State legislative leaders, stunned by new revenue projections showing a $5 billion hole in the next two-year budget, see deep and painful cuts ahead.

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OLYMPIA — It’s never been this bad.

That’s how legislative leaders summed it up Wednesday, stunned by new revenue projections showing a $5 billion hole in the next two-year budget.

The enormous gap portends deep and painful cuts ahead.

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“This is about as real as it gets,” said House Majority Leader Lynn Kessler, D-Hoquiam.

Just about everything is being looked at, legislators say, including making cuts in higher education, laying people off and suspending pay increases for state workers and teachers. Some lawmakers also weren’t ruling out putting a tax increase on the ballot.

Simply put, the state is taking in less tax money because people are spending less. More than 70 percent of the money collected by the state comes from sales and business-and-occupation taxes.

“Faced with an uncertain job environment, declining value of equity in their homes, a falling stock market that is wiping out huge chunks of retirement savings, consumer confidence has plummeted to its lowest value ever recorded. I am not surprised that the American consumer has finally decided to just sit on their wallets,” said Arun Raha, the state’s chief revenue forecaster.

“This kind of financial crisis is unprecedented,” Raha said. “We have not had this kind of problem since the Great Depression.”

Raha delivered the dour news to members of the State Economic and Revenue Forecast Council on Wednesday, noting conditions won’t improve anytime soon.

“Our state revenues are dependent on people buying cars and homes and gifts over the holidays. Right now no one is buying cars and houses,” he said, adding that holiday shopping is looking dismal as well.

In fact, the state expects to collect less money from taxes in the 2009 fiscal year, which runs from July 1 to June 30, than in 2008.

The one positive note: Raha expects a recession in Washington to be shorter and more shallow that what happens nationally.

The new forecast projects the state will bring in $500 million less than expected in the current two-year budget, and revenues will be down an additional $1.4 billion in the 2009-11 budget, which legislators will start writing in January.

Back in September, the state already was projecting a $3.2 billion shortfall. The new figures bring the total gap to around $5 billion, said Victor Moore, the governor’s budget director.

State lawmakers said they expected bad news Wednesday, but the new figure was still a shock.

“We knew it was going to be awful. But it was more horrible than we were talking about,” said Senate Ways and Means Committee Chairwoman Margarita Prentice, D-Renton.

Back in 2003, the state Legislature plugged a $2.65 billion shortfall by doing things such as suspending pay increases for state workers and most teachers, making cuts in programs for the poor and disabled, and approving modest tax increases.

This shortfall is much bigger, but the Legislature will likely look at similar options. For example, pay increases for teachers and state workers in the next budget are expected to cost around $1 billion.

Legislators said they’ll take a hard look at that, along with everything else. “No one is going to be exempt. There are going to be many, many cuts ahead,” Prentice said.

She expects state workers will be laid off: “I don’t see how we can avoid it.” Prentice also said lawmakers may consider putting a tax measure on the ballot. Gov. Christine Gregoire has announced several steps in recent weeks to reduce state spending, including a freeze on hiring, out-of-state travel, personal-service contracts and equipment purchases.

The governor’s budget office also has told agencies to prepare for deep budget cuts. The state’s colleges and universities are preparing for cuts up to 20 percent, or $600 million over two years.

There are some things the state cannot cut because they’re protected by state or federal mandates, such as spending for public schools.

State Department of Social and Health Services spokesman Thomas Shapley said that in anticipation of the bad revenue news, the agency has been crunching numbers for months.

In terms of where to possibly cut, Shapley said there are basically three choices: Reduce rates paid to doctors and other contractors who provide services; reduce the benefits that people receive; or, less likely, limit eligibility for programs. Job losses at the department are possible, too.

Gregoire pledged during her campaign this year that she would not increase taxes or fees to help balance the budget. She has reaffirmed that promise in recent interviews.

Initiative 960, approved by voters in 2007, requires a two-thirds vote in the Legislature to increase taxes. Under the initiative, taxes passed with only a simple majority have to go to the ballot.

If the Legislature sent a tax increase to voters, it would go directly to the ballot without the governor’s involvement.

Republican lawmakers said the Legislature can, and should, balance the budget without trying to increase taxes.

“The question I’d ask is, if the economy is this tough, how can the citizens afford any more taxes? If the problem is consumer spending and we increase taxes, there’s going to be less for consumers to spend,” said Rep. Ed Orcutt, R-Kalama, member of the forecast council and the ranking Republican on the House Finance Committee.

Republicans blame Gregoire and Democratic lawmakers for a big chunk of the shortfall, criticizing them for spending surplus tax dollars that rolled in when the economy was humming. In addition to controlling the Governor’s Office, Democrats hold large majorities in the House and Senate.

State spending has increased by $8 billion since Gregoire was elected governor in 2004. Half of that money, around $4 billion, was spent on public schools and higher education. The current two-year general-fund budget is $33.6 billion.

“The national economic situation has exacerbated the situation, certainly, but we’d be in a much different position today if the Legislature and the governor had saved more of the surplus revenue instead of spending it these past few years,” Sen. Joe Zarelli, R-Ridgefield, the ranking Republican on the Senate Ways and Means Committee, said in a statement.

Moore, the budget director, disagreed. “Forty other states have this problem, and the idea that we are in a peculiar spot because we spent a lot of money, I just don’t see it,” he said.

Staff reporter Maureen O’Hagan contributed to this report.

Andrew Garber: 360-943-9882 or

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