(Adds governor's proposal paragraphs 4-5)
By Gary Robertson
RICHMOND, Va., March 24 (Reuters) - Virginia's Democratic governor, Terry McAuliffe, and the state's Republican-dominated House of Delegates faced off on Monday in the start of a special legislative session on Medicaid expansion.
The impasse over Medicaid, the federal health care program for the poor, is holding up passage of a two-year, $96 billion budget. If the two sides fail to reach a deal by July 1, the state government could grind to a halt.
Legislators deadlocked over the budget during a 60-day regular session that ended March 8.
McAuliffe, a former Democratic Party fundraiser, proposed on Monday a two-year pilot expansion of Medicaid, which could be terminated if it is unsuccessful.
"We can end the program without penalty if it does not serve Virginians well over those two years," McAuliffe said during an appearance with administration officials and legislators.
McAuliffe, who made expanding Medicaid coverage to more than 400,000 Virginians a priority during his gubernatorial campaign in 2013, is expected to release details of his budget proposal in coming days. Republican leaders could put out their spending blueprint on Monday.
Under the current Medicaid proposal, the federal government would pay the full cost of Virginia's expansion through 2016, then pare its contribution to 90 percent by 2020.
McAuliffe has argued that accepting $2 billion in federal funds to expand Medicaid under the Affordable Care Act would release money that could be used to create jobs, raise state salaries, bolster pensions and come up with health reforms.
But Republicans have called the move unaffordable.
"We're not going to do Medicaid expansion in the budget," Kirk Cox, majority leader of the House of Delegates, said last week.
House Republicans contend the federal government cannot afford to make good on its promise to pick up most of the Medicaid tab. They have spent much of March pointing out the Affordable Care Act's shaky launch.
Republicans in Virginia's lower legislative chamber defeated Medicaid expansion 67-32 in a test vote during the legislature's regular session. Cox said no minds had changed since then.
The evenly split Senate is leaning toward supporting McAuliffe's expansion program. (Editing by Ian Simpson, Jeffrey Benkoe and Meredith Mazzilli)