Gov. Linda Lingle said yesterday that all state spending would be reviewed and prioritized as the state manages a projected budget deficit, but she did not describe the financial situation as a crisis and said the state is fundamentally on the right track.

The state Department of Budget and Finance has projected a deficit of $162.3 million for this fiscal year and, if state revenues do not increase and spending reductions are not made, the deficit would balloon to $584.5 million after fiscal year 2010 and $903 million after fiscal year 2011.

While such large deficits are not a certainty, since the economy is expected to improve sometime next year and, by law, the government would make cuts instead of carrying that much red ink, the projections are a warning that the state must change its spending pattern.

"Everything has to be under consideration when you're chasing $900 million over a three-year period," the governor said at a news conference at the state Capitol. "Everything is under consideration."

Lingle said she would inform public-worker unions in meetings next week that there is no money available for pay raises in collective bargaining talks. Internally, state department directors are being asked to look at spending restrictions of up to 20 percent.

Lingle has already imposed 4 percent across-the-board spending restrictions at state departments this fiscal year along with a general hiring freeze. The governor's office also must authorize out-of-state travel and substantial new contracts or procurement orders.

The governor also will be cautious about releasing money for programs approved by the Legislature for this fiscal year.

But Lingle said she would go ahead with spending on bond-financed capital improvement projects, which economists believe could help the construction sector of the economy. She also said that investments in science and technology education, workforce development and alternative energy will continue, and would help position the state toward an economy less reliant on land development and more on innovation.

The steps the administration have outlined so far may help the state get over the initial deficit for the fiscal year that ends in June but, by this December, the governor will have to explain how she plans to address the deficit over the two-year budget cycle.

Yesterday, Lingle said it was too early to provide specifics about program cuts, but said the administration would attempt to avoid layoffs of state workers, which she said is "a last resort."

Lingle said she would again urge lawmakers to repeal an expanded inspection fee on cargo entering the state, which was passed over her veto to fund invasive species inspections. The Republican governor ruled out any tax increases or using money from the state's hurricane relief fund to close the deficit.

While Lingle did not provide details, a finance memo sent Thursday by the state budget director to department heads shows some of what is being discussed. The memo contained attachments that mapped out scenarios for mandatory 10 percent, 15 percent and 20 percent spending restrictions by department, which would cut deeply into programs.

The deficit projections — circulating for weeks at the state Capitol and first reported Wednesday in The Notebook, The Advertiser's government and politics blog — have caused alarm among some lawmakers and state workers.

The swing from record surplus to projected deficit was caused by the dramatic decline in state revenues as the economy faltered from double-digit growth a few years ago to the current 1 percent growth estimate for this fiscal year.

The downturn, influenced by declines in tourism and construction and higher fuel costs, has led to the closure of Aloha Airlines, ATA Airlines and Molokai Ranch, and layoffs at several high-profile companies including Weyerhaeuser, Maui Land & Pineapple and The Advertiser.

In the latest example of the slowing economy, the state Department of Taxation reported yesterday that state revenue collections for the first two months of the fiscal year are off 7.9 percent from last year. Money from hotel-room taxes is down 16.9 percent, while general-excise taxes are off 12.5 percent.

Some House and Senate leaders have described the deficit projections as a crisis, but Lingle, asked yesterday to characterize the situation, wasn't as worried: "In leadership, you face these issues all the time. You want to refrain from calling everything a crisis because you get people much too worked up.

"This is something that we will manage through."

State Rep. Marcus Oshiro, D-39th (Wahiawa), the chairman of the House Finance Committee, noted that the House has been pressing for fiscal restraint for the past few sessions, and has at times been criticized by the Senate and the administration.

"I think it's a crisis because this is a huge amount of adjustment to be made in the current budget cycle," Oshiro said. "There is not much wiggle room without having an impact on services and people's jobs."

Oshiro said he is concerned that Lingle might take short-term steps to close the initial deficit and leave more difficult spending decisions closer to the end of her term in 2010 or afterward.

"Mentally, for myself, I'm hoping for the best but preparing for the worst," he said.