CHICAGO - Wisconsin Gov. Jim Doyle has ordered a new round of cutting and a hiring slowdown to begin chipping away at a record $5.4 billion deficit that's now expected through the next two-year budget cycle. But the more painful decisions will await the new Legislature when it convenes early next year.

The announcement late last week followed a review of expected revenues and departmental budget requests. It raises the specter of steep cuts - even in education, which has escaped trimming in the past - and tax increases in the next two-year budget that Doyle is expected to release in February.

The $5.4 billion projected deficit followed the governor's warnings just a week earlier that the state was in the red for roughly $5 billion, a number that itself marked a significant jump from the $3 billion estimate earlier this fall.

"This is the worst deficit in the state's history," Department of Administration Secretary Mike Morgan wrote in the report produced by his office and sent to the governor. "For the first time in decades, revenue collections are expected to fall in two consecutive fiscal years."

The report anticipates that general fund revenues will fall 2.2% this year and 3.9% in the next fiscal year due to the recession and its impact on consumer purchases and job losses. The deficit includes a $300 million to $400 million shortfall in the current budget due to a drop in collections expected during the current fiscal budget that ends June 30.

Sales tax and corporate income tax collections have taken the sharpest hits, with sales tax collections down 2.5% so far this year and corporate income taxes down 20% over last year, according to budget director Dave Schmiedicke.

"That's a bad trend," he said.

Lawmakers likely will be called back to work early next year to address that shortfall in a budget repair bill. The current projections anticipate an economic rebound in fiscal 2011 when revenues are forecasted to grow 4.1%.

To begin chipping away at the deficit, the state will leave as many as 3,500 vacant positions open during the current fiscal year, suspend some pay increases and bonuses, and sell 500 state vehicles. Legislative authority also will be sought to trim 2.5 % from agency spending.

An additional 10% in cuts are being considered in the next budget cycle. The current deficit is significantly higher than the last record deficit of $3.2 billion in the fiscal 2004-05 budget.

In other measures to help trim the deficit, Doyle is expected to resurrect his failed plan to impose a hospital assessment tax that could leverage hundreds of millions of dollars in federal Medicaid matching funds.

Some tax and fee increases are expected, and while Doyle has said an increase in sales or income taxes is a last resort, he has also stressed the importance of maintaining essential services and avoiding cuts in areas like health care. Wisconsin also is hoping a second federal stimulus package will include state aid.

Democratic leaders in the Legislature echoed Doyle's sentiments about belt-tightening and the need to create jobs, while Republicans warned against tax increases. When lawmakers convene next year, the Democratic governor will enjoy Democratic majorities in both chambers, Republicans having lost their majority in the Assembly in the election earlier this month.

"Our state was on track to closing our gap before the national economic storm hit us. Now we must take further action," said Senate Majority Leader Russ Decker of Weston. "We will need to tighten our belt even further, but we must also do what we can to put people to work now. The best way out of this is to mirror the efforts at the federal level to stimulate the economy by protecting the jobs we have and creating new jobs."

Assembly Republican Minority Leader Jeff Fitzgerald of Horicon warned: "While Gov. Doyle listed some new agency guidelines as steps to modestly reduce spending, his first legislative requests will unfortunately be tax increases. As Democrats control all aspects of state government, he will likely get his wish. Families are struggling to make ends meet and higher taxes will make things worse. We cannot put a higher priority on the state budget than we do on the family budget."

The Wisconsin Taxpayers Alliance believes the deficit is exaggerated because it takes into account the requests by state agencies for additional funding in the next biennium.

The budget repair bill lawmakers are expected to receive early next year for the current fiscal year's deficit would mark the second time the Legislature will be asked to correct a shortfall in the current two-year budget.

Last spring, faced with a downward revision of revenues in the $57 billion budget, Wisconsin adopted a plan that delayed repayment of about $125 million of commercial paper, cut $270 million in spending, drained $57 million from the state's small budget reserve, took $150 million in upfront savings from a proposed tobacco bond restructuring, and closed corporate tax loopholes.

Capital finance director Frank Hoadley's office is working on the restructuring of $1.4 billion of tobacco bonds in hopes of bringing the transaction that would be backed by the state's appropriation credit to market before the close of the fiscal year. In addition to the $150 million in cash, the current budget relies on the transaction for another $150 million to fund an antismoking and health care-related endowment.

The looming deficit followed more positive news over the summer when Wisconsin was upgraded by Standard & Poor's and fiscal 2008 results showed a better-than-expected $130 million ending balance helped by revenue collections that increased more than 4%.

The state's balance sheet has been strained by an ongoing structural deficit, but the gap had been shrinking in the last two budget cycles. The state continues to rely on nonrecurring revenues to cover ongoing expenses, but the amount has been reduced to $600 million in the current budget from $1.8 billion in the 2005 two-year spending plan.

Standard & Poor's analyst John Kenward attributed the upgrade to the state's success in managing its finances with narrow balances, managing through its budget deficit this past spring, and the positive advances over the last two biennial budgets to bring down an ongoing structural deficit, reduce the use of one-time revenues, and put a first-time deposit into a reserve.

Wisconsin's $5.8 billion of general obligation debt is rated AA by Standard & Poor's, AA-minus by Fitch Ratings, and Aa3 with a negative outlook by Moody's Investors Service.

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