The state Council on Revenues trimmed the state's revenue forecast yesterday, but the reduction was less than state lawmakers feared, and economists spoke optimistically about the state moving out of the recession.

The council predicted state tax collections would decline 2.5 percent for the fiscal year that ends in June, compared with the 1.5 percent decline projected last August.

The council believes revenues will grow by 7.6 percent the following fiscal year, up from the 6.5 percent increase estimated in August.

The new forecast adds about $40 million to the state's budget deficit, which is projected at $1.1 billion through June 2011.

Gov. Linda Lingle plans to release her supplemental budget request on Monday, which should detail how the governor would close the deficit.

State lawmakers had worried the council may significantly adjust the forecast downward because actual revenue collections through the first five months of the fiscal year were off 6.5 percent.

The council's forecasts are used by the governor and lawmakers when drafting the state budget.

Paul Brewbaker, an economist and the council's chairman, said it may be hard for some to accept the potential for growth when the pain of the recession is still fresh in their minds.

"But we have to sort of look through that, recognize that some of these things do become positive in meaningful ways, and build them into the forecast," he said.

Some lawmakers continue to be disappointed that the council's forecasts have failed to accurately predict the decline in tax revenues, just as the council missed the extent of revenue growth when the economy was strong.

Brewbaker and others on the council said the governor and lawmakers should factor in that the forecasts could be off by about 2 percent — a potential $90 million swing in revenue.

MORE CUTS POSSIBLE

Lingle did not achieve as much in labor savings as she wanted from new contracts with the Hawaii State Teachers Association and the Hawaii Government Employees Association, and two other public-sector unions — the United Public Workers and the University of Hawai'i Professional Assembly — are still in negotiations.

Additional layoffs and further cuts to state programs are possible as lawmakers prepare for another session in January where the deficit will dominate.

Public school leaders and interest groups that work with the poor have asked lawmakers to spare students and the needy from more budget cuts. Many parents and educators also hope lawmakers will find the money to reduce teacher furloughs after talks between the teachers union and the Lingle administration broke down.

"Today's forecast is likely to once again prompt calls for further restrictions on government agencies to balance the state budget," Garrett Toguchi, the chairman of the state Board of Education, said in a statement. "This time, I hope our state leaders will spare our public school system's budget and make the education of our students a priority."

'WE'RE STILL CHASING'

State Rep. Marcus Oshiro, D-39th (Wahiawä), chairman of the House Finance Committee, said additional budget cuts are likely because of the deficit.

"We're still chasing right now," said Oshiro, who put the deficit at $720 million this fiscal year and $1.1 billion in fiscal year 2011.

State Sen. Donna Mercado Kim, D-14th (Hälawa, Moanalua, Kamehameha Heights), chairwoman of the Senate Ways and Means Committee, said lawmakers should assume the forecast is too positive so they do not have to make a severe adjustment if the next forecast declines in March.

"I like to err on the cautious side so that we plan for the worst. If it's better, then that's good, then we don't have to go chase more dollars," she said.

Kim said she has received several requests to restore public services that have been reduced because of the deficit, which suggests many do not fully grasp that the state has less money to spend.

"We were driving a Cadillac, and now we have to drive a Honda," she said.