State tax collections were off by 5 percent in July and August, a steeper decline than estimated by the state Council on Revenues and another indication the state's economic recovery could take longer than expected.

The lower collections prompted Gov. Linda Lingle to again warn yesterday that the state is unable to afford existing labor expenses, while public-sector union leaders have said the state's budget deficit should not be closed mostly through cuts to state workers.

The state Department of Taxation reported that revenue collections were down 5 percent through July and August compared with the last fiscal year that ended in June. The council, trying to avoid chasing the revenue decline like it has for much of the past year, had downgraded its forecast last month from zero growth to a 1.5 percent decline.

Economists on the council believe the state is approaching the bottom of the recession and predict revenue collections will rebound and grow by 6.5 percent next fiscal year.

Lingle said the tax collection figures back up her calls to reduce labor costs in contract negotiations with the unions. The governor has also ordered more than 1,100 layoffs of state workers starting in November after her furlough plans were blocked and contract talks stalled.

"This reinforces the need for decisive actions to ensure the state maintains our fiscal viability," the governor said in a statement. "The fact is, we simply cannot continue to spend beyond our means, and my administration is looking for additional ways to immediately reduce expenses while maintaining public services and remaining focused on growing our economy.

"The lower actual revenue collections also re-emphasizes that we cannot put off making tough, realistic decisions needed to close the budget shortfall. Every month that goes by without a resolution means the state will fall deeper and deeper in the hole, and the amount of savings we will need to make up the difference will only get bigger."

Lingle said she would work toward negotiated settlements with the Hawai'i Government Employees Association and the United Public Workers rather than wait for binding arbitration decisions in December. The state is also in negotiations with the Hawai'i State Teachers Association and the University of Hawai'i Professional Assembly.

Binding arbitration hearings between the state and the HGEA, which have been closed to the public and the news media, broke yesterday after seven days of witness testimony. The hearings are scheduled to reconvene on Oct. 1, according to the union. The three-member arbitration panel has heard from the state's witnesses and is in the process of listening to union witnesses.

Arbitration hearings between the state and the UPW, initially expected to start today, have been delayed because of a dispute over the neutral arbitrator who would lead the panel, the governor told television reporters.

Lingle is scheduled to meet today with Randy Perreira, the HGEA's executive director, to discuss a potential settlement. The arbitration panel has urged the two sides to reach a deal outside of arbitration.

"We always would prefer a voluntary settlement versus arbitration," said Jodi Chai, the HGEA's communications officer.