Steve Norton thought the news was bad when he released a report last month on the upcoming New Hampshire budget. The bottom line: Heading into the 2010-2011 budget cycle, with state revenues slumping and education costs expected to rise, lawmakers face a hole of $150 million to $500 million.

But since then, the director of the New Hampshire Center for Public Policy Studies has taken a lot of critical calls, he said. "People on both the right and the left believe that I was overly optimistic about revenue," Norton said.

State government is girding for difficult times. Gov. John Lynch has instructed department heads to construct two preliminary budget requests for 2010, expecting either level-funding or a 3 percent cut from current spending levels.

Still, legislators say its too early to know what they'll face next winter and spring. Until the November elections, it's unclear who's in charge in either Concord or Washington, D.C. More broadly, they say, no one knows for sure whether the economy will revive or continue to sink, conditions that will influence business and real estate taxes, along with the host of fees that fund state government.

"This is an extraordinarily difficult thing to try to estimate right now because the economy is having fits," said Rep. Susan Almy, a Lebanon Democrat who chairs the House Ways and Means Committee.

But no one sounded optimistic about a budget year that will be difficult for a variety of reasons. Fuel and health care costs are up. State education aid could rise as much as $100 million by 2011 under a preliminary plan legislators approved last spring.

Personnel costs are also rising fast: A new state contract gives workers a 5 percent pay raise in 2010, and the state's pension costs are expected to rise nearly 40 percent. As the economy contracts, more people may seek Medicaid or other state-funded help. Meanwhile, there are questions about how much money the state can rely on from two sources: the federal government and its own auditing department.

"Everybody knows that there's trouble in the bubble," said state Sen. Lou D'Allesandro, a Manchester Democrat who chairs the Senate Finance Committee. "Nobody expected $4 a gallon gas and $5 a gallon fuel oil. There are a series of things . . . which we can't control."

While legislators are anticipating a difficult winter of budget talks, there's still the matter of balancing the current budget. Last spring, Lynch made more than $80 million of cuts to keep the 2008-2009 budget balanced, with more expected. Legislators and the governor have predicted that the current $10.3 billion budget could fall as much as $225 million short of original revenue expectations.

The books have closed on fiscal year 2008, which ended June 30, but the final reports won't be finished until the end of the month, said Linda Hodgdon, the commissioner of the Department of Administrative Services.

As part of a series of measures intended to close the gap, the Legislature authorized the governor to take out as many as $40 million in bonds to pay for school building aid in each fiscal year, 2008 and 2009.

"I think as I sit here we're not going to need to do any of that bonding in 2008," Hodgdon said. "I think we're going to need to do all of the bonding for 2009."

The fiscal forecast will get a little clearer in October, when Hodgdon prepares an outlook of the revenues for the current fiscal year, 2009, and the two years to come.

Charlie Arlinghaus, of the Josiah Bartlett Center for Public Policy, is preparing a prediction of his own. He foresees the gap between spending trends and revenue trends as around $300 million. "I think I'm going to call it 'Starting in a Hole,' " he said.

Here's a look few at some of the factors that could drive the state budget.

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