Gov. Christine Gregoire released an austere state budget proposal this morning that slashes more than $3.5 billion in funding for public schools, higher education, social services and other areas to help close the biggest budget shortfall in state history.

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OLYMPIA — Gov. Christine Gregoire released an austere state budget proposal this morning that slashes more than $3.5 billion in funding for public schools, higher education, social services and other areas to help close the biggest budget shortfall in state history.

Gregoire proposes filling the gap, projected at more than $5 billion, by making scores of cuts and using untapped pots of money, including $600 million from the state rainy-day fund.

In addition, the governor is banking that the federal government will send Washington at least $1 billion as part of an economic stimulus package.

Among the cuts proposed by Gregoire: $682 million in pay increases for state workers and teachers; $500 million in health care for children, the poor and the disabled; and $178 million in funding for Initiative I-728, which was approved by voters in 2000 to reduce class sizes in public schools.

The proposed budget also would change how state pensions are funded, and reduce contributions to the worker-retirement programs by $400 million over the next two years. No cut was too small to pursue. The governor proposes closing 13 state parks to save $5.2 million, shuttering the visitors center at the state Capitol to save $1.7 million and eliminating toll-free numbers to the state Department of Revenue to save $260,000.

The governor said the cuts were necessary, but that she “hates” the budget and expects legislators and lobbyists will as well. “There’s something in there for everybody not to like.”

The news conference was barely over before groups hurt by the budget started to complain. State workers and teachers still want their pay increases. Advocates for the poor don’t want their services reduced.

“Cuts in the governor’s proposed budget yank the safety net out from under hundreds of thousands of children around Washington state,” Jon Gould, Deputy Director of the Children’s Alliance, said in a statement. “Without a more creative approach … children and families in our state will suffer.”

The budget would not increase taxes or end tax breaks for businesses. Some legislators have talked about sending voters a tax package to help balance the budget. The governor’s office would not speculate whether Gregoire would support such a move.

The cuts were hard to make, said Victor Moore, the governor’s budget director. “The more we looked at it, the more we realized we had to go pretty deep and to… places where no one was really comfortable,” he said.

The governor’s budget next will go to the state Legislature for consideration. Both the state House and Senate will present their own proposals during the legislative session that starts next month. Then all three sides have to reach agreement.

Overall, the governor is proposing a 2009-11 spending plan worth $33.5 billion. The Legislature approved spending $33.6 billion in the current two-year budget, which runs through next June, but lawmakers are expected to cut about $300 million out of that spending plan because of declining tax revenue.

In that context, Gregoire’s proposed spending plan for the next two years represents an increase of less than 1 percent over the current budget.

Which raises a question: What’s being cut if state spending is essentially flat?

The answer: Mostly proposed increases in state spending.

Simply put, it generally costs more money each year to provide the same level of state services.

For example, when more children enroll in public schools, the state must pay for their basic education as required in the state Constitution. Washington currently is seeing a spike in enrollment, in part, some officials think, because many financially strapped parents are pulling their kids out of private school.

In addition, the state, like the private sector, has to deal with increased health-care costs and wage increases.

Because the state by law has to fund certain services, such as basic education, lawmakers must find cuts in areas that are not protected. That includes pay raises for state workers.

Gregoire’s proposed budget closes the current projected budget shortfall, but the economy could get worse. That would likely mean deeper cuts.

As it is, her budget relies heavily on one-time fixes to bridge the gap: She’d tap the state rainy day fund and expects at least $1 billion in aid from the federal government.

Moore said he thinks the federal money will come through as part of a stimulus package. If it doesn’t, he said, “We have a big, long list of cuts; we just have to go deeper.”

Gregoire tried to sound a positive note this morning amid the gloom, saying “it will get better and we will get through it. But we all have to work together.”

Here are some highlights from the proposed budget cuts:

Health and human services: $1.4 billion

Reductions include cutting $500 million from state programs that provide health care for children, the poor and the disabled. The cuts could eliminate health-care services for 46,000 people.

Other cuts include eliminating the General Assistance-Unemployable program, which provides a temporary safety net for people unable to work because of mental or physical disabilities. That would save more than $160 million.

In addition, the governor proposes a 5 percent cut in the amount of money the state provides to nursing homes to take care of Medicaid patients, saving the state $46 million.

Pay raises: $682 million

The governor would eliminate proposed pay increases for state workers and teachers. The state employee pay raises were negotiated between the governor and state worker unions, but haven’t yet been approved by the Legislature. Initiative 732, approved by voters in 2000, requires annual salary increases for teachers to be pegged to inflation. However, the Legislature can suspend the initiative with a simple majority vote.

However the state would provide the additional money needed to continue paying 88 percent of the health-insurance premiums for state employees, as required by their contracts.

Public schools: $610 million

Cuts include a 33 percent reduction in levy equalization payments to public schools. This money helps support about 200 school districts that have small property-tax bases to rely on. It would save the state $125 million.

In addition, the governor would save $178 million with a 24 percent cut in funding for Initiative I-728, which was approved by voters in 2000 to reduce class sizes. Many schools use the money to hire more staff and pay for training and other programs.

Higher education: both cuts and tuition increases

The governor would cut $216 million — 13 percent — from the budget for four-year public universities. Two-year community colleges would be cut by 6 percent, or $110 million. The cuts are expected to result in larger class sizes and faculty layoffs. Gregoire suggests letting the colleges and universities decide if they need to reduce enrollment to maintain quality.

Community colleges were spared the deepest cuts because the governor’s office felt those institutions will get the brunt of laid-off workers heading back to college for retraining.

Universities would be allowed to increase tuition by 7 percent, which would raised $128 million to help offset the cuts. Community colleges can increase tuition by 5 percent, which would raise $34 million.

Public safety: $156 million

Among the cuts, the Department of Corrections would eliminate supervision for certain low-risk offenders who have completed their jail or prison sentences. For people who remain under community supervision, the terms of their supervision would be capped at 12 months, with the exception of sex offenders.

Those actions would save nearly $70 million.

Another $1.5 million would be saved by allowing the early release of elderly inmates and chronically or terminally ill offenders age 55 or older.

Natural resources: $35.8 million

The proposed cuts include closing 13 of Washington’s 121 state parks, saving $5.2 million, and shuttering some fish hatcheries, saving $6.6 million.

Andrew Garber: agarber@seattletimes.com or 360-236-8268