The state Council on Revenues yesterday lowered the state's revenue forecast for this fiscal year but predicted a stronger rebound next year.

The council concluded the recession may be reaching the bottom in the Islands.

The new forecast estimates tax collections will decline 1.5 percent this fiscal year, which ends June 30, down from the zero growth projected in May. But the council believes revenues will bounce back and increase 6.5 percent next fiscal year, up from the 5.6 percent estimated in the previous forecast.

Under the new forecast, the state's budget deficit would expand by between $92 million and $98 million through June 2011, from $786 million to at least $878 million. The larger deficit estimate could influence labor negotiations between the state and the four public-sector labor unions, since Gov. Linda Lingle has cited declining revenues as a reason to reduce labor costs.

"To close the remaining budget shortfall, we will need to reduce the state's labor costs, which comprise 70 percent of our operating budget," Lingle said in a statement. "I remain hopeful we will be able to reach an agreement with the public-sector unions that minimizes the impact on public services.

"In addition, all state government agencies — in all three branches — will need to continue to carefully re-examine all operations to ensure that we eliminate repetitive or overlapping services and programs, maximize efficiencies, and focus our limited resources on core services that protect our most vulnerable citizens, ensure health and public safety, and build the foundation for our long-term future.

"At the same time, the public also needs to re-evaluate its expectations of what services government can provide given the realities of our current budget situation."

State House Speaker Calvin Say, D-20th (St. Louis Heights, Palolo Valley, Wilhelmina Rise), said the larger deficit could hurt the unions' negotiating position in talks with the state. He urged union leaders, Lingle and county mayors to settle on new contracts by the end of September and avoid the 1,100 layoffs of state workers the governor has ordered.

"Let us all work together and try to stop the bleeding, which will impact all of the people of the state of Hawai'i, public employees and private employees," Say said.

Say repeated that there are no plans for the state House and Senate to return in special session on the two-year budget. Lawmakers will add the new labor figures to the budget — either after a settlement or binding arbitration — during the next session that starts in January.

'DOWNWARD SPIRAL'

The Hawai'i Government Employees Association and the United Public Workers' public-safety units are headed toward binding arbitration with the state in September and the process is scheduled to run through late December. The Hawai'i State Teachers Association and the University of Hawai'i Professional Assembly are also negotiating with the state.

Say and state Sen. Donna Mercado Kim, D-14th (Halawa, Moanalua, Kamehameha Heights), the chairwoman of the Senate Ways and Means Committee, said lawmakers will likely have to consider all options to close the deficit, including an increase in the general-excise tax, scooping hotel-room tax revenues from the counties, the use of special funds, and legalized gambling.

Say and Kim have both been reluctant to endorse a GET increase because of its regressive nature.

"I think it hurts businesses. It's cumulative. It's regressive," Kim said. "And a lot of businesses are just barely making it and to add that on to them at this point in time, if they go under, if they have problems, they are going to lay off people. We'll have more people on unemployment.

"I mean, it's just a downward spiral."

Say also said lawmakers may consider structural changes to labor that would apply to future government workers, such as the duration of new contracts and the scope of health care and retirement benefits. Kim said lawmakers may look at binding arbitration.

Say, as Lingle has said throughout the year, cautioned county mayors that they will likely be facing larger deficits next year. He warned that lawmakers will look closely at keeping the hotel-room tax revenues the state now sends to counties.

"They are going to face this fiscal crisis next year in their second year of the budget. And I hope they understand that," Say said.

OPTIMISTIC OUTLOOK

Economists on the Council on Revenues generally agree that the recession may be hitting its trough and are optimistic the economy will improve by the next fiscal year. But they also warned of the fallout from a rapid decline in the private construction sector and noted that consumers have yet to show signs of confidence in a recovery.

Paul Brewbaker, an economist and the council's chairman, said the lower forecast for this fiscal year was an attempt to avoid underestimating the revenue decline. The council's previous forecasts have not accurately captured the extent of the decline, just as the forecasts did not track the rate of growth during boom years.

"I just don't want to be chasing it all year," Brewbaker said.

The governor and lawmakers use the council's forecasts when drafting the budget. State House Finance Committee staff and the Lingle administration offered slightly different estimates of how much the deficit would grow because of the new forecast, with the House coming in at $92 million and the administration at $98 million.

"Our models are telling us that there's still a bit more revenue fade in the current fiscal year, even though by the end of the fiscal year, the impact of economic recovery in several areas will have begun to show strong signs," Brewbaker said.