Governor Donald Ccarcieri has unveiled his final state budget. Yesterday, he released the 7.5 billion dollar spending plan for the fiscal year starting July first.

The Carcieri administration released details of its 2011 spending blueprint yesterday afternoon - and the big challenge is how to close a 427-million dollar deficit.  The governor's plan would spend about 400 million dollars less than this year's budget. It saves almost 38 million dollars by eliminating car excise tax payments, among other cuts to cities and towns.

Governor Carcieri acknowledges that his budget is built on some assumptions, including an expectation of 95 million dollars in federal Medicaid money.

"And the question will be, what if you don't get it, Governor?" Carcieri said. "And the answer is, we have a long list of things which are not pleasant that would be further reductions if that does not happen."

But Carcieri repeated his view that property tax increases are not inevitable. He says the General Assembly could make those tax hikes unnecessary by cutting pension costs and eliminating state mandates for cities and towns.

"You know if some of these things had been done two years ago, when I first started talking about them, the financial situation would look very different for cities and towns," Carcieri said.

Local officials say it's more complicated than that. Warwick Mayor Scott Avedisian says Rhode Island's second-largest city will be hit hard by cuts made or proposed by the governor.

"He's already cut seven million in general revenue sharing for this year," Avedisian said. "He's looking to cut seven million in the car tax for this year. That's a 28-million dollar swing in less than 18 months, and I don't know how any group can withstand that kind of money loss."

Carcieri's budget avoids increases in the sales and income tax. But it proposes adding tolls once the new Sakonnet River Bridge is completed. The revenue would be used for statewide transit improvements.

The governor also wants to offer small businesses a two-thousand dollar tax credit for each new employee they add between July first and the end of 2011.

"We estimate that this could create as many as three thousand, six hundred jobs, and obviously, the indirect benefits: by putting people back to work, in terms of tax collections, both income, sales, and other money being spent," the governor said.

Carcieri says his plan for next year would spend about the same as this year's budget on public education. One notable increase is the governor's eight million dollar boost for charter schools.

But overall, Carcieri offered a sobering picture of Rhode Island's fiscal future -  for years to come.  And he anticipated questions about projections that state deficits will continue long after he leaves office next January.

"When you look at the out years, it looks like we're starting at deficits for as far as we can see," Carcieri said.

But the two-term Republican governor blames Rhode Island's 13-percent unemployment rate and budget deficits on factors beyond his control, like the national recession. And Carcieri calls his final budget an effort to steer the state in the right direction.

"All the steps we are taking now will position the state better," Carcieri said. "And so that when this economy improves - which it will - we will be in a better position to sustain what we have. If it doesn't, then we'll be in the same position."

How the General Assembly will alter the governor's spending plan remains to be seen.

Carcieri is stopped short of a veto threat. But he warned the General Assembly not to freeze or eliminate Rhode Island's flat tax. And he says it would be a mistake to expand the number of items covered under the state sales tax.

However the budget battle lines are drawn on Smith Hill, big challenges remain for the state - even if Carcieri knows that a year from now, they'll belong to a different governor.