MONTPELIER – Commissioner of Education Armando Vilaseca and state Commissioner of Finance James Reardon fired the first warning shot in next year's battle over school spending Tuesday with a letter to school boards, principals and superintendents.

The letter contains ideas on cutting school spending to meet a looming state budget deficit, many of which are likely to encounter stiff opposition from school boards, teachers and administrators.

Among the suggestions — some of which have already stirred up controversy — are ending grants for small schools, statutory requirements that future contracts require 20 percent of health insurance be paid by teachers, and moving at least a portion of the teachers' retirement obligation into the Education Fund — a move that has been criticized as shifting the retirement fund burden onto property taxpayers.

"Last year, over 90 school districts had a zero or negative growth in their budgets. This kind of work is required of more school districts in order to weather this financial storm," according to the letter.

Gov. James Douglas and his administration caught some flak last year for proposing level funding of state reimbursement to schools when school districts had a very short time before their budgets had to be finalized and printed for town meetings. This year, determined not to make the same mistake, they sent the letter out with more than 10 weeks before school budgets will be finalized, Reardon and Vilaseca said.

"Last year late in the budget season there was some information sent to schools regarding some potential recommendations to be made to the Legislature around school funding," Vilaseca said by telephone. "It was really late in the process."

"I really felt it was important to send a letter out," he added. "The facts are we have a lot less money coming in than we had in the past."

"We are having extraordinary challenges the state is facing," Reardon said.

The letter offers several other possible changes to school funding that may be recommended to lawmakers as the state grapples with shortfalls in funding:

Requiring some contracts, such as transportation and food, to be negotiated at the supervisory union level rather than by individual schools.

Giving the commissioner of education more leeway and power in consolidating schools and districts.

Increasing the threshold at which special education costs are considered extraordinary.

Scaling back a one-year break schools get from the state when enrollment levels drop.

"I don't particularly like any of them," Vilaseca said, but the economic downturn is forcing tough choices. "We have never seen anything in my lifetime like this," he said.

"What we tried to do is say these are the kind of issues that will be coming up next year," Vilaseca said. "I know there is going to be some anger (but) it does provide superintendents and school boards some time to look at their budgets."

Darren Allen, spokesman for the Vermont National Education Association, the union that represents most Vermont teachers, said the broad strokes of the proposal are not surprising although the union has not yet seen the details.

"We are disheartened but not surprised the governor would once again try to balance the state budget on the backs of students and the backs of property taxpayers," he said. "What part of local control doesn't the governor seem to get? He is intruding somewhere state government should not go."

Reardon said the ideas contained in the letter are not merely a shift onto the property tax base. Many of the proposals will result in lowered school spending and those that do result in more expenses in the Education Fund – for instance moving a portion of retirement costs to that account – can be counter-balanced by lower budgets, he said.

And, after all, school spending only increased by 2 percent this year, a smaller increase than in previous years, even if actual student enrollment is declining.

"I don't know how we can continue to do business as usual," Reardon said. "It is time we understand it is time we make some changes in how we do business."

The General Fund is expected to have a $238 million deficit over the next two years as federal stimulus money dries up and first quarter revenues this fiscal year were down 10.6 percent from a year earlier.