Facing an already-gaping deficit, state lawmakers were told today that they will have to cut yet another $40 million from this year’s operating budget—and they’ll have $1.5 billion less to spend next year.

The sobering news, from the latest quarterly revenue forecast prepared for the state legislature by its nonpartisan policy staff, also noted that widespread economic doldrums are causing a dip in assessed property values in local school districts, further burdening a state budget that must backfill local school funding.

Today’s forecast included an upbeat prognosis for the economy in general.

“The recession in Colorado is over, and the recovery is beginning,” chief legislative economist Natalie Mullis told a panel of lawmakers this morning.

However, the continued decline in state revenue, despite a recovery, comes atop earlier projections that the state already had to pare some $560 million to balance the books by the end of the current fiscal year, June 30. And while tax revenue to the state is expected to grow modestly the following year, the actual operating budget for next year will have to shrink dramatically as supplemental sources of spending money like federal stimulus funds—tapped to fill previous budget gaps—are drying up.

“The end of the recession is not the end of difficult times,” Mullis told the lawmakers.

After the briefing, Colorado Springs Rep. Kent Lambert, a minority Republican on the powerful Joint Budget Committee, said the new forecast figures set the stage for innovative thinking

“There needs to be a discussion on whether we can give more flexibility to higher-ed in return for cuts,” said Lambert, in reference to a long-standing push by the state’s colleges and universities for more autonomy in raising their own revenue amid eroding state funds.

Lambert also said a proposal by Gov. Bill Ritter to raise revenue by suspending or eliminating 13 tax breaks for business raises the ante in the coming legislative budget battle.

“The removal of tax credits—that’s going to be a huge debate—and if there’s a net tax increase, it’ll need to go to a vote of the people,” he said. Majority legislative Democrats, pointing to a Colorado Supreme Court ruling earlier this year, say they don’t need to put the elimination of tax credits and exemptions to a vote if the net effect is just to maintain current spending levels.

The Colorado Association of Commerce and Industry—the statewide chamber of commerce—has raised concerns for months about the Ritter proposal, contending the elimination of such tax-based incentives, used to reinvest in capital and hiring, could hamper the state’s recovery. The organization issued a press release this afternoon warning its members that the new forecast raises pressure on lawmakers to cut the tax breaks.

Meanwhile, Education News Colorado reported today that already-pending cuts in state funding for K-12 schools in 2010-11 may now have to go $65 million to $70 deeper than previously thought, given the latest forecast.

Ritter, in a prepared statement issued this afternoon in response to the new data, said in part, “…based on today’s numbers, it looks like we’ll need to do some additional work to re-balance the current FY09-10 budget and the proposed 10-11 budget.

“While we’ve been preparing for this, it will take a few days to integrate the forecast with our previous balancing plans and some other variables.”