The theme of the upcoming session of the state Legislature could be fiscal restraint.

The state Council on Revenues, tracking a state economy that shows signs of moderation, agreed yesterday to downgrade the state revenue forecast. Slower revenue growth through the first six months of the fiscal year, combined with a flat to negative picture on tourism, led to the change.

The Lingle administration will likely impose additional budget restrictions this year in response to the lower forecast, and state lawmakers will be much more skeptical about new spending during the session that starts Jan. 16.

The council adjusted the forecast to 4.9 percent, down from 5.7 percent, which could mean about $37 million less in state revenue available in this fiscal year's $10.3 billion budget.

The council slightly raised the projection to 4.1 percent for next fiscal year, up from 3.8 percent, because of the expected strength in the construction sector and a potential bump in personal income.

State revenue growth was up 4.5 percent over last year through December, and the council did not believe revenue growth over the next six months would achieve the higher forecast made last August.

"It's just really hard for the number to reach our forecast by the end of the fiscal year unless there is some positive surprise," said Paul Brewbaker, a Bank of Hawai'i economist and chairman of the council. "So we made what is essentially a technical adjustment to that. In terms of the economic underpinnings to the adjustment, there is a problem with tourism, which does seem to be worse than expected. And there are problems that, in terms of real estate investment and activity, that to some extent are probably related to the recent financial turmoil" in mortgage lending markets.

The council has lowered revenue projections in each of its past three forecasts since May as the economy has softened from the double-digit state revenue growth of the past few years.

The Lingle administration had been anticipating a $475.4 million budget surplus at the end of this fiscal year in June, but, with the council's lower forecast, that figure will likely shrink.

Both Brewbaker and Carl Bonham, a University of Hawai'i-Manoa economist, said proposals by the Lingle administration and some state lawmakers for increased spending on bond-funded capital improvement projects may be a silver lining.

Public construction projects may help the economy hold steady and offset a downturn in private-sector construction. "It's not rocket science," Bonham said of public works' projects. "We have road problems. We have school problems."

Gov. Linda Lingle has proposed tripling state spending on capital improvement projects next fiscal year, with about half in revenue bonds directed primarily at state harbors and airports.

Separately, Lingle has suggested a 2.9 percent increase in the operating budget next fiscal year and a 1.9 percent increase in the general-fund portion of the budget, where the governor and lawmakers have the most discretion. Two-thirds of her general-fund increase would cover higher fringe benefits for state workers, with the rest focussed mostly on education, health and public safety.

Lingle has also put aside money for new initiatives, including modest tax relief, that she plans to announce during her State of the State speech later this month.

"That's simply because revenues have moderated," Lingle, in a radio interview yesterday, said of her intention to offer more targeted tax relief this year compared to her broad tax cut proposals in past years. "As you know, we've had tremendous rates of growth in the revenue coming into the state. And, while we're going to continue to have increases in revenue — on the broader base now that we have — it's not going to be as fast as the growth we've seen in the previous two years."

State Rep. Marcus Oshiro, D-39th (Wahiawa), the chairman of the House Finance Committee, said lawmakers are expecting budget restrictions this year and difficult spending decisions during the session.

"We're coming in for a soft landing, and the revenue projections are showing that it's slowing. We need to make adjustments, not only in the current budget but in our new plans," he said.

State Sen. Rosalyn Baker, D-5th (W. Maui, S. Maui), the chairwoman of the Senate Ways and Means Committee, said there is an obvious demand for improvement projects at public schools and UH and believes it would make sense to put some of the projects into the pipeline now so they might pay off in a few years if there is a slowdown in private-sector construction.

Georgina Kawamura, the state's director of budget and finance, had told House lawmakers on Monday there would be additional budget restrictions this year if the council lowered its forecast.

The administration has the discretion on when and whether to release money appropriated by the Legislature and has been restricting the release of money since last summer because of budget concerns. For example, Kawamura told state departments that grants-in-aid would not be released until the second half of the year unless they involved health, safety or critical issues.

Although the economy has slowed, the state has again met the threshold under the state Constitution for a mandatory tax refund this session. A refund is required when the budget surplus exceeds expected revenues by 5 percent for two consecutive years.

Reach Derrick DePledge at ddepledge@honoluluadvertiser.com.