The latest revenue projection for Washington state indicates lawmakers will face a nearly $1.4 billion budget shortfall when the special session convenes Nov. 28 in Olympia.

That assumes they use $266 million in available "rainy day" savings. If not, lawmakers will have to come up with $1.65 billion in combined spending cuts and revenue increases.

Either way, the budget picture is slightly brighter than anticipated two weeks ago, when Gov. Chris Gregoire suggested the budget gap could be upward of $2 billion.

The new forecast, issued Thursday by the Washington Economic and Revenue Forecast Council, projected $30.2 billion in total revenue collections during the 2011-13 biennium. That was down $122 million compared to the forecast in September.

However, Chief Economist Arun Raha cautioned there's still considerable downside risk. In particular, the European debt crisis or political deadlock in Congress over fiscal policy could stall the economic recovery and further erode state revenues.

"Revenues depend on the economy, and the economy is a moving target," Raha said. "Much of the risk in Washington's economy is based on events outside the region."

He estimated there's a 50 percent chance Thursday's forecast will hold true, compared to a 40 percent chance it could be much worse and only a 10 percent chance it could be better.

In the pessimistic scenario, Washington would collect $28.2 billion - on par with the 2009-11 biennium - which would force lawmakers to find $3.6 billion in savings or new revenue. The optimistic scenario projects $32.2 billion in revenues.

Raha noted there were some positive areas in Washington's economy. For example, state exports were up 29 percent in the third quarter compared to the same period of last year, and unemployment dropped to 9 percent in October, the lowest level since March 2009. In the manufacturing sector alone, more than 16,000 new jobs have been added in the past two years, including 9,100 at Boeing.

"The recovery in Washington, as in the nation, has been driven largely by the manufacturing sector," he said.

On the other hand, the construction sector remains weak, and state and local governments shed 5,100 jobs in the past two months, much of it in public schools and higher education.

Gregoire is expected to release her revised budget proposal Monday, detailing the mix of spending cuts and revenue options she'd like to see.

Senate Ways and Means Chairman Ed Murray, D-Seattle, said it will take a combination of cuts and revenue to balance the budget.

"Everything is on the table," he said.

Ridgefield Sen. Joseph Zarelli, the ranking Republican on the Ways and Means Committee, said he'd like the Legislature to focus on reforms before it considers new revenue.

The goal for the special session, Zarelli said, should be to develop an "all-priorities budget, meaning a dollar isn't spent unless it's tied to a priority of government."

"I hear the calls for new revenue to balance the budget," he said. "What I don't hear is anyone making the case that state government is being so efficient with the revenue already coming in that it simply can't provide basic public services unless taxpayers dig deeper."

The new revenue forecast and related material can be found at www.erfc.wa.gov.

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Spence may be contacted at bspence@lmtribune.com or (208) 791-9168.