Governor Pataki outlined the rules of engagement yesterday for the annual battle here over taxpayer dollars, putting what could be the most contentious issue in the legislature at the center of the fight.

Medicaid reform was widely expected to figure prominently in Mr. Pataki’s annual budget address, with current growth estimates putting the cost of the program for poor and disabled New Yorkers at more than half the state’s budget by 2016 and members of both parties agreeing on the need for restraint.

And in a half-hour speech to hundreds of legislators, lobbyists, and aides eager to hear how New York’s chief executive will seek to cover $105.5 billion in costs with $101.3 billion in revenue, the governor zeroed in first on a health care program that he said is “crushing” taxpayers.

But in a sign of coming acrimony, Democratic legislators made clear in speeches of their own throughout the day that the governor’s plan to slow spending with new and increased hospital assessments, the “right-sizing” of health care facilities, increased car registration fees, and an increased number of gambling sites in the state will meet stiff opposition in coming months.

The Legislature’s top Democrat, Sheldon Silver, opened his remarks on the governor’s plan by citing the need for cooperation in light of last year’s record-setting late budget and a recent report that found New York State government the most dysfunctional in the nation. The Manhattan assemblyman said he did not want to give Mr. Pataki any reason to “disengage himself from budget negotiations.”

Yet, after a brief nod to a Pataki plan that would cap county and New York City Medicaid payments at 2005 levels, Mr. Silver, the Assembly speaker, characterized the governor’s budget as being “more bad than good” and containing “a lot that is simply not grounded in reality.”

Mr. Silver focused his criticism on a variety of proposals that Mr. Pataki has previously failed to get through the Legislature, including university tuition hikes, new gambling sites, and health care facility assessments, to conclude that the governor’s plan proves true the saying “that no experience of the failure of his policies has shaken his faith in their essential tenets.”

“The governor’s budget is tantamount to a self-inflicted wound on himself and New York’s economy,” Mr. Silver said.

On the spending side, Mr. Pataki is proposing major funding of the state’s transportation infrastructure. He wants to commit $19.2 billion to improve the Metropolitan Transportation Authority system and $17.4 billion on the state’s highway and bridge system. He also plans to increase school spending by $526 million, to increase the number of state troopers, and to provide $1.4 billion for environmental projects.

Overall, Mr. Pataki’s rhetoric signaled a return in principle to the tax-cutting proposals that got him elected in 1994. He framed his third, third-term budget as a way to reward state residents with lower property taxes, a more efficient health care system, safer communities, efficient local governments, and the prospect of increased job growth in coming years.

To help spur economic growth, the governor proposed a plan, called Co-Star, that would pay local governments for limiting spending increases to the annual growth rate of Medicaid. Reform of the state pension system was proposed as a way to save local governments and residents $621 million next year.

Increased aid to distressed cities was proposed to boost economic activity upstate, with some qualifying for a 25% increase in state funds through a program called Aid and Incentives for Municipalities.

“We must control spending and reduce the tax burden that limits economic growth so we can put these fiscal difficulties behind us just as we’ve done in the past,” Mr. Pataki said.

The rhetoric of restraint is a retreat from last year’s budget, which raised the ire of many of the governor’s early supporters. In contrast to the sharp tax and spending cuts of the mid-1990s, last year’s budget sought to increase state spending at double the rate of inflation. It took until August to pass.

Some early Pataki supporters, though, questioned the figures behind Tuesday’s fiscal tough talk.

A budget analyst with Manhattan Institute, E.J. McMahon, said the governor misrepresented the state’s spending growth by focusing on its general fund rather than the state fund. The latter reflects increases in the cost of state government and services. Mr. McMahon said the cost of running the state is up by twice the rate of inflation this year, or more than twice the rate of growth in the “All Funds” pool.

“The bottom line is that by the best measure, the state is spending at two times the rate of inflation,” Mr. McMahon said. “The state doesn’t have a revenue problem, it has a spending problem…If you put away what’s new in here, the cost of maintaining the status quo in New York State is increasing at two times the rate of inflation.”

Republican lawmakers said they would resist several details in the governor’s spending plan, raising the prospect of another lengthy negotiating process this year. Senator Joseph Bruno, the Republican majority leader from upstate Rensselaer County, told reporters following the governor’s speech that he and the thick crowd of Republicans who flanked him were “concerned” by the proposed health care cuts. Mr. Bruno also said the governor’s proposal to spend $526 billion on education is “well below” the level the Senate Republican Conference has decided on.

Mr. Silver agreed with Mr. Bruno on this point, but went even further, saying the governor’s budget “completely ignores” a Court of Appeals ruling from last year that ordered the state to spend billions over the next several years to improve education in New York City.

Still, both Messrs. Bruno and Silver told reporters that no reason exists for the budget to come in past the April 1 deadline this year. Early signs suggest this will be tough. In addition to the concerns voiced by Messrs. Bruno and Silver, health-care lobbyists made clear their opposition – and willingness to fight the budget – plain by issuing strongly-worded press releases and circling reporters at the Capitol throughout the day.

“The whole message he was trying to get across here is that you can’t do Medicaid takeover without Medicaid cost containment,” Mr. McMahon at the Manhattan Institute said. “And he’s absolutely right. One might quibble on the details, but compared to the previous budgets he’s proposed, it’s a pretty ambitious Medicaid reform and cost containment agenda, probably the most ambitious he’s proposed.”