The state Council on Revenues today lowered the state’s revenue forecast for this fiscal year but predicted a stronger rebound next year after concluding the recession may be reaching the bottom in the Islands.

The new forecast estimates state revenue collections will decline 1.5 percent this fiscal year, down from the zero growth projected in May. But the council believes revenues will bounce back and increase 6.5 percent next year, up from the 5.6 percent estimate from the previous forecast.

Under the new forecast, the state’s budget deficit would climb by $92 million through June 2011, from $786 million to $878 million. The larger deficit estimate could influence labor negotiations between the state and the four public-sector labor unions, since Gov. Linda Lingle has cited declining revenues as a reason to reduce labor costs.

Paul Brewbaker, an economist and the council's chairman, said the lower forecast was an attempt to avoid downplaying the potential revenue decline this fiscal year. Economists expect a rebound next year.

"I just don't want to be chasing it all year," he said.

The council's forecasts are used by Gov. Linda Lingle and state lawmakers when drafting the state budget.

The Hawaii Government Employees Association and the United Public Workers' public-safety units are headed toward binding arbitration with the state in September.

The two other public-sector labor unions — the Hawaii State Teachers Association and the University of Hawaii Professional Assembly — are also negotiating with the state.