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RALEIGH - Legislators returning to Raleigh next month will be faced with an economic Gordian knot: tax revenues falling as demand for services is rising.

Solving this puzzle is first and foremost on the mind of House and Senate leaders and members alike when you ask them about their priorities come

Jan. 28. North Carolina's situation is by no means unique - other states have the same issues or worse - but it is relatively unfamiliar after five years of relative plenty.

"All information about how much money we will have is simply pretty raw speculations, so we don't know how bad it will be," said House Speaker Joe Hackney, who has been tapped by his party to lead the chamber again next year.

The hole in the current year's budget has been pegged at $1.5 billion to $3 billion, but even that is guesswork until business tax returns come in during the first part of the year.

Whatever the number, the financial industry crisis and its derivatives will mean less tax revenue for the coming year.

At the same time, top legislative leaders are taking aim at some of the biggest problems that have faced state government in decades. The state's still-struggling mental health reform effort continues to sap funding. More straightforward problems, such as a probation system that doesn't have adequate technology to track prisoners, are also in line for attention.

"You're seeing a mismanaged government, and that has to be corrected," said Sen. Marc Basnight, the long-serving leader of the Senate who is likely to serve another term as President Pro Tempore.

Meanwhile, two of the state's most consistent problems - a massively underfunded highway infrastructure and rising health care costs for those on Medicaid and the uninsured - could gobble hundreds of millions of dollars next year and be far from satisfied. On top of that are long-running demands for help with water and sewer systems, open space preservation and hundreds of other projects across the state.

"There is no money down here to do any new projects, and I'm afraid existing projects and appropriations that have been made in the past may have to be cut due to the economy," said Don Vaughan, who will begin his first Senate term in January.

Vaughan is no rookie - he's been a lobbyist at the General Assembly - and he sees a lean year ahead compared to the past five.

"My feeling is by late spring, you'll see some uptick," said Gov. Mike Easley, who will leave office in January. Easley has ordered state agencies to withhold a portion of their budgets to ensure state spending does not outpace tax revenues.

Despite his hunch that revenues will improve, Easley said he'd rather cut on the front end of the state's problems.

"I'd rather have the money and not need it," he said.

The next governor, Bev Perdue, can then return the money to programs rather than facing a five-month deadline to balance an out-of-kilter budget.

Beyond that, he said, the state will have to find a way to make progress on things like education while dealing with job losses and slower business growth.

"There's nothing you can do about the national economy," Easley said.

Sen. Phil Berger, the Republican leader in the Senate, said the economic downturn could be an opportunity to pare back what he describes as over-abundant state spending.

"What the state of North Carolina can do (to help economic recovery) is not overburden the people with additional taxes and not hamstring our potential for growth with a larger government that will require a larger amount of money to sustain," Berger said.

Close watch would need to be kept on federal actions as well, Berger said. The state and local governments have been urging Congress and incoming President Barack Obama to create a stimulus package that would help states build roads and other infrastructure.

If that money comes, Berger said, the legislature should continue making its own investments in those things rather than letting the federal dollars supplant state spending.

Outside the budget, legislators will find themselves dealing with a number of issues of particular importance to Greensboro and the area. Two of the most high-profile:

l Greensboro politicians are discussing returning the power of protest petitions to the city. Such petitions allow neighbors to make it more difficult to develop or redevelop a piece of property by forcing a super-majority of the City Council to approve land-use changes.

Vaughan and Rep. Pricey Harrison have expressed interest and have said they would work to return the power to Greensboro's citizens.

l New rules designed to protect Jordan Lake could be costly for local governments and curtail development. They are designed to limit the amount of phosphorus and nitrogen flowing into the lake from sewer plants and runoff from cities and other developments.

"We need to do what we can to have those rules disallowed or modified in some way," Berger said. The legislature will have final say over the rules.

Contact Mark Binker at (919) 832-5549 or mark.binker@news-record.com