Michigan state legislators voted yesterday to approve Gov. John Engler's proposed budget cuts, slashing higher education funds in a move that will call for tough decisions by University officials.

Engler's executive order cut funding for universities and colleges by 2.5 percent. But soon after the appropriations committees in the Senate and House narrowly approved the order, the full Senate passed a bill reducing higher education cuts to 2 percent by using surplus Michigan Merit Award funds.

The House has yet to vote on that bill, which state Sen. John Schwarz said has Engler's support. Schwarz (R-Battle Creek) said the bill would not cut the number of Merit scholarships.

University Provost Paul Courant said the University has expected cuts for some time and planned accordingly, making a mid-year tuition hike unlikely. He said administrators will try to reduce spending rather than make students absorb the cuts. By leaving positions vacant and postponing programs, they can direct the brunt of the reductions away from education, he said.

"There might be some paint peeling in some places," he said.

But when the University Board of Regents sets tuition rates next year, it may have to deal with similar cuts in state funding for 2003-04. The regents raised tuition by 7.9 percent this year after the state kept University funding steady.

"The effects really depend on how permanent these cuts are," Courant said.

The executive order cut $337 million from departments across the state government in order to wipe out most of the $460 budget deficit. While an executive order does not have to pass the full state House and Senate, the appropriations committees in both houses must approve it.

Most departments, and the revenue sharing that aids local governments, saw reductions of 3.5 percent.

While cuts had to be made to ensure a balanced budget, many lawmakers believed the money should have come from a delay of the state income tax reduction. But the House yesterday voted down a bill that would have frozen the income tax.

In its initial vote, the Senate committee declined the executive order, but Schwarz and Sen. Leon Stille (R-Spring Lake) reversed their votes after meeting with Engler.

Schwarz said he changed to a "yes" vote because of the progress from 2.5 to 2 percent on higher education cuts.

"We were able to soften the blow to the universities to the tune of one half percent," he said, adding that the difference means $1.8 million more for the University of Michigan.

Sen. Alma Wheeler Smith (D-Salem Twp.), top Democrat on the Senate committee, voted against the executive cuts. She said the income tax reduction, which she blamed for much of the state's current budget woes, should have been paused to preserve higher education funds and revenue sharing.

The order is likely to increase the cost of college, she said.

"That income tax cut has a value for the average household ... of $30 a year," Smith said. "The students aren't out of the woods. Their parents aren't out of the woods. But by God, you saved $30 in personal income tax."

Schwarz said while a tax freeze would have provided the necessary money to protect higher education, "there was no hope whatsoever of pausing the income tax cut."

But Smith said halting the tax cut was the only solution she could have voted for.

"The governor was able to buy off members with certain concessions," she said of the two senators who changed their votes.

Gov.-elect Jennifer Granholm will now inherit a balanced budget, a luxury Engler did not have when he took over from his predecessor, James Blanchard, Engler spokesman Matt Resch said.

But Granholm will have to deal with a ballooning deficit for next year.

"The cuts made today are just the beginning (of those) that are going to have to be made," Schwarz said.

-Daily News Editor Elizabeth Kassab contributed to this report.