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Hawaii lawmakers agreed on an operating budget Thursday evening that calls for spending an additional $800 million a year for each of the next two years.

The Legislature still has to come up with about $500 million in new revenues to pay for the plan.

Lawmakers wrapped up conference committee on , agreeing on an $11 billion operating budget for fiscal 2012, with $5.4 billion coming from the general fund. The budget for fiscal 2013 is $10.9 billion, with $5.5 billion in general funds.

That compares to a $10.2 billion budget for the current year — or about an 8 percent increase both years. The increases were mostly attributed to higher Medicaid and welfare costs, increases in public workers’ health and retirement benefits, and debt service.

The conference committee also approved $1.8 billion for capital improvement projects in 2012 and $1 billion for 2013.

“The challenge before us was that during down economic times, demand for public services skyrocket, so there is about a $600 million increase in Medicaid, for example,” Senate Ways and Means Chairman David Ige told reporters. “The biggest addition really dealt with those safety net services … and clearly there were increases in fixed costs — debt service, increased public health benefit costs and those kinds of things — which clearly we don’t have an option in funding or not funding.”

While state spending is going up, the budget is $800 million smaller than what Gov. Neil Abercrombie proposed in February. The governor had wanted an $11.4 billion budget ($5.7 billion in general funds) for fiscal 2012, and an $11.3 billion budget ($5.9 billion in general funds) the following year.

The scaled-down budget, which now goes to the full House and Senate for final votes, helps narrow the state’s projected two-year shortfall from $1.3 billion to about $500 million.

“It’s not the budget we would prefer … it is a budget, we think, that lays a foundation for long-term success,” said House Finance Chairman Marcus Oshiro. “We tried to, where we can, restore both funding and personnel where its most needed.”

Oshiro said the committee cut a total of about $200 million from state departments — cuts identified as “fiscal restraints.” But for $100 million of those savings, rather than identify actual cuts, he said the committee is giving the Abercrombie administration the “flexibility” to determine where additional savings can be realized.

“We’re giving the governor the tools he needs and his Cabinet will need to retool and reprioritize government in the coming years,” Oshiro said.

The budget also restores furlough savings that are set to end June 30. But lawmakers are assuming $88.2 million a year in labor savings should state employees covered by the Hawaii State Teachers Association and the United Public Workers agree to similar terms reached between the state and the Hawaii Government Employees Association. That contract includes a 5 percent pay cut and nine additional paid days off.

To close the remaining $500 million shortfall over the next two years, Ige and Oshiro said they are counting on revenue-generating bills (read: tax hikes) that are currently being vetted in conference committee.

“Our target is for a balanced budget,” Ige said. “We have several options before us.”

State Budget Director Kalbert Young said the revenue proposals on the table may not be adequate, meaning more cuts will have to be made.

“We’ll have to wait for which revenue measures will be agreed upon and in what fashion and in what capacity,” Young told Civil Beat. “And we’ll have to wait and see if the revenue actualizations occur. Because anything short of the mark will mean certain programs will have to suspended or curtailed.”

Oshiro said lawmakers can close the gap through revenue measures that include: suspending GET exemptions for businesses; eliminating income tax deductions and itemizations for higher income earners; capping other tax credits; and an increase in the alcohol tax.

Oshiro said lawmakers can close the gap through revenue measures that include:

• SB 754: Suspends GET exemptions for businesses ($175 million a year).

• SB 570 and HB 1092: Taxes pensions of higher-income earners ($100,000 threshold for individual filers, $150,000 for head of household and $200,000 for joint), eliminates income tax deduction and itemizations at those same thresholds. (About $21 million a year.)

• SB 756: Caps other tax credits, including the Renewable Energy Technologies Income Tax Credit ($6.5 million).

• SB 741: Increases the alcohol tax by 20 percent ($7 million a year).

Other bills that are scheduled for conference committee votes Friday afternoon include:

• SB 120: Repeals 16 special or revolving funds and takes money from another 23 funds. (About $13 million.)

• SB 1186: Caps counties’ share of the Transient Accommodations Tax; increases TAT on timeshares by 2 percentage points. (About $13 million a year for the timeshare piece; $10 million and $16 million in 2012 and 2013, respectively, for the capping piece.)

• SB 1270: Raids the Hurricane Relief Fund. (About $75 million.)