LANSING — Legislative Republicans and Democratic Gov. Gretchen Whitmer are racing to finalize a Michigan budget by the end of September and avoid a partial government shutdown.

Both sides express optimism they’ll agree to terms by the constitutionally mandated Oct. 1 deadline, an annual process aided and complicated this year by a massive influx of $8.5 billion in federal stimulus funds, along with a separate $3.5 billion state surplus.

But with only three weeks to spare, lawmakers say they are now delaying talks over the federal stimulus funding to focus on a more traditional annual budget.

And the Whitmer administration is quietly preparing for the worst: Budget Director Dave Massaron has directed state departments to prepare contingency plans for laying off non-essential employees if the budget is not completed by the end of the month.

Officials are not discussing details of the closed-door negotiations, but Senate Majority Leader Mike Shirkey said Thursday he expects the upper chamber will begin voting on a budget in two weeks, which would give Whitmer an additional week to review and sign the legislation.

“I’m not going to jinx it, but I’m going to tell you that I’m very optimistic about the process and continue to be,” Shirkey, R-Clarklake, told Bridge Michigan. “Of course, the most difficult things are the last few things, but those are coming to the surface soon.”

One potential sticking point, Shirkey said, is the higher education budget that funds the state’s 15 public universities. While he didn’t divulge specifics, Republicans oppose vaccine mandates adopted by several Michigan universities and could try to use the budget process to try to punish or discourage them, an approach Whitmer is unlikely to sign off on.

Higher education is “going to be one of the (budgets) that we’re going to have to wrestle with a little bit,” Shirkey acknowledged. “It starts with philosophy, and then it gets to dollars. That’s all I’m going to say.”

Whitmer and the GOP-led Legislature agreed to a record-setting $17.1 billion K-12 education budget in July, a major breakthrough after what had been a prolonged and acrimonious standoff over statewide COVID-19 orders the governor ultimately lifted this summer.

But the two sides have so far struggled to finalize what will likely be a $50 billion to $60 billion budget to fund state departments, services and local governments. The Legislature blew past its own self-imposed deadline of July 1.

Negotiations picked up in the last two weeks as lawmakers returned from a summer recess that functioned as a “cooling down” period for officials on both sides, according to Shirkey. “People are engaged. They’re in the rooms. They’re talking. Nobody’s storming out,” he said.

Massaron, who is leaving the state government after the 2022 budget is finalized, reported that “good progress continues to be made this week,” and he was “very optimistic that (an) agreement will be reached before Sept. 30,” said spokesperson Kurt Weiss.

“No specifics to share yet, but he said the talks continue to go well,” Weiss told Bridge.

The billions of dollars in federal stimulus funds sent to the state has prompted a series of expensive proposals from Whitmer, who has toured the state with plans to expand child care access, jumpstart the economy and replace underground lead service lines across Michigan.

Conservatives in the Legislature have championed their own stimulus spending plans, including a $1.5 billion bridge repair proposal by Senate Republicans and an $80 million House GOP proposal to help police departments recruit new officers.

But negotiations over the stimulus funds are likely to wait until after the budget process, Shirkey said Thursday.

“The budget that we’re working on right now is not spending all those dollars,” added Sen. Curtis Hertel Jr. of East Lansing, the ranking Democrat on the appropriations committee.

Like Shirkey, Hertel predicted a deal within the next two weeks to fund government operations and ensure “the state is running on time” while talks over federal stimulus funds continue into the fall.

Business leaders have urged the Legislature to use stimulus dollars to “transform” the state and make it a more attractive place to live, work and play.

But getting all sides to agree on what constitutes transformational change is not easy. And in Lansing, both lawmakers and lobbyists are pushing their own plans for funding to benefit their specific district or special interest.

“My office is like ‘Shark Tank’ right now,” because “there’s always somebody coming in with an idea on how to spend the dollars,” Hertel said, referencing the reality television series in which would-be entrepreneurs pitch business ideas in hopes of securing start-up funding.

“There’s no shortage of ideas,” Hertel added. “This is a unique opportunity to invest in Michigan’s future, invest in our infrastructure, invest in our people and solve big problems that we haven’t been able to solve in the state for a very long time.”

House Republicans, in earlier budget plans developed amid the pandemic response feud with Whitmer, proposed controversial provisions to withhold full funding for state departments and prohibit universities from utilizing “vaccine passports.”

Their focus has more recently shifted to local health and school officials.

House Appropriations Chairman Thomas Albert and three other Kent County Republicans last month warned a local health officer they could use the “power of the purse” to punish him for a new school mask mandate he nonetheless adopted.

But punitive provisions of that kind are unlikely to survive negotiations with Whitmer, who has applauded local health departments and school districts for mask mandates. And if Republicans insist upon penalizing universities or local governments for COVID orders, Democrats said they fear it could still derail a process both sides say is currently going well.

“We’re going to find out,” Hertel told Bridge Michigan.

Massaron sent a notice to department and agency directors on Aug. 27 asking them to identify non-essential functions that would be halted in the event a deal is not struck and the government shuts down Oct. 1.

A shutdown would prompt immediate but temporary layoffs among the state’s roughly 48,000 employees. That hasn’t happened since 2009, but Whitmer and the GOP-led Legislature came close in 2019, a tumultuous budget cycle marked by the governor’s unprecedented veto spree.

“While we remain optimistic and hopeful that we will reach a budget agreement with the Legislature prior to Oct. 1, we must be prepared if that does not happen,” Massaron told department heads in the letter.