By JIM BARON

PROVIDENCE — Peering over the holiday horizon at the coming year, Gov. Donald Carcieri sees just one huge issue, overwhelming and overshadowing all else: the state budget.
The governor sees 2008 as “a watershed year.”

If the state can’t grasp the reins of runaway state spending and make real changes in the way it operates this year, he said in a Christmas Eve interview in his Statehouse office, it will not only continue but accelerate its slide into the fiscal abyss.
One concrete indication of this is the Wall Street bond rating agencies, after increasing the state bond rating at a desirable AA just two years ago, have put Rhode Island on a “watch list,” meaning that “if we don’t show them a long term solution (to the state budget problem) we could face a lowering of the rate,” Carcieri said.
That means nibbling around the edges, or searching for one-time revenue rabbits like selling off hundreds if millions of dollars of tobacco bonds to pull out of the budgetary hat just won’t do. Big changes will be required.
One bold stroke, Carcieri hinted, will probably be proposed in “the whole area of schools.”
Reluctant to say too much before he unveils his proposal in the State of the State address scheduled sometime in the next six weeks or so because he said the proper groundwork must be laid, Carceiri nonetheless noted that he was in Charlotte, N.C. last year and “Charlotte is bigger than the state of Rhode Island but they have one school system, one fire department, one police — we’ve got 36 school districts with 36 superintendents and all the administrative staffs that go with those superintendents. We need to figure out a different way to do it.
“None of this is going to be easy,” he admits, “either we are going to for once decide we need to make some hard decision and change what we are doing and the way we are doing it, and put the state on a positive path, or we are going to continue to slide and slide.”
The state is poised to make many of those decisions, Carcieri believes.
“We’ve done a lot of good things — and when I say we, I credit the General Assembly for doing a number of things like the flat tax option, made modest pension reform, put the property tax cap on — to position ourselves competitively much better than we have in the past,” the second-term Republican said. “The Historic Structures Tax Credit, all those things have been fueling a positive direction in the state. We are spending a lot of money on infrastructure: the Iway, the state airport, URI.
“But the issue right now for us as a state is putting ourselves in a place where we can sustain the level of spending in the budget,” he said. “This is the biggest deficit we have faced in the years I have been here and the biggest percentagewise probably going back to the credit union crisis” of the early 1990s.
Last month estimators reckoned that the state budget will probably run $150 million short in the current year and as much as $450 million for the fiscal 2009 budget that Carcieri must present to the legislature next month.
“It’s going to be very difficult,” he acknowledged. “This hasn’t been a pleasant year.”
Referring to his much talked about plan, now being put into effect, to reduce the state workforce by 1,000 employees, he said, “No chief executive, no leader of an organization likes to reduce the workforce. It is a very unpleasant thing to do. You don’t like to have to talk about restructure pensions and other benefit systems, on the other hand, my job is to represent all the citizens of the state and make a judgment in terms of what the taxpayers can afford. We need to demonstrate what everybody else out there has had to live with for several years now, which is balance their spending with their revenue, and they expect the state to do the same thing.
Despite all the number crunching and the unflinching facts of balance sheets, Carcieri says what the state faces is a series of philosophical debates and value judgments.
“There are some cases where individuals are dependent upon the state, people with disabilities, seniors in nursing homes, people who are very poor,” he noted. “The debate, and I think it is a policy discussion, is where do you draw that safety net.” Once you draw that line, he added, you have to find a way to take care of the people on the other side of it.
“That’s the debate you are going to see in the General Assembly,” Carcieri predicted. “On the other hand, in many cases we have evolved a number of these human service systems  — we keep expanding and expanding and expanding beyond what the original purpose was. That is where the pressure is, but we can’t afford it. Who are we saying are the people we really need to help and we need to support, and from that where do we draw the line and just say, we can’t afford to do this.
“This is the crux of the debate and what the General Assembly and all of us are going to have to grapple with this year.”
The governor knows that there are going to be people on the other side of the lines he is trying to draw, pushing back.
Rhode Island has a well-organized and experienced network of social service groups that will be fighting to keep the programs that are already in place.
Those pressure groups “are good at what they do,” Carcieri says. “They’ve got this down to a science. No legislator is going to wants to sit there on a panel” to be berated for budget cuts.
Asked about his own slippage in the polls, in part caused by taking on these groups and issues, Carcieri said, “You just do what you think is right and try to keep doing it.”