SALEM Oregon’s economy is showing signs of recession and that slowing in the economy means the state looks to have $106.5 million less than previously expected to spend in the next two years, the state economist predicted Thursday.

The anxiously awaited March Revenue Forecast gives lawmakers a clue how much they’ll have to spend when the session’s final budget projection is released in May.

”This forecast is a wake-up call,” said Senate Majority Leader David Nelson, R-Pendleton. ”We can’t continue to go forward on the budget path we’re on.”

The forecast will force lawmakers to take a closer look at the proposed budgets that were based on December’s higher projections. But Central Oregon lawmakers believe their top priority $7.2 million for the start-up of a branch university in Bend is safe for the moment.

While the news was disappointing, the state’s economy is hardly in a tailspin, and the financial picture is far from grim: Tax collections in 2001-2003 are still expected to balloon enough to push the state’s general fund up by 6.6 percent, to $11.4 billion.

And the latest revenue forecast included good news for taxpayers. Because of better-than-expected income tax collections in the current two-year budget cycle that ends June 30, the state’s kicker law will send an estimated $337 million back to individual taxpayers, the second-highest sum since the law was enacted two decades ago.

Under that law, the state returns unexpected income taxes if the two-year total is at least 2 percent more than originally projected.

If the kicker materializes, taxpayers with annual income between $30,000 and $40,000 could expect an average return of $137; those earning $40,000 to $60,000 would see an average $209 return.

State Economist Tom Potiowsky said income tax collections in 2001-03 are expected to be $113.4 million less than expected, but lottery revenues would climb by $6.9 million, for a net drop of $106.5 million from the previous estimate.

”The economy is slowing down,” he said. ”Things were going quite well until the end of 2000,” when the stock market dropped and big layoffs occurred, he said.

Potiowsky gave the economy a 50-50 chance of continuing its slide in the next few months.

While some kind of decline in 2001-03 revenues was expected, many lawmakers and lobbyists had hoped that it would be more modest, which would have left the door open wider for proposed new programs or tax cuts.

”It certainly is going to make things more difficult,” said longtime lobbyist Mark Nelson.

Despite the downturn, the proposal to launch a branch campus of Oregon State University in Central Oregon does not appear among programs in jeopardy at least not yet.

”This is still an issue of fundamental fairness to our region,” said Sen. Bev Clarno, R-Redmond.

Rep. Ben Westlund, R-Tumalo, the co-chairman of the budget-drafting Joint Ways and Means Committee, said the budget figure could withstand even ”dipping a little further” before the college proposal could be in trouble.

”This is a political process and nothing is guaranteed, but it is not a time to panic,” he said.

”We knew the budget was tighter than a tick on a junkyard dog. Now it’ll just be a little tighter.”

Legislative leaders and Gov. John Kitzhaber will work out revised budgets over the next few weeks, he said.

”It’s clear we’re not going to have as much money to deal with and it’s going to be a challenge,” said Bob Applegate, Kitzhaber’s spokesman.

One of the most-watched items will be public schools, which accounts for almost half of the general fund budget. Already, Senate Revenue Committee Chairman Ted Ferrioli, R-John Day, is predicting that the Legislature won’t reach the proposed $5.2 billion figure for public schools.

”Everything needs to be back on the table,” he said.

He said lawmakers need to proceed cautiously with budgets because the state could be dipping into a recession. ”In every session in the past decade the (revenue forecast) figure has been on an upward trajectory, but now that trajectory has changed.”

Because the state will have a surplus in the existing budget cycle, it could introduce the possibility of paying some state debts now rather than later which would free money in the next cycle.

But that strategy has a political downside: Any such move would reduce the popular kicker or even eliminate it.

Those discussions probably won’t begin until after the May Revenue Forecast, said Rep. Tim Knopp, R-Bend, and any such decision would hinge on the final budget numbers.

”We need to know if we’ve bottomed out or if we keep dropping,” he said.