A new forecast released Thursday shows the state's economy is recovering, but not fast enough to forestall yet another multi-billion budget shortfall next year.

The governor's budget office projects state lawmakers will face around a $3 billion gap when they start writing a new two-year budget in January. It would be the third year in a row the Legislature has had to confront such a problem.

And lawmakers aren't out of the woods when it comes to the current budget. The new forecast projects the state will take in $200 million less than was expected in the budget that runs through June 2011. The drop can be handled by reserves -- assuming Congress approves $480 million in federal aid the state is counting on.

If that money does not come through, the state will face closing an immediate shortfall of more than $200 million with less than a year to go in the current budget.

And the $3 billion shortfall projected for the next two year budget could be optimistic.

Again, it assumes Congress will award the federal aid, a prospect that's become questionable. It also does not factor in a proposed ballot measure, Initiative 1107, that would end taxes worth about $300 million over three years, if the measure makes it on the ballot and is approved by voters.

Democrats and Republicans alike say the Legislature next year has no choice but to look at more cuts and potentially end some state programs.

"We've taken every account and wiped it clean and there's no place to go. It's about spending reductions now," said Sen. Joe Zarelli, R-Ridgefield, the ranking Republican on the Senate Ways and Means Committee.

Even Democrats, who currently control the House, Senate and governor's office, are making similar comments.

"It's obvious to me we have to do some very significant restructuring of state government," said Sen. Ed Murray, D-Seattle, chairman of the Senate Democratic caucus. "It may mean getting out of lines of business we're in today."

More than half of the projected shortfall next year, about $1.8 billion, is related to spending on education.

To balance past shortfalls the Legislature gutted spending for I-728, an initiative aimed at reducing class sizes, and I-732, which mandates annual raises for teacher pegged to inflation. Restoring funding for those two measures would cost more than $1 billion.

On top of that, the Legislature last session approved a new plan for funding basic education that's expected to cost an additional $710 million over the next two years.