Gov. Linda Lingle will urge state lawmakers to dip into the state's rainy day fund to close a budget deficit caused by the slumping economy.

The governor wants to use $40 million from the rainy day fund, along with $221 million in savings and spending cuts, to erase a budget deficit for the fiscal year that ends in June.

But the governor acknowledged yesterday that additional spending cuts may be ordered soon if the state Council on Revenues lowers the revenue forecast when it meets again in early January. The council has projected a 0.5 percent reduction in state revenues, but the actual reduction has been 2.6 percent through the first five months of the fiscal year.

Lingle, at a news conference at the state Capitol, explained her plan to close the deficit for this fiscal year and released her budget proposal for the next two years.

Over the past few years, because of the deteriorating economy, the state's financial picture has gone from a record surplus to a projected deficit. Without spending cuts, state budget analysts have estimated a $1.1 billion deficit by the end of the 2011 fiscal year.

"The world has changed, and our fiscal situation has changed dramatically," Lingle said. "And that means it simply can't be business as usual."

The Lingle administration will achieve the $221 million in savings this fiscal year through a 4 percent restriction on discretionary general-fund spending, a general hiring freeze, restructuring state debt, and converting some cash capital improvement projects at public schools and the University of Hawai'i to bond financing. The state House and Senate — in two-thirds votes — would have to agree to the emergency transfer of $40 million from the rainy day fund.

For the two-year budget cycle, Lingle is proposing a combination of spending cuts, special-fund transfers, tax revisions and debt restructuring to avoid deficits.

Lingle has recommended an overall operating budget of $11.1 billion in fiscal year 2010 and $11.3 billion in 2011. The capital improvement budget, which covers state construction spending, is $2.9 billion over two years.

The general-fund portion of the budget, over which the administration and lawmakers have the most discretion, is $5.3 billion in 2010 and $5.4 billion in 2011. After adjusting for the lower budget base due to declining revenues, Lingle is calling for $209 million in spending cuts in 2010 and $186 million in reductions for 2011.

The reductions include 14 percent cuts to discretionary general-fund spending.

SOFTENING THE BLOW

Lingle has tried to soften the pain of program cuts — only Healthy Start and adult dental services would be eliminated entirely — while tapping into the rainy day fund and two special funds to close the gap. Lingle would also try to generate more money through tax collections and by tightening the state's high-technology investment tax credits.

Along with the $40 million from the rainy day fund for this fiscal year, Lingle wants to take another $35 million from the fund in 2010. The $74 million fund, which is replenished by the state's share of a settlement with the tobacco industry, would fall to $15.7 million by 2011 and could leave the state vulnerable if there is another emergency.

Lingle would also transfer $36 million from the deposit beverage container special fund and $9 million from the wireless enhanced 911 special fund in 2010. The governor said she is awaiting a legal opinion from the state attorney general's office about whether these transfers are permissible given a recent state Supreme Court ruling. The court ruled last week that it was unconstitutional for lawmakers to transfer $3.5 million of insurers' regulatory fees from a special fund to the general fund.

Lingle would not discuss whether she would reverse her long-standing opposition to transferring money from the state's hurricane relief fund to the general fund. Some lawmakers believe using the hurricane relief fund may have to be an option if the revenue picture worsens.

The governor will ask the Legislature to lift a restriction on her use of federal welfare money so the money could be used to offset cuts to state spending. For example, the governor wants to use $3.2 million of federal welfare money to pay for the state's Preschool Open Doors program.

PRESERVING SERVICES

Lingle said her budget tries to preserve essential services and minimize cuts to programs with strategic importance to the state, such as science, technology, engineering and math education and renewable energy.

The governor also avoided proposing layoffs. Instead, she said, the state will not recommend any pay increases for public-worker unions. The governor has also asked lawmakers to defer pay raises that are scheduled to take effect in January.

For the first time since she took office in 2002, the Republican governor does not plan any significant tax-relief proposals, but will recommend that lawmakers lift some state fees, such as a cargo fee passed last session to combat invasive species.

In a reminder of how quickly the state's revenue fortunes have changed, lawmakers will likely have to provide a token tax refund to meet a state constitutional requirement. Refunds are required when the budget surplus exceeds projected revenues by more than 5 percent for two consecutive years, which it did at the close of the 2007 and 2008 fiscal years.

Lingle briefed state House and Senate leaders about her budget proposal yesterday morning and said she wanted to work collaboratively with majority Democrats. Her proposal will go before the House and Senate during the session that starts in January.

FARING WELL

Lingle said Hawai'i is better off than many other state governments struggling during the economic downturn. She described the state's approach to the budget as a "shared sacrifice."

"We're all in this together," she said. "We need to work together now, to collaborate as we never have in the past, at a level we haven't in the past.

"I've said before and I want to repeat it now, no one is going to come here to rescue us. We have to meet these challenges head-on. We have to do it in a collaborative fashion, not only between myself and the Legislature. But between myself, the Legislature, the community, the public employees of the state government, and the entire community," she said.

State Rep. Marcus Oshiro, D-39th (Wahiawa), the chairman of the House Finance Committee, said he appreciated that the governor reached out. "It gave me the impression that she does realize the seriousness of where we are today and the need to set aside politics and really work together," he said.

Oshiro believes it is almost certain the Council on Revenues will lower revenue projections and prompt further spending cuts. Georgina Kawamura, the state's budget director, said the administration has discussed contingency plans for additional cuts but would not publicly disclose the possible scenarios.

"We agree, I think, it's going to get worse before it gets better," Oshiro said.