LITTLE ROCK—Gov. Mike Beebe on Thursday called for a 1-cent cut in the state’s sales tax on groceries in a $4.4 billion balanced-budget proposal that leaves out nearly $146 million in funding for Medicaid programs, prisons and other state services.

The governor said he wanted to use part of a projected $300 million surplus as a “rainy day fund” that would be used to help pay for some projects that would otherwise go unfunded because of slowing revenue.

“If things are as bad as our conservative forecast predicts, then we could use some of that one-time money to meet those essential services,” Beebe told reporters. The unfunded projects could also be paid for if revenues next year come in above the state’s predictions.

Beebe released the proposed budget and forecast for the next two years as lawmakers prepare for the legislative session that begins in January. The forecast released Thursday predicted that net available revenues will reach $4.5 billion in the next fiscal year, an increase of $89.3 million. For the following fiscal year, the state predicted revenues would reach nearly $4.7 billion, an increase of $178 million.

With about a third of new revenue next year earmarked for the tax cut, some lawmakers immediately questioned whether the reduction was necessary as the state faces a potential shortfall in some services that would have to be plugged with money traditionally used to pay for one-time projects.

“There’s a conflict with a lot of legislators as to why we would cut revenue coming in to the state and then have to plug ongoing obligations with one-time money,” said incoming House Speaker Robbie Wills, D-Conway. “There’s an inherent conflict there that’s going to have to be addressed.”

The budget was unveiled as lawmakers are grappling with how to adjust to annual sessions now required by a constitutional amendment approved by voters last week. The amendment requires the Legislature to meet every year and budget on an annual, rather than biennial, basis.

The governor’s proposal included a forecast for the second year of the biennium, which he said was included to offer a guide to lawmakers for future sessions.

The unfunded items that Beebe would like to use the surplus money to pay for include $58.4 million in Medicaid costs for the Department of Human Services, and $18.9 million for the Department of Correction to open a new unit in Malvern.

The tax cut continues a reduction Beebe signed into law last year that halved the grocery sales tax from 6 cents to 3 cents, which cost the state $121 million. Beebe campaigned for governor on the promise that he would phase out the tax.

“It helps the most Arkansans, the greatest number of people, particularly on the basic necessities of life in a time when it looks like economically more and more people need as much help as they get,” Beebe said. “The second reason is I’m a big believer in doing what you said you were going to do.”

Lawmakers questioned the move to cut taxes while simultaneously leaving out money for Medicaid and other state services that Beebe says could be funded with surplus money.

“Help my thought process here on what sense it makes to have all of these $145 million in what the administration is calling needs yet at the same time taking another penny off the grocery tax,” said Rep. Chris Thyer, D-Jonesboro. “What sense does that make?”

The approach Beebe took to addressing the unfunded portions of the budget also faced skepticism from lawmakers who note that with annual sessions, the state will be halfway through its next fiscal year when lawmakers return to the Capitol.

“Is it really necessary to use such a complicated process in light of the fact that we’re going to have this annual budget session in the even numbered years?” said Sen. Jim Luker, D-Wynne. “At any point in time we’re never going to be more than a year out in our budgeting.”

Sen. Gilbert Baker, R-Conway, said he didn’t see a conflict between the unfunded items and the tax cut and said he wanted to see if there was a way to cut even more off the grocery tax.

“I think this was a conservative approach to budgeting in light of a very uncertain economic time,” Baker said.

One question that remains unanswered is how much power Beebe will have to decide whether to use the surplus money for the unfunded needs. Legislation approved last year established a rainy day fund, but did not appropriate any money for the reserve fund.

Arkansas Department of Finance and Administration Director Richard Weiss said Beebe would likely seek amendments to the rainy day fund measure signed into law last year. Weiss said the state prepared the budget facing a certain impact from the nation’s economic crisis.

“We are facing economic times like we have not faced in this country for a long, long time,” Weiss said. “This is not business as usual at all.”

Beebe said later that he didn’t believe he was putting the tax cuts at a higher priority than funding some Medicaid services and prisons.

Beebe said he didn’t know how much of the projected surplus he would use to plug gaps in his budget, but said it was unlikely it would pay for all of the $145.9 million in unfunded appropriations listed. Beebe said the unfunded appropriations offers lawmakers a preview of the revenue stabilization bill that prioritizes spending for state government based on revenues.

Beebe said he listed the unfunded appropriations in the budget proposal against the advice of his chief of staff and the Department of Finance and Administration.

“It goes ahead and shows folks who would get the additional money if things aren’t as bad as our forecast suggests,” Beebe said. “It also gives you a preview of where the cuts are, because those that are getting that money in that column are the ones getting that cuts because of the very conservative forecast.”