Confronted with a revenue forecast that has fallen dangerously into the red, state lawmakers will open their session on Wednesday with the challenge of making significant spending cuts to balance the budget while preserving a safety net for the most vulnerable.

The startling decline in the state's revenue forecast since last year has erased what remained of a record budget surplus and left Gov. Linda Lingle and state lawmakers no option but to reduce state spending.

Economists predict that tourism, the lifeblood of the state's economy, will continue to drag for several more months. Job losses and home foreclosures are also expected to increase, which could push more people into the margins and increase the demand for social services.

In March, the state Council on Revenues will update its forecast, and economists have warned that it could be bleaker, forcing lawmakers to cut spending further in the final weeks before the 60-day session is scheduled to end in May.

"Right now, we're going through a storm," said state Senate Vice President Russell Kokubun, D-2nd (S. Hilo, Puna, Ka'u). "I think what we need to do is first indicate that we know that there are people vulnerable, very vulnerable, to these kinds of impacts.

"So we want to be sure that our safety nets are out there for everyone."

Although the economic backdrop is grim — some economists believe it could be the worst since the Great Depression — lawmakers said they will try to protect public education and health and human services from the most severe cuts. Lawmakers will also attempt to move forward with alternative energy to reduce the state's reliance on fossil fuel, and regulatory improvements that might better position the Islands for an economic recovery.

House and Senate Democrats who control the Legislature plan to fully embrace President-elect Barack Obama's economic stimulus package and to work with the state's congressional delegation in Washington, D.C., to obtain as much federal infrastructure money as possible.

In Opening Day speeches on Wednesday, and over the next few weeks, lawmakers will release more details about their priorities for the session. But in private caucuses and in interviews over the past week, House and Senate leaders outlined some of their ideas.

State House Majority Leader Blake Oshiro, D-33rd ('Aiea, Halawa Valley, 'Aiea Heights), said lawmakers will have to evaluate how state government has been spending money.

"Because of the deficit, we need to closely examine what are essential services and what we can do to live within our means," he said.

BUDGET HOLE

The Lingle administration, as a result of the downgraded revenue forecast, is expected to recommend how to fill a $125 million hole in the budget for the 2009 fiscal year that ends in June. Georgina Kawamura, the state's budget director, is scheduled to speak Wednesday afternoon at an informational briefing with the state House Finance Committee and the Senate Ways and Means Committee.

The Republican governor and majority Democrats will work collaboratively during the session on the two-year budget for fiscal years 2010 and 2011. The lower revenue forecast means lawmakers will have to consider spending cuts that go substantially beyond what the governor proposed in her budget draft in December, which was $209 million in 2010 and $186 million in 2011.

Lingle's proposed operating budget is over $11 billion for each fiscal year in the two-year budget, about half of which involves general-fund spending that depends on state revenue collections.

The options that have surfaced so far to close the deficit include diverting money from the state's rainy day fund and other special funds and furloughing state workers.

Lingle has sought to avoid layoffs of state workers through program cuts and restrictions that fall most heavily on state contractors in the nonprofit social-service sector. House and Senate leaders, meanwhile, have discouraged talk of any new tax increases and have downplayed revenue-generating ideas such as legalizing gambling.

Lawmakers may take a hard look at tax exemptions and credits, including the controversial high-technology investment tax credit that Lingle has said should be tightened.

"The budget deficit is so daunting, there are going to be a lot of measures that we think a lot of people will dislike, but we believe they need to have a close examination and discussion," Oshiro said.

Lawmakers will also have to satisfy a constitutional requirement for a tax refund or credit due to the budget surpluses of the past two years — a vestige that shows how rapidly the revenue forecast has turned negative.

Fearful that program cuts could fall on the most vulnerable, Senate Democrats have discussed taking money from the rainy day fund to help maintain program levels for public education, human services and health. The Democratic Party of Hawai'i's Kupuna caucus has urged Democrats to use a quarter of any local economic stimulus package to maintain and expand the nonprofit social-service sector.

"We are trying to make sure we don't cut off our nose to spite our face," said state Senate Majority Leader Gary Hooser, D-7th (Kaua'i, Ni'ihau). "We have to protect that safety net."

With little state cash available, new investments will likely come through bond-financed capital improvement projects. Along with accelerating state construction projects already in the pipeline, the Lingle administration has proposed new bond-financed traffic improvements to H-1 and the Middle Street merge, and recreational improvements to state parks, trails, harbors and beaches.

Senate Democrats may suggest $155 million a year for three years in bond-financed projects to retire the bulk of the repair and maintenance backlog at public schools.

Lingle has turned down two emergency spending requests for the Hawai'i Health Systems Corp., the state's public hospital system, and administrators have warned lawmakers the system is so fragile that a public hospital could close by the end of the fiscal year.

Lawmakers are discussing restructuring options for HHSC, including allowing individual hospitals — or the system itself — to transition to private or nonprofit corporations to try to become more efficient and escape the state's civil-service requirements.

ENERGY, TECHNOLOGY

Looking at ways to promote alternative energy, Senate Democrats may propose a ban on future fossil-fuel power plants and expand net metering so consumers who install solar and other renewable energy devices in their homes can get retail credit for the energy they generate. Parts of Lingle's Hawai'i Clean Energy Initiative — with its goal of getting 70 percent of the state's energy needs from renewable sources by 2030 — may also be considered.

Lawmakers may move a telemedicine bill that would clarify that medical advice over the Internet or telephone is within a doctor's scope of practice. The Hawaii Medical Service Association, the state's largest health insurer, has just launched an Online Care service available to all residents to help improve access to doctors.

The bill may ensure that treatment recommendations in telemedicine are held to the same standards as traditional doctor visits at clinics and hospitals.

Senate Democrats may also propose a broadband commission to consolidate the regulation of telecommunications and cable franchises under one agency. The commission, some lawmakers believe, may help position the state to take advantage of Obama's vision of high-speed broadband access as an economic driver.

CEDED LANDS

Lawmakers, particularly in the Senate, appear interested in responding to a request by the state Office of Hawaiian Affairs to place a moratorium on the state's sale of ceded lands.

The U.S. Supreme Court is expected to hear arguments in February to the Lingle administration's appeal of a state Supreme Court ruling that prevents ceded lands from being sold until Native Hawaiian claims are resolved. Ceded lands are former crown lands transferred to the federal government after the overthrow of the Kingdom of Hawai'i and later shifted to the state.

While a moratorium may be difficult to advance, lawmakers may suggest requiring a two-thirds vote in the Legislature before ceded lands are sold.

Kokubun said a ceded lands bill may be one of several that lawmakers fast-track to Lingle so, if she vetoes, the bill would return to the Legislature for possible override before the end of session.

GOP IDEAS

State House and Senate Republicans, who suffered losses in the November elections that weakened their presence at the Legislature, will focus on strategies to help businesses and protect jobs while evaluating the effectiveness of government programs.

State Senate Minority Leader Fred Hemmings, R-25th (Kailua, Waimanalo, Hawai'i Kai), said the recession is an opportunity for the state to change its financial management. "That includes public-private partnerships in developing public resources. It includes farming out jobs that could be done by the private sector.

"We will respect the 'warm bodies' policy of not laying anybody off, but we've got to figure out ways to cut government overhead and save jobs and save money so we can do all those things," he said. "But we can't do it with the same old formula of the past, which is borrow, tax and spend."

Republicans may consider pushing for tax credits for defense contractors that hire local residents and tax incentives for the development of wind, ocean, wave and solar energy systems.

Republicans want to lift a cap on new startup charter schools and encourage public schools that might be targeted for closure to either convert to charter schools or allow charter schools to use the traditional schools' facilities.

State House Minority Leader Lynn Finnegan, R-32nd (Lower Pearlridge, 'Aiea, Halawa), said the GOP theme is "to keep businesses open and to keep labor working."

CIVIL UNIONS, DOCTORS

Two hot-button topics — civil unions and medical-malpractice liability reform — will also be up for debate in the House this session.

State Rep. Jon Riki Karamatsu, D-41st (Waipahu, Village Park, Waikele), the chairman of the House Judiciary Committee, said he plans to try to advance legislation on both issues.

Oshiro, who will introduce the civil-unions legislation, said there may be enough votes for civil unions to pass in the House. Several in the Senate are predicting a civil-unions bill will cross over from the House and some are already privately counting votes in the Senate Judiciary and Government Operations Committee.

Karamatsu said he is looking at tax incentives to help offset medical-malpractice insurance costs for doctors in certain medical specialties and to help recruit doctors to rural areas. He said he would also consider — on a trial basis — a $1 million cap on noneconomic damages in medical-malpractice lawsuits against doctors in some specialties.

Tax incentives to bring doctors to rural and underserved areas were proposed last session but put off for further study. Lawmakers have also tried ways to increase state, federal and private health-plan reimbursement rates to doctors and hospitals.

With state money now evaporating, new tax credits would likely have to be balanced with spending cuts.

"Not only is there not money, we have to take back some money," said state Rep. Pono Chong, D-49th (Maunawili, Olomana, Enchanted Lake), the majority whip. "To me, we have to spread the pain around, for lack of a better word.

"Everything is on the table. Everything has to be on the table. And so it is going to be painful to try to figure this out. But, if we can keep an open mind, and if members are open and willing to spread things around, we're going to get through this."