Lawmakers in Washington state passed supplemental operating and capital budgets on Wednesday that they say will preserve funding for education and launch about $1 billion in construction projects.

The fiscal 2012-2013 biennial budget supplemental agreements, which came early in the morning during a second special session of the legislature, also close a shortfall that earlier this year was as high as $1.1 billion.

I'm pleased the legislature reached an agreement this morning to solve our budget shortfall, said Governor Chris Gregoire in a statement. The supplemental budget passed preserves critical programs, including education, and sets our state on a more sustainable path.

Lawmakers also brought the state's reserve fund up to nearly $319 million - less than the $600 million level that Gregoire had previously advocated.

The governor must sign off on the proposals and has the power to veto portions she does not like.

Washington state has already cut $10.5 billion from its budget over the past three years, Gregoire said. Its operating budget now stands at about $31 billion. The supplemental budgets are for the two-year budget cycle that ends June 30, 2013.

The state's budget gap led Fitch Ratings to revise its rating outlook in January to negative from stable. The agency affirmed an AA-plus rating on the outstanding general obligation debt but revised its outlook due to challenges faced by the state in addressing a sizable budget gap that developed after the adoption of the current biennial budget.

That same month, Moody's Investors Service revised its outlook to negative from stable, while affirming its Aa1 rating on $17.5 billion of outstanding Washington state general obligation debt and its Aa2 rating on $903 million of the state's outstanding certificates of participation.

The outlook revision to negative from stable reflects the magnitude of the revenue fall-off that continues to challenge the state as it struggles to recover from the recession, Moody's said at the time.

The state relies heavily on revenue from sales taxes as it does not have an income tax.

The state was the fourth biggest issuer of debt in the first quarter of 2012 at nearly $1.6 billion in five deals, according to Thomson Reuters data.

It also now has the authority to issue additional new debt to help fund the $1 billion supplemental capital budget passed on Wednesday.

Of that total capital budget, $510.4 million could be comprised of general obligation bonds and $378.1 million is expected to be paid for with cash, according to Chris McGann, a spokesman for the Washington State Treasurer's office. The rest would be financed with certificates of participation, he said.

The $510.4 million of bonds is an increase in authorization, but it is not incorporated in any of our near-term borrowing plans, McGann said.

Projects to be funded in the supplemental capital budget include higher-education related projects, public infrastructure, skills centers, hatcheries, parks and natural resource projects, according to state Senator Linda Evans Parlette.

We wanted to invest in projects that will improve the curve of our state's economic recovery, she said in a statement. Purchase them now, while prices and interest rates are low, and invest in projects that will help ease the pressure on future operating budgets.

(Reporting By Hilary Russ; Editing by Leslie Adler)