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Tennessee Governor Bill Haslam talks about education and his budget to the editorial board at the Times Free Press.

NASHVILLE —Putting the finishing touches on the budget he'll present to lawmakers early next year, Gov. Bill Haslam said he has a "good problem" on his hands: extra revenue two years in a row that he can spend on priorities such as K-12 and higher education.

"We have a good problem, having a surplus right now," Haslam told the Nashville Rotary Club last week.

It's interesting, he added, that "once you have a surplus, all the different ideas come out of the woodwork" about what do do with the extra money.

Haslam last week wrapped up two weeks of public hearings for the fiscal 2017-18 budget that would take effect July 1.

This year's state budget is $34.9 billion, including federal funds and higher education tuition. Tax collections in the first few months have been about $200 million above expectations.

Revenues exploded in the 2015-16 year that ended June 30, coming in about $1 billion above low-ball estimates set by the State Funding Board. That panel comprises the state comptroller, treasurer, secretary of state and Haslam, who is represented by his finance commissioner.

The cash influx is happening for a variety of reasons, including economic growth. But the Republican governor acknowledged another factor at work.

"You project [estimated revenue increases] conservatively, you outgrow the projections, you cut the size of government, and then the fourth thing you do is you don't spend everything in your budget just because it was budgeted," he said.

Of this year's $1 billion surplus, about $662 million was recognized as one-time money, not available for use in ongoing programs. Instead, some was socked away to beef up the state's Rainy Day emergency reserve and for one-time building and maintenance projects.

But $355 million in recurring money this year, plus some additional funds, could put $466 million in new revenue in the 2017 budget, according to a legislative estimate.

Haslam intends to put additional money for K-12, especially teacher salaries, and higher education in his proposed 2017 budget, if state lawmakers agree.

He told reporters that "since we've been in office, we've already increased K-12 spending over a billion dollars. And that's before this year's increase and before you add whatever we do for teacher salaries."

Education Commissioner Candice McQueen asked for a $67.1 million budget increase, including a $58.7 million boost to the $4.5 billion Basic Education Program funding formula for local schools.

McQueen left salary increases for Haslam to decide. Over the past two years, Haslam put $200 million toward his goal of making Tennessee teacher salaries the fastest-improving state in the nation.

Not everyone's been happy, though, with the nature of Haslam's support of K-12 education.

Hamilton County and six nearby school districts have a pending lawsuit charging that state officials failed to fund schools properly and didn't fully implement a funding formula revamp known as BEP 2.0. Metro Nashville and Shelby County schools have filed suits as well.

In their suit, Hamilton County and other systems cited unmet recommendations by a BEP review panel to underscore their charge that public education was dramatically underfunded.

In response, State Board of Education officials eliminated many of the recommendations. Then Haslam persuaded the Republican-controlled General Assembly to stop the phase-in of BEP 2.0, enshrining in law the current hybrid funding scheme.

That drew vitriol from critics.

"History will judge the Haslam administration as the worst for public education in the modern history of the state," said Will Pinkston, a Nashville school board member and former adviser to Democratic Gov. Phil Bredesen.

Another Haslam priority is higher education. His Drive to 55 plan calls for boosting the number of adult Tennesseans with college degrees, two-year associate degrees or technical certificates to 55 percent by 2025.

Under the state's 2010 Complete College Act, pushed by Bredesen, institutions in the University of Tennessee and Tennessee Board of Regents systems began receiving funding based on how well they moved students along toward graduation rather than simple enrollment.

But that money has only begun showing up in the past three budget years. Now Tennessee is bucking a decades-long national trend of large tuition and student fee hikes seen elsewhere as state support slowed to little or nothing.

Tennessee tuition increases in the last two years mirrored normal inflation rates. Projections for this year are between zero and 5 percent, depending on the degree of state support.

"You'd have to go back to when "Grease" and "Animal House" were in the movie theater to find two consecutive years when it's been this low," UT system President Joe DiPietro said. "For two Junes running, you'd have to go back to the late 1970s" to find such low increases.

Mike Krause is executive director of the Tennessee Higher Education Commission, which oversees the UT and regents systems.

During budget hearings, Krause asked for $48 million in Complete College Act funding in 2017. Other requests would bring the total sought to $94.4 million.

Other agencies have needs to be balanced as well.

The state's $11.3 billion TennCare Medicaid program for low-income women and children projects it will need an additional half a billion dollars. The program is jointly funded by the state and federal governments.

Tennessee's share of the increase is $191.39 million, with medical inflation and utilization alone accounting for $40 million on the state's part. There's also $72 million for increased pharmacy costs for senior citizens eligible for both Medicaid and Medicare.

TennCare, like all departments, was required to offer up plans to find some savings in other areas.

The wild card in all this is President-elect Donald Trump, who assumes office Jan. 20.

"That's one area where there's a lot of uncertainty, everything from, what might happen with the Affordable Care Act [Obamacare] to, do they decide to block-grant Medicaid to us," Haslam told reporters.

"That could fundamentally change the way we run TennCare," Haslam said of block grants. "That area, any area where we have a lot of federal funds come in, I think there's a good deal of uncertainty."

That extends to transportation, where Trump has advocated for increased infrastructure spending but wants to use private-sector funding for projects like toll roads.

"You have to go ahead and budget for what you know now," Haslam said, adding, "we'll adjust accordingly."

Contact Andy Sher at asher@timesfreepress.com or 615-255-0550. Follow on twitter at AndySher1.

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