The state of South Carolina should have more than $350 million “new” dollars to spend next year.

But hold off on popping the champagne: Lawmakers say the state needs to put more than that — at least $500 million — into basic education and health care needs.

Revenue to the state is expected to grow by 3 percent over this year, easing the tight budget constraints of the past few years that forced cuts in state agencies.

That means targeted cuts are likely for the next fiscal year, which begins in July, rather than the across-the-board budget cuts the state has used in recent years.

The wild card is Gov. Mark Sanford’s “activity-based” executive budget, expected in early January. Sanford’s budget experiment could change radically how lawmakers cobble together the state’s final spending package.

For now, many in the General Assembly aren’t paying much attention to the state’s next budget.

“To be quite honest, most people have been too busy on the campaign trail to give the budget much thought,” said state Sen. Nikki Setzler, D-Lexington.

State government will continue to operate on paper-thin margins. But that likely won’t dampen the spirit of some lawmakers who will come to Columbia this January armed with wish lists for the 2005-06 budget year.

A safe bet is they are in store for months of horse trading and backbiting over a relatively small pool of new money.

The Board of Economic Advisors predicted Wednesday that state government will take in about $5.87 billion in fiscal year 2005-06. That’s an increase of about $148 million over the state’s current budget.

The board also revised an earlier estimate for the current operating budget, adding an extra $109 million in revenue that can be spent next year.

The positive forecast also means the General Assembly can tap the $99 million capital reserve fund — a rainy-day account — for the first time in four years.

That equals a total of about $356 million new dollars next year over the current budget.

‘PLAYING CATCH-UP’

It’s good news for those who depend on state services. Sort of.

Economic Advisors chairman John Rainey said while state revenue is holding its own, it’s still a long way from vibrant.

“It continues to be a very gradual, upward trend,” Rainey said. “But minus inflation, a 2 percent net growth is no great shakes.”

While the numbers show the state is on the upswing in terms of tax revenues, it still won’t provide the kind of money lawmakers would like to fully fund education and cover higher costs in Medicaid and state workers’ health insurance.

“Even though it looks like we have a lot of money, the reality is we still have the same obligations, and we’re playing catch-up,” said Bobby Harrell, R-Charleston, chairman of the House Ways and Means Committee.

Other states are facing similar scenarios. South Carolina was one of 21 states to experience only modest budget growth in 2004.

And Nicholas Jenny, a senior policy analyst at the Nelson A. Rockefeller Institute of Government, said most states will see only modest spending increases in the near future.

‘DIFFERENT APPROACH’

In South Carolina, the first salvo of the annual spending fight will be Sanford’s executive budget.

The governor and his team are tight-lipped about what that proposal might look like, but a series of budget hearings held this fall could provide a window into Sanford’s thoughts.

The goal of the hearings, in Sanford’s words, was to subject every agency to a Socratic examination of what it does, what it could do better and — perhaps most importantly — what it shouldn’t be doing.

Sanford is modeling his budget approach on Washington state, where Gov. Gary Locke is using a modified “zero-based” budgeting system.

The idea is to view the state as a collection of consumers who are buying services from government. Instead of working off last year’s budget, the system is supposed to start from the ground up, choosing from about 1,500 existing functions of state government.

“It’s certainly a different approach,” Sanford said. “In Washington state, it was very widely accepted, and that was a very divided camp.”

But the devil is in the details. In Washington state, for instance, proposed cuts in education, the state’s work force and health care were controversial.

During his budget hearings, Sanford took aim at targets big and small.

He derided a book about sharks published by the Department of Natural Resources and a promotional music compact disc given away by the S.C. Lottery Commission; the latter not just because it was a government-sponsored CD, but because, Sanford said, it was a bad government-sponsored CD.

Sanford also renewed a debate from last year about the value of Clemson University’s public service activities and raised fresh questions about the Palmetto Pride anti-litter program.

The exercise forced agency heads into justifying programs and even their very existence.

“We don’t ask: ‘What would happen if we just stopped doing that?’’’ Sanford said. “That’s a scary question because you’ve got constituencies for everything you can do that will scream bloody murder.”

‘A VERY CLOSE LOOK’

Nobody’s screaming yet.

“We’ll take a very close look at it, like we did last year” said House Speaker David Wilkins, R-Greenville. “We know he (Sanford) takes a very hands-on approach, and we passed a major portion of his executive budget.”

No matter what Sanford’s budget recommends, the two top spending issues will be education and health care.

Those two areas make up about 80 percent of all state spending and probably will account for a big portion of any new money spent next year. Harrell said increasing per-pupil spending to the state’s recommended level alone would cost $315 million.

“If we make the priorities K-12 education and the health of our citizens, which we should, that’s $500 million right out of the chute,” he said. “I guess the good news is we’re working with positive numbers this time instead of negative ones.”

Reach Stensland at (803) 771-8358 or jstensland@thestate.com.