State leaders are discussing using some stimulus money to restore and preserve a rainy-day fund for public schools, so that fund could be tapped later if the economy sinks even further.

They're also considering using stimulus money to replace part of the state's share of the Medicaid program, which gets both federal and state money, rather than eliminating some planned cuts in other programs.

The proposals could dash hopes that the stimulus money would prevent the sharp cut in public-schools spending proposed by state schools Superintendent Tom Luna to meet new, lower budget targets set by Gov. Butch Otter in response to plummeting tax revenues.

But they could save other state-funded programs and avoid projected 5 percent cuts in school and state-government payrolls by allowing lawmakers to move dwindling state funds around in unconventional ways. They could also strengthen the state's ability to cope with a deep or long recession.

"It's going to fill in some of the holes, but not all of them," Luna said.

Luna talked to reporters Thursday, after meeting Wednesday with Vice President Joe Biden and Secretary of Education Arne Duncan in Washington. The same day, the Legislature's budget-writing committee heard from staff analysts about the stimulus law's impact on Medicaid.

Luna said the stimulus law could help preserve teacher pay and save some from being laid off, part of the job preservation the stimulus law is intended to achieve.

"When the Legislature was looking at a 5 percent cut of salaries, it meant the real possibility of having to lay teachers off and administrators losing their jobs," he said. "I don't think this is going to generate new jobs, but I do think that there is a long-term benefit, if you believe as I do that education is economic growth."

Even so, Luna returned to Idaho prepared to revive the $62 million cuts he proposed last month.

Idaho is getting $351.5 million for education, including $201 million to help the state stabilize its appropriations for schools in fiscal years 2009, 2010 and 2011. Another $105 million is to beef up federal programs for low-income, special-needs and other students. Of the $201 million for state-budget stabilization, $166 million will go to public schools and $35 million to higher education.

Luna is considering spending $85 million, more than half of the public-school share, this fiscal year to replace rainy-day fund cash the state has tapped to cover a 6 percent budget shortfall. He's considering spending $47 million in 2010 and $34 million in 2011.

The law is designed to stimulate the economy quickly with government spending, but allows some education funds to be spent as late as 2011.

Luna's scenario - which he stressed is not final and could change by Wednesday, his deadline for submitting a proposal to a stimulus task force Otter appointed - would not forestall $62 million in cuts for fiscal 2010 that he proposed last month. Those cuts would not be avoided in 2011, either.

His plan would leave the rest of the Public Education Stabilization Fund, which has $114 million, intact for now. The fund might be needed to avoid mid-year cuts to public schools, he said.

A Boise Democratic legislator questions that idea. "Why isn't he using (the rainy-day fund) for exactly what it was created for?" said Sen. Eliot Werk, the assistant minority leader.

Meanwhile, legislative budget writers are considering reallocating state Medicaid funds to fill budget holes elsewhere.

The federal government has covered about 70 percent of Idaho's $1.4 billion Medicaid program, but that will jump to 79 percent under the stimulus law, legislative budget analyst Amy Castro told the Joint Finance-Appropriations Committee.

Consequently, Idaho will save $52.3 million this fiscal year and $73.2 million in the fiscal year starting July 1, when taking into account cuts to existing Medicaid programs that already cleared the 2009 Legislature and the expected passage of a $10.4 million savings bill still in the Idaho Senate.

Even with the new federal money, state officials want to preserve those Medicaid cuts, including ending nonemergency transportation for some recipients and freezing nursing-home rates. Officials argue that these cuts more closely align the state with what's offered by private insurers.

Legislators say the stimulus-related savings on Idaho's share of Medicaid could lessen the planned state personnel cuts of 5 percent being contemplated for fiscal year 2010.

"Perhaps it won't be the 5 percent," said Rep. Maxine Bell, R-Jerome and co-chairwoman of the committee. "I don't see any other way to save jobs."

Idaho now expects to take in only $2.55 billion in revenue in the year ending June 30, down hundreds of millions from the year earlier, and many fear things will get worse.

State agencies and private companies have until Wednesday to submit a list of proposals that could qualify for federal money.

A panel will review those submissions until March 19 before Otter issues recommendations to the Legislature.

Though Otter has said he could turn down money that forces Idaho to create new programs that will cost the state money once the federal funding ends, it's clear Idaho will take a good portion of its potential $1 billion share, said Joe Austin, a Legislative Services budget analyst.

For instance, the Republican governor has already agreed to a federal program to increase unemployment benefits for 47,000 jobless residents by $25 per week, or $1.2 million weekly. The state also expects to take an interest-free bridge loan to replenish the unemployment trust fund that's now at $140 million, down from nearly $320 million in November 2007.

Brian Murphy: 377-6444