The Lingle administration announced yesterday that it would use an additional 2 percent spending cut to state departments to help close a $75.6 million budget gap for the fiscal year that ends in June.

The cut, which will be imposed over the next five months, comes on top of a 4 percent restriction on discretionary spending implemented last summer.

"It's something that's necessary to be done for us to close the gap for 2009," said Georgina Kawamura, the state budget director, who added that memos will go out to departments over the next few days. "We recognize it's going to be a challenge, but we need everybody to do their best and get in there, because everybody has to cooperate in this endeavor."

With a plan in place to close the immediate budget deficit, the administration and legislators will now look at solving an estimated $315.4 million deficit for 2010 and a $549.8 million deficit for 2011.

Gov. Linda Lingle and state House and Senate leaders have said a variety of spending cuts and revenue-generating options have to be on the table due to the size of the projected deficits.

The Lingle administration took several creative steps to try to get through this fiscal year with a minimal amount of disruption to state functions.

Starting last summer, when revenue projections began to fall, the administration imposed the 4 percent spending restriction on state departments, ordered a general hiring freeze, restructured debt and converted cash capital improvement projects to bond financing.

The administration saved $221 million through these steps and had planned to ask lawmakers to transfer $40 million from the state's rainy-day fund.

But after the state Council on Revenues lowered the state's revenue forecast earlier this month, the administration was faced with a $75.6 million deficit.

CLOSING THE GAP

Lingle asked for another $20 million from the rainy-day fund — for $60 million total — and has told lawmakers the state expects $31 million in extra federal Medicaid reimbursement payments.

In letters to the Senate Ways and Means Committee and the House Finance Committee on Tuesday, Kawamura outlined how the administration plans to close the rest of the gap.

Kawamura said the administration would impose the 2 percent spending restriction on state departments, which would save $16 million. The administration would also take excess money from the Public Utilities Commission special fund and the Unclaimed Property Trust Fund — about $14 million — for this fiscal year instead of leaving it in the general fund for 2010.

These steps would produce $81 million, enough to close the $75.6 million deficit and leave a $5.4 million surplus.

Such a paper-thin surplus is the latest sign of the staggering decline in state revenue. By comparison, the state ended the 2008 fiscal year with a $331.2 million surplus, the 2007 fiscal year with a $493.2 million surplus, and the 2006 fiscal year with a record $732.3 million surplus.

"I'm really concerned about the rainy-day fund. The governor has emphasized that she's not just looking at short term, she's looking at long term. That was the whole thing, that she's not going to leave this for the next generation," said state Sen. Donna Mercado Kim, D-14th (Halawa, Moanalua, Kamehameha Heights), the chairwoman of the Senate Ways and Means Committee. "They're saying that, but they're raiding everything now."

THE 'WHAT IF' QUESTION

Kim said diverting $60 million from the rainy-day fund this year and another $15 million in 2010, as Lingle has proposed, would leave the fund dangerously low. The rainy-day fund is made up of money from the state's share of a settlement with tobacco companies over the health-related costs of smoking.

"What happens if something happens next month or next year?" Kim asked.

The Lingle administration has proposed replenishing the rainy-day fund by moving portions of any future budget surpluses into the fund. A bill by state Rep. Karl Rhoads, D-28th (Kaka'ako, Iwilei), in the House Democrats' majority package calls for a constitutional amendment requiring the transfer of surplus money into the rainy-day fund when the budget surplus is projected to be 7 percent higher than the previous year's revenues.

State Rep. Marcus Oshiro, D-39th (Wahiawa), the chairman of the House Finance Committee, said the administration is digging a deeper hole for 2010 by taking more out of the rainy-day fund and other special funds to get through this year. He also wondered what options the administration will have left if the state Council on Revenues lowers the revenue forecast again when it meets in March, which many believe is possible.

"It's OK," he said of the administration's approach, "but it's not good."