OLYMPIA — More than 21,000 state employees could get pay raises of up to 5 percent in the next year, despite Gov. Chris Gregoire’s proposal to cut $1.7 billion from public schools, health care and other programs to solve a budget shortfall.

The $83 million worth of raises represents the “step” or longevity-pay increase that almost one-third of the state’s general-government workers are entitled to earn in yearly increments, typically over their first six years in a job.

The step pay is separate from cost-of-living raises, which state lawmakers this year agreed to suspend for two years for state workers, and college and public school employees. After the session ended in April without new state employee contracts, Gregoire and state employee labor unions struck agreements on pay and medical benefits that left intact pay arrangements from the 2007-09 contract, which legislators had ratified.

State Sen. Joseph Zarelli, R-Ridgefield, criticized Gregoire’s handling of the newer pay deals. In an analysis paper released last week, he argued that Gregoire has not actually frozen pay as her budget director Victor Moore has claimed. Zarelli further questioned what message the step increases send.

“What does it say to the average Washingtonian who is fearful of becoming unemployed that his or her taxes are going to pay 5 percent annual salary increases for state workers?” asked Zarelli, the ranking Senate Republican on budget matters.

Zarelli said Monday that Gregoire’s agreement to split health insurance costs with workers on a generous 88 percent state, 12 percent employee basis, would require almost $140 million more in outlays that the state can ill afford. All told, he said the governor’s agreements would cost $225 million that the state could use for other programs.

Gregoire has defended her work with the labor unions. She told The Olympian’s editorial board last week that unions did not want to renegotiate contracts in a way that might lower pay, even if it meant fewer job cuts in her budget proposal.

The second-term Democrat said state labor unions were instead more concerned about limiting state workers’ share of health care premiums at 12 percent, letting the state pick up the rest as inflation and employees’ heavier use of health benefits drive up the cost of insurance.

As for accepting furloughs or pay cuts to save jobs, she said, “They don’t want to do that.” Under her budget proposal, Gregoire would cut more than 1,500 jobs in general government and higher education, in addition to the 3,200 expected to be lost from budget cuts she signed into law in May.

Gregoire spokesman Glenn Kuper said the state was bound under a 2007 collective bargaining agreement to honor the step pay raises for at least one year, and that the general-fund cost of the step pay is just $38 million of the total Zarelli quoted. The rest comes from dedicated funds that pay workers at agencies such as the Department of Labor and Industries, Employment Security or others.

Kuper said state agencies are being asked to squeeze the raises out of existing budgets, so no new burden is put on the budget shortfall now estimated at $2.6 billion.

The Washington Federation of State Employees is simply unwilling to reopen contracts, spokesman Tim Welch said.

State workers gave up $1 billion in wages and benefits when Gregoire’s budget office rejected formal pay contracts it had negotiated in 2008 with more than a dozen unions, he said. The governor’s budget office rejected those contracts on grounds that cost-of-living raises were no longer affordable.

Welch also said step raises are traditional and predate the state’s collective bargaining with workers that began in 2004. “To pick on step increases that go to custodians that get $25,000 a year seems out of place,” he said.

But Zarelli thinks the state should reopen pay talks because it’s one more place it could hold down costs in an emergency. Rep. Ross Hunter, a Medina Democrat who is working on a tax-increase package with other members, said Monday that he thinks lawmakers should consider all their options.

“I think the step increases, like everything else this year, is on the table if we’re going to be talking about raising revenue during the worst economic downturn since the Great Depression,” Hunter said. “The problem is you have to negotiate it. That could be difficult.”

Hunter said he agrees with Gregoire that her proposed spending cuts, which she herself wants to avoid by raising taxes, are too deep, calling some of them “unconscionable.” Hunter mentioned cuts to children’s health care and college financial aid among those he wants to reverse using new revenue.

The state Department of Personnel released data last week showing 65,290 overall workers in general-government agencies as of June 30, and 57,131 were classified employees in nonmanagement jobs that could be considered for step raises.

Under step pay rules, classified workers can receive increases of 2.5 percent for each step on the anniversary of their job-hire date, and workers typically climb two steps a year until they reach the top, Personnel Department spokesman Andy Colvin said. The average salary for classified workers is $49,924 a year, including part-time workers, he said.

But just under 38 percent of classified workers, or about 21,079, are now eligible for the incremental increases, because they had not yet reached the top step, Colvin said. Of that eligible group, nearly 15 percent are one step away from the top and would receive single raises of 2.5 percent on their anniversary date.

Workers in the “at will” management and other jobs are not eligible for step pay raises. Neither are those in Washington Management Services, a special category of employee created to give management more flexibility in hiring. All told, there were 4,511 workers in WMS, 2,386 “at-will” employees and 1,252 “at-will” managers as of June 30, Colvin said.

Republican Rep. Gary Alexander of Thurston County said he thinks Gregoire’s options were limited on the step pay issue. “I’m in favor of freezing employee salaries,” said Alexander, the House Republican minority’s lead voice on budget issues. “I didn’t believe we had the ability to freeze step increases if they were part of the contractual obligations in the contract.”

But Zarelli said the step pay agreement would have lapsed after one year if the governor had not quietly renewed the labor agreements. That would have cleared the deck after June 30, 2010, for lawmakers to make reductions in pay or void step increases.

Gregoire is expected to begin negotiating in the spring with unions on pay and nonpension benefits for the next budget cycle, covering July 2011 to June 2013, according to Kuper.