PHOENIX (AP) - Arizona Gov. Janet Napolitano on Friday signed into law a bill to erase a $1.2 billion deficit in the current state budget in relatively painless fashion, though lawmakers still have to figure out how to balance the next one.

With the action, the budget has been reduced by roughly $500 million, to $10.1 billion, and kept in the black despite an ongoing economic slump that led to a steep drop in tax collections.

Napolitano signed the bill (HB2620) Friday after the Legislature approved it Thursday evening on bipartisan Senate and House votes.

Key elements include spending about $487 million from a $700 million rainy day fund, delaying a $272 million payment of school funding into the next fiscal year, taking $300 million from special-purpose funds and cutting $311 million in spending from agencies and programs throughout most of state government.

Though the latest formal estimate on the shortfall was $1.2 billion, the package adds up to $1.37 billion of cuts and other changes. That’s because lawmakers fear the deficit will grow by the June 30 end of the fiscal year. They included a provision to take more money from the rainy day fund if necessary.

Republicans proposed the plan, taking many elements from agreements negotiated by legislative leaders and the governor during closed-door talks over the past month.

Many of the reductions approved for agencies are lump sums that give the governor and her directors flexibility to decide where to cut, legislative leaders noted.

Napolitano assured lawmakers that the cuts ``will not significantly impact the delivery of most government services,’’ House Speaker Jim Weiers, R-Phoenix, said.

Lawmakers return to work Monday to take up the budget for the next fiscal year. That budget, which must be approved by July 1, represents a major challenge because its projected shortfall is between $1.8 billion and $1.9 billion, or nearly 20 percent.

Legislative leaders, later joined by Napolitano, started negotiating budget fixes in January, months after it became apparent that the 2007-2008 budget needed to be rebalanced.

The leaders wanted to offer a comprehensive package that included both changes to the current budget and decisions to balance the next one. Though they largely settled on spending cuts and raids on special funds for the current budget weeks ago, key issues on the next budget remain unresolved. That prompted Republicans to push for approval of the fix for the current year.

The bill signed Friday is an excellent start because it protects education and safety-net services for the vulnerable and needy, Napolitano said.

``We will manage our way through these budget problems,’’ she said.

Many Republican legislators complained that the approval of the current year’s budget fix relatively late in the fiscal year blocked deeper spending cuts that, if repeated, would also help balance the next budget.

``We’re making no tough decisions,’’ complained House Appropriations Committee Chairman Russell Pearce, a Mesa Republican who pushed unsuccessfully for a special session last fall to tackle the then-emerging budget problem.

Napolitano said cost cutting moves she’d ordered agencies to take last fall produced savings without gutting important programs.

On the Net:

Gov. Janet Napolitano: http://www.azgovernor.gov

Arizona Legislature: http://www.azleg.gov.