When House Majority Leader Lynn Kessler (D-Hoquiam) addressed the Association of Washington Business last week, she talked about the uncharted waters they are navigating in Olympia this session.

Kessler, a well-respected legislator who was first elected in 1992, said the House planned to produce a budget based on an $8.5 billion revenue shortfall, but no sooner had she arrived back at the state capitol when the shortfall ballooned by another $400 million.

Today it sits at $8.863 billion.

Further complicating matters is Washington’s unemployment rate jumped to 8.4 percent in February, the highest in more than two decades.

Balancing the budget over the next month will be a daunting task for Gov. Gregoire and legislators.

Some may paint this as a crisis, but there are solutions to this unprecedented fiscal challenge.

First, we should consider how we got here. When times were good, lawmakers spent money on all sorts of new programs and initiatives.

Spending increases in the 2005-2007 and 2007-2009 biennia totaled $8.5 billion.

We also have to consider which budget we are talking about when we’re throwing around numbers.

As Sen. Joe Zarelli (R- Ridgefield) points out, the $9 billion deficit figure is not real — not yet, anyway. In reality, the deficit for the current budget, ending June 30 is $1.5 billion.

The $9 billion deficit figure presumes that we don’t balance our current $1.5 billion deficit, that the unbalanced spending continues into next biennium, that we maintain growth in entitlement and discretionary programs, and all the new policies and compensation increases are funded.

We’ve taken everything on the books at face value and moved it forward into the new biennium. The $9 billion figure also ignores $3 billion in federal stimulus funds the state will receive.

Zarelli, the Senate Republican leader on the state Economic and Revenue Forecast Council, says that even accounting for growth in the entitlement caseload and setting aside a responsible reserve, the real budget gap for the next biennium is $4.1 billion.

Don’t get me wrong: $4.1 billion is still a lot of money. But it is not an insurmountable challenge.

Some lawmakers believe the only solution is to raise taxes, but Sen. Zarelli has a plan to close the revenue gap without raising taxes. It is a good start and is based on the premise that raising taxes in a down economy only exacerbates our economic woes and results in additional layoffs.

Gov. Gregoire has promised not to raise taxes and using Zarelli’s model as a launching point, lawmakers can leave Olympia with a no tax, balanced budget.

It is important to understand that while our economy will produce slightly more tax revenue in the next two years (2009-11), we will still be behind the curve unless we make significant system-wide cuts.

That means state government will have to change the way it provides services. Some restructuring work is already underway:

The Department of Licensing, for example, is finding ways to renew drivers’ licenses online and is closing underutilized centers.

That is a start, but it needs to go deeper. Lawmakers should focus on funding essential services and look at the total compensation of people employed by the state, including days off, salary adjustments, benefits — even job sharing.

Kessler and Speaker Frank Chopp (D-Seattle) have the right approach.

Despite our dire circumstances, lawmakers have proposed a bin full of costly new programs.

Kessler and Chopp are saying, if you can’t find a way to fund it, drop it. It is good advice, and it is important to remember that any new fee or costly regulation ultimately is paid by struggling employers and families.

Now is not the time to burden taxpayers with another layer of costly government programs. And, this is not a problem outside our reach.

We should be prioritizing within the state budget based on the income available, just as Main Street does with its books every day.

Don Brunell is president of the Association of Washington Business.