AUGUSTA – President Bush submits his budget to Congress today and state officials are bracing for more cuts in domestic spending that could potentially poke holes in Gov. John Baldacci’s two-year state budget.

“We have been cut in the formulas, cut in terms of particular items in the budget and the drug agents, “Baldacci said last week. “I certainly don’t want to prejudge anything at this time other than to say ‘please don’t cut any more because we are having a hard enough time.'”

The governor is weighing how to make up for about an $80 million shortfall in federal Medicaid funds over the next two budget years as a result of the change in the match rate that occurred because the state’s per capita income increased.

He also was in the midst of drafting his budget proposal when Congress passed the federal budget in November that widely cut domestic spending programs. Nearly every agency of state government that received federal funds saw adjustments, most of them downward.

Those cuts stemmed from the GOP leaders in Congress deciding to limit the overall increase in domestic spending to 1 percent more than last year. In addition, to meet the budget target, spending was cut across the board by 0.8 percent. So while some programs received increases, particularly in education, others were cut more deeply to make the target.

The Omnibus Budget covered funding for all of the federal government, except the Departments of Defense and Homeland Security. Maine took a cut in homeland security funding separately from that legislation. Last year, the state received more than $22 million. This year it is scheduled to receive $16.7 million in grants.

President Bush, and several of his key advisers, have indicated the budget he is proposing will seek to hold down the growth of domestic spending to less than the rate of inflation, and, because some areas such as Medicaid must increase to meet needs, other areas will be cut.

“I am going to the National Governors Association meeting at the end of February and we will be looking to meet with the president, his people and the congressional delegation,” Baldacci said. “I think all the governors want to be partners with the president, and I understand it is a tough time.”

State agencies that are most dependent on federal funds could be hurt the most. For example, more than four out of every five dollars spent by the Department of Labor comes from federal sources.

The Maine Department of Environmental Protection is another state agency that derives much of its funding – nearly half – from the feds. Several programs will be affected by the cuts, but the hardest hit is expected to be the block grant for Clean Water Act programs.

“We are keeping a very close watch on this,” said Finance Commissioner Becky Wyke,” every department and agency is watching for the impact on their programs.”

She said a problem facing Maine and most states is that Congress will not pass the federal budget until the fall; months after the state budget must be in place.

Lawmakers on the legislature’s Appropriations Committee, which is holding public hearings on Baldacci’s two-year budget proposal, are concerned. Sen. Peggy Rotundo, D-Lewiston, co-chairwoman of the panel, is worried about further loss of federal funds.

“All of the agencies that have come before us have expressed uncertainty in terms of what is coming out of Washington, and all say they believe that there will be more cuts,” she said. “These cuts have enormous implications for the state.”

She said the trend over the last few years has been less federal funds for domestic programs than expected, even as Medicaid funds have increased. She said another major concern is mandates.

“We see more areas where the federal government says we must do something and they do not pay for it, “she said.

Rep. H. Sawin Millett, R-Waterford, is the lead GOP lawmaker on the budget writing committee. He shares some of Rotundo’s concerns about federal mandates, but he warns that the state has become too reliant on uncertain federal dollars.

“The relationship between state budgeting historically and federal matching monies of one kind or another is getting more direct and more of a cause for concern, “he said. “We have got to get off the bandwagon of becoming more and more addicted to federal matching monies, particularly Medicaid.”

Millett said that even with the formula change, Maine gets more from the feds in Medicaid dollars than it spends. He said those “extra” dollars are very attractive, even though it’s clear to him the state cannot continue to provide the state funds needed to get all of the federal dollars available.

Millett warned that Congress has every right to put spending requirements in federal programs. He said the state often does the same thing for grants and programs for local schools or municipalities.

It was four years ago that President Bush proposed his first budget. It too contained proposals for several cuts and raised the concern of then Gov. Angus King.

“The reality is that federal money is not reliable in the long run, particularly when it is used for personnel costs,” he said. “But where there are needs, and advocates, you can get pretty battered around the head and shoulders around here for not taking federal grants that are available.”