SALEM – State agencies are hashing over their budgets to cope with a whopping $577 million hole in the state budget for the current biennium.

State economists announced the shortfall last week, blamed it on higher-than-expected income tax refunds and an 80 percent decline in capital gains taxes over the past two years.

Tom Potiowsky, state economist, said there was positive news in that jobs increased in the first quarter of 2010, suggesting that the recession is bottoming out. However, that wasn’t enough to counteract the revenue gap.

Gov. Ted Kulongoski responded to the news by calling for an across-the-board 9 percent cut in most state agency budgets, including those for schools and social services.

Republican legislators attacked the across-the-board cut approach.

State Sen. Ted Ferrioli (R-John Day) said it would be the harshest approach to the problem.

“The responsible thing to do is to set careful priorities in a special session, protecting the services that go to the most vulnerable,” he said.

He said the governor’s “reset cabinet” had confirmed “what Republicans have long been saying, that unsustainable spending will result in decades of deficits no matter how much the revenue forecast decreases.”

“The way government budgets is so badly broken that the revenue forecast has become just another talking point for the next government-sponsored tax increase,” he said.

State Rep. John Huffman (R-The Dalles) said the Legislature needs to find “the political will” to determine to spend less than estimated revenue, to identify core services, and require state agencies to rate every department, program and offering as critical, less critical and noncritical. That ranking would set the framework for funding.

He said there would be hard decisions, but out-of-control spending is to blame.

“I still maintain, in spite of the current revenue forecast, that Oregon does not have an income problem. We have a spending problem,” Huffman said.

While Republicans pushed for a special session to deal with the budget crisis, Democratic legislators balked at the idea.

Senate President Peter Courtney (D-Salem) and House Speaker Dave Hunt (D-Gladstone) favored the governor’s approach last week.

Courtney said legislators don’t have the base of understanding yet to hold a session.

Hunt told The Oregonian he is open to the idea of a special session, but not until he has more information about the impact of cuts and the possibility of federal assistance.

The state money woes come as school districts across the state have finished up their budget deliberations for the coming year.

The Oregon Department of Education released a district-by-district chart projecting the impact on state funding. The breakdown projects that Grant School District 3 will need to absorb a $319,102 reduction in state school support funds. According to ODE, the other Grant County school districts also are projected to share the pain: $97,951 in Prairie City; $49,465 in Dayville; $46,482 in Monument, and $43,465 in Long Creek.

However, District 3 officials expect that cut to be offset in the coming fiscal year because of the timing of certain tax payments from the Grant Education Service District. The ESD must pass on tax revenue in excess of its $1 million ceiling set by law, and the state eventually takes that amount off the district’s basic school support. The gap in timing could cushion any state cut for the coming year’s budget.

In Dayville, Superintendent Debbie Gillespie said she’s not in panic mode over the latest news.

“We’ve been through this roller coaster of ups and downs of state funding before,” she said. “State school funding has always been a guessing game.”

She said the Dayville district’s budget already is pared down to bare essentials, and the district will continue to be frugal. She’ll be watching the revenue picture, which also includes ESD funds and proceeds from the Common School Fund, to see if more adjustments need to be made over the coming year.

Meanwhile, other agencies are preparing for cuts.

The Oregon Department of Forestry could see its previously proposed Central Oregon District budget increase for 2010-11 evaporate, according to George Ponte, district forester.

Ponte said last Friday that his office is preparing to trim at least $440,000 from the budget. The cuts must focus on areas that use general fund dollars.

In the private forests program, the district expects to cut some money for bark beetle treatments and Conservation Reserve Enhancement Program.

The fire protection program also faces cuts, Ponte said. Among the likely cuts, the district will drop a proposed contract helicopter in John Day, keep some vacant positions open, delay seasonal worker hiring by two weeks, and park three engines – one per unit – for the summer. The district also will scale back its fixed-wing patrols by several weeks.

“At this point I’m fairly confident that these reductions will go forward,” he said. The goal will be to “maintain services as best we can,” he added.

Ponte planned to discuss the changing budget picture at a meeting Tuesday, June 1, past Eagle presstime, in Mt. Vernon.