SAN FRANCISCO - Oregon Gov. Ted Kulongoski yesterday ordered departments to cut spending by almost 5% for the remainder of the 2007-2009 biennium after the state economist said tax collections are coming in much weaker than expected.

The general fund revenue forecast for the 2007-2009 biennium was cut by $165.9 million to $12.7 billion, state economist Tom Potiowsky said in a quarterly forecast yesterday. He blamed the shortfall on unexpected weakness in personal income tax collections.

The new forecast revealed a $142.1 million deficit in the current biennial budget and a $762 million hole in the upcoming 2009-2011 biennium, versus the current-services budget.

"Today's forecast shows the depths of this recession and the economic uncertainty facing our state and our nation right now," Kulongoski, a Democrat, said in a statement.

Oregon's jobless rate rose to 7.3% last month from 5.4% a year earlier, according to the state Employment Department. Potiowsky said Oregon will not create any net new jobs this year and is likely to see payrolls contract by more than a full percentage point next year.

The governor ordered departments to cut 1.2% from their current two-year budget, but since the state is already nearly three-quarters of the way through the budget cycle, the cuts equate to almost 5% of the spending that was planned for the remainder of the fiscal year that ends June 30.

Kulongoski will propose his 2009-2011 budget on Dec. 1. Last week, he proposed more than $500 million of new gasoline taxes and vehicle registration fees to fund billions transportation infrastructure development.

Already, Republicans are pushing for spending restraint in the overwhelmingly Democratic state and preparing to fight tax increases.

"Rather than finding new ways to extract more money from Oregonians, we will work to put more money back into their pockets and back into the economy," said House Republican Leader Bruce Hanna. "It's time to bring government spending back under control."

"We believe this is a bad time to raise taxes," said Nick Smith, a spokesman for Hanna.

But Republicans will be hard pressed to stave off Democratic proposals to increase the state corporate income tax, taxes on medical providers, and tobacco taxes because Democrats won a large majority in both houses in the Legislative Assembly in this month's election.

Oregon law requires a three-fifths legislative majority to impose taxes, and Democrats now have enough seats in both houses to pass tax increases without any Republican votes.

Still, Democrats acknowledged the state's projected budget gap is so large that it will require both spending reductions and new revenues.

"This recession demands tough decisions and requires shared sacrifice - and today's action is the first of many difficult decisions that lie ahead," Kulongoski said of the budget cuts he ordered yesterday.

While the state's budget outlook has deteriorated sharply, Oregon's finances remain stronger than some states that have been hard hit by the housing downturn, because it created a rainy-day fund in 2007. The rainy-day fund and a separate education stability fund will grow to a combined $733.9 million at the end of the current budget cycle, Potiowsky said.

Oregon's general obligation bonds are rated Aa2 by Moody's Investors Service and AA by Fitch Ratings and Standard & Poor's.

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