February 3, 2010 -- Gov. Phil Bredesen said Monday night he plans to use the states reserves to spare some state jobs and key services but he stressed that painful cuts will be unavoidable and hundreds of state employees may be laid off.

The Democratic governor detailed his plans during his eighth and final State of the State address.

Weve had a share of easy years and tough years, said Bredesen, who received an unusually long standing ovation before speaking. By any standard these past two years have been extraordinary. This coming one will be as well.

His $28.41 billion budget proposal  a 5.1 percent reduction from the current year  includes a fee increase for drivers licenses, a cable tax and $394 million in cuts to recurring spending plans, including $201 million from TennCare, the states expanded Medicaid program.

The TennCare funding and other budget cutbacks worsen the financial woes of The Regional Medical Center at Memphis.

They came as MED officials pushed for Bredesen to match a $10 million increase in subsidies from Shelby County with federal funds that the state controls. Bredesen did not come through for The MED and in published comments said the hospital did not have a plan for sustainability.

Gene Holcomb, the chairman of the board for the county-owned hospital, said he was disappointed and surprised by the governors comments.

For the governor to say we dont have a plan is just wrong, Holcomb said. We do have a plan and hes got to know better than that. His saying that we dont even have a plan hurts us in our efforts to obtain funding from other entities and other states.

We do have plan. Its a carefully constructed plan. It defines the mission of the plan as retaining the core centers of excellence for services that are not available elsewhere.

The plan was put together after the hospital restructured to save millions of dollars in yearly operating costs. However, the state cut subsidies to the hospital simultaneously with those measures, so The MEDs financial footing did not improve.

The whole point of the whole project was to come up with a plan that kept us from having to go back to agencies (every year) and beg  to make The MED be sustainable, he said.

Holcomb has asked hospital accountants to estimate what the cutbacks will mean for The MED. He said a plan to close the hospitals emergency room to non-trauma patients that has been postponed may have to be implemented July 1.

The emergency room is a gateway into the hospital for the uninsured. He said he remains hopeful that federal funding can be secured for the hospital.

However, the governor said he plans to soften the blow by dipping into the states roughly $900 million in cash reserves. It will be the second consecutive year Bredesen has used some of the rainy day money, something hes tried to avoid in the past.

I believe we are in a strong enough position and it is raining hard enough that we can use some reserves to soften the worst of some of these cuts, he said.

State Senate Speaker Ron Ramsey said he believes the governors budget is responsible.

We cant print money like Washington, D.C., said the Blountville Republican. We have to live within our means, and I think were doing that the best we can.

Bredesen said about 1,363 state workers may be laid off. However, hes hoping to use about $200 million in reserves over the next two years to preserve about 400 of those jobs. He also wants to use reserves to keep in place important services, such as a safety net program for the mentally ill.

Democratic House Minority Leader Gary Odom of Nashville said preserving services for people with mental illnesses is very important.

All in all, I think the approach that has been taken is the right approach, he said. Now we just have to get down to the details. The devils in the details.

Bredesen said the Tenncare changes will apply more to institutions than the roughly 1.2 million people enrolled in the program. In 2005, Bredesen cut 170,000 people from TennCare to save the state money.

Tony Garr, director of the Tennessee Health Care Campaign, said the state could avoid some of those cuts if it raised more revenue. For instance, he said money could be gained by closing corporate loopholes in Tennessee. You just cant do it all with reserves and cuts, Garr said.

The budget reflects a $1.5 billion reduction in federal stimulus money compared to the current year.

We were all very aware that these funds would disappear at the end of December this year, and have carefully planned how we transition from using those funds to once again standing on our own, Bredesen said.

However, the plan does include some new spending. For instance, $165 million will be used to give state workers a 3 percent bonus, $82 million will go toward the state retirement plan and $11 million is allotted to restore land and soil conservation funds.

The governor also said hes pleased to be able to fully fund the states education funding formula, or Basic Education Program.

To achieve that, we had to make one commonsense adjustment and froze the growth in the capital outlay component this year, he said.

Sen. Jamie Woodson, a Knoxville Republican and member of the Senate Education Committee, said fully funding the BEP is sensible because of recent steps the state has taken to raise its education standards.

I think this gives us an opportunity to move forward with preparing students for this global economy, she said.

Finance Commissioner Dave Goetz said earlier Monday that the drivers license fee increase  from $19.50 for five years to $46 for eight years  is necessary for a new drivers license issuance system and the purchase of better communication equipment for state troopers. Its expected to generate $22 million.

We have troopers who are using their cell phones to be able to communicate when theyre in certain areas where our radio system does not reach, Goetz said. We need a new radio system for the troopers.

The Associated Press contributed to this story.