AUGUSTA (AP) – Legislative budget negotiators, in a breakthrough for bipartisanship, have reached agreement on a package of spending adjustments designed mainly to make up for decreased federal aid to Maine’s Medicaid program.

Now, after proposing a patch for that $73 million hole, they turn to a tougher issue – replacing a $450 million borrowing provision in the pending biennial budget that appropriates money to operate state government for the two years beginning July 1.

“We’re talking about a combination of cuts and, potentially, some revenue,” said Senate Majority Leader Michael Brennan, D-Portland.

Overnight decisions by the Appropriations Committee on the smaller Part II budget, worth about $100 million in all, were being drafted and are expected to be taken up by the full House and Senate later this week.

Key compromises involved a revised allocation of funds owed to hospitals and the establishment of a Medicaid drug policy aimed at promoting less expensive prescriptions by doctors.

The bipartisan accord cleared the way for new discussions concerning the most controversial item in the $5.7 billion budget for fiscal 2006-2007 – the $450 million revenue bond plan.

That borrowing provision is the subject of a Republican-backed people’s veto petition drive, and majority Democrats have been exploring ways to replace it with more budget cuts, new revenue or both.

“This is a serious undertaking,” Gov. John Baldacci told reporters Tuesday. “I want to repeal the borrowing package.”

The net amount needed to replace the budget borrowing provision and keep the budget in balance would be about $250 million. Other proceeds from the borrowing would be earmarked for lowering the state’s pension liability and boosting reserves.

Last week, the Baldacci administration produced a sketch of what a new round of budget cuts in the range of 5 percent would look like. The House chairman of the Appropriations Committee, Rep. Joseph Brannigan of Portland, told his Democratic colleagues at a caucus Tuesday that replacing the borrowing provision in the pending budget will require substantial cuts.

“We have lists that are pretty ugly,” Brannigan said as Appropriations Committee members prepared to renew Part I budget discussions.

One method under discussion for minimizing cuts would be an increase in Maine’s tax on cigarettes.

“It’s a possibility,” said Assistant Senate Majority Leader Kenneth Gagnon, D-Waterville.

Independent Rep. Richard Woodbury of Yarmouth, the House chairman of the Taxation Committee, said as recently as Monday that he remained hopeful that “whatever revenue sources are considered could still be placed in a more comprehensive package of reforms.”

Republican Sen. Richard Nass, R-Acton, who sits on the Appropriations Committee, said the likelihood of a bipartisan deal on a borrowing replacement was “slim.”

“It’s going to be very difficult to reach any consensus on that,” he said.

Already, said Nass, there was restlessness among Senate Republicans over the Part II Appropriations Committee accord.

Issues raising concern, he said, included an extension of so-called tax-and-match assessments to mental retardation service providers, worth $12 million, and the treatment of hospital settlement funds.

“It’s going to be a rough sell for Republicans. But I think it’s a good thing to do now, shows we can work together,” Nass said.

A Democratic summary indicates that the establishment of a modified drug formulary – a tightening of prescription drug access for Medicaid beneficiaries – would be designed to produce $11 million in savings, down from $19 million proposed by the governor.

The package would earmark $9 million available for hospitals, down from $29 million, to help offset the loss of federal funding.

“Better,” said Maine Hospital Association Vice President Mary Mayhew. “We’re pleased that they were able to restore $20 million to the $29 million reduction.”

House Speaker John Richardson, D-Brunswick, said the success of negotiations on the borrowing provision in Part I could depend on a willingness of bargainers to avoid starting with bottom-line demands.

Asked about the prospects for compromise, House Republican floor leader David Bowles of Sanford said, “at this point we don’t know because there hasn’t been any public discussion of anybody’s position on it.”

AP-ES-06-07-05 1713EDT