The state Council on Revenues yesterday predicted tax revenue will decline 0.5 percent this fiscal year and warned that the state's financial picture could deteriorate even more because of the volatility of the nation's economy.

The council previously had forecast tax revenue would grow by 1 percent. The new prediction reflects a weakening economy and means the state will have $75 million less than previously forecast.

The Lingle administration had estimated a deficit of $155.4 million by the close of the fiscal year that ends next June. With the lower forecast, that would swell to about $230 million.

The new forecast presents an immediate challenge for state budget planners, who will have to restrict state spending over the next several months. It also further dampens preparations for the proposed two-year budget Gov. Linda Lingle will release in December and state lawmakers will consider in January.

State department directors already have been asked to sketch budget restrictions of 10 percent, 15 percent or 20 percent, and the new forecast means even less money is available.

The council also agreed yesterday to lower its forecast for fiscal 2010 to 3.5 percent growth, down from 4 percent, which strips away another $25 million in revenue in addition to the lower base from this year.

Some economists on the council wanted the projection for this fiscal year to be lower, but the council instead chose to offer an extraordinary caution. "I would like to convey how uncertain this number is," said Carl Bonham, a University of Hawai'i-Manoa economist who serves on the council.

The lower forecast is based on a decline in tourism, lower personal income growth, higher unemployment and ebbing consumer confidence. Revenue collections are up 1.5 percent through the first three months of the fiscal year, but without a one-time franchise tax collection, actual growth is zero.

Economists on the council say the drop in tourists to the Islands and the number of job losses will continue to increase into 2009 as the state feels the full force of the economic slowdown.

UNUSUAL MEETING

State House and Senate leaders asked the council to meet outside of its regular quarterly schedule to update the forecast after the downturn in the nation's financial markets in September. The council had projected 1 percent growth for the fiscal year back in July, after Lingle had requested an update outside of the regular schedule because revenue collections for last fiscal year came in lower than expected.

The council had not interrupted its regular schedule since after the 9/11 terrorist attacks. Paul Brewbaker, a Bank of Hawaii economist and the council's chairman, questioned the value of yesterday's update because the full impact of the economic contraction and the federal government's bailout of financial institutions is unknown. The council was not scheduled to meet again until January.

But economists on the council appreciate that the forecasts are used for state budget planning and said it was better to release the negative projection sooner than later. "The bottom line is we need to be doing what we think is right," Bonham said.

Lingle, in a statement yesterday, said the state would try to limit spending cuts on state public health and safety programs and those that help needy individuals and families.

"The Council on Revenues' lower projections reflect the economic realities we are facing as a result of factors that are taking place at the national and global level that are beyond our control," the governor said. "We will review the council's revised projections and work with our departments to determine additional areas where we can reduce discretionary spending, and look for new ways to increase our operational efficiencies.

"By law, our state government is not allowed to have a deficit, and we will not have a deficit. My administration is cutting spending for all state departments, while implementing innovative ways to maintain public service at the highest levels."

PLAN FOR THE WORST

State House Speaker Calvin Say, D-20th (St. Louis Heights, Palolo Valley, Wilhelmina Rise), said he wants to hear from the Lingle administration as soon as possible on how the state would get through this fiscal year. The speaker's own revenue growth projection is much lower than the council's — negative 2 percent — and he said the state is better off planning for the worst than having to make additional spending cuts if revenue collections fall short.

"I'd rather be on the fiscal responsibility side," Say said.

State Senate President Colleen Hanabusa, D-21st (Nanakuli, Makaha), said she wanted the updated forecast so the administration would have current information when drafting the two-year budget. Like Say, she said she would have preferred the council's forecast to go lower yesterday — if that is what some economists believe — rather than have to make up for a shortfall later.

"At least this gives us an indication, and should give the administration an indication, as to where we're headed," she said. "It's always nice if there's growth, because that means more money than what we anticipated. What's problematic is when there's less money than what we thought we would have, not only in terms of the budget itself but in terms of the pure operations of the state."