 2011, when the stimulus money will disappear, the state could be facing further difficulties. “If we didn’t have the stimulus money now, we’d be in serious trouble,” says Manwaring. “We got some of the stimulus money in 2009, and it was a godsend. We’ll see the bulk of it in 2010, and there will be some left in 2011.”

Governor Douglas has already called the Legislature back into session beginning Tuesday, June 2. Manwaring says she expects a veto, and she also expects that there will be an attempt to override the veto. The Legislature issued its first override in 19 years this year, on the Marriage Equality Act. Another overrride, Manwaring says, would mark a sea change in Montpelier. “If (House Speaker) Shap Smith can pull off another veto, that would be a seismic shift in power.”

If the veto override fails, it will be left to legislators and the administration to hammer out a budget that both sides can live with. “The governor will get a lot of what he wanted, and the Legislature will get some of what it wanted,” Manwaring says. “We can only play this brinkmanship game for so long. We can’t operate without a budget like the federal government can.”