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PHOENIX — First belt-tightening on the job at most state agencies. Now the prospect of no pay raise next year, or at best only a small one, as the state's budget shortfall starts to hit home for state employees.

Thursday's revelations came in a report by the state Department of Administration, which normally provides a pay-raise recommendation in September for lawmakers to consider while drafting the next year's state budget in the spring.

But the department is holding off on pay-raise proposals for now, citing "the realities of the current economic situation of the state's budget."

No or minimal pay raises would hit a lot of Southern Arizonans, where the University of Arizona and the state are the area's second- and third-largest employers.

Department Director William Bell says he'll work with executive-branch and legislative budget offices to develop proposals as more information becomes available on the fiscal situation. But the prospects aren't promising.

Gov. Janet Napolitano last week announced that tax collections slumping below anticipated levels would produce a projected $600 million shortfall in the current $10.6 billion budget — a shortfall she has already developed plans to resolve.

The governor is now working on her proposed 2008-2009 budget, which will go to the Legislature in January, when the tax-collection picture is more clear.

Thursday's report to a legislative advisory committee said state pay raises in recent years have narrowed the pay gap between nonuniversity state workers and those in the larger work force from 21.7 percent in 2005 to 7.1 percent.

Meanwhile, turnover resulting at least partly from low pay has been reduced from 21.7 percent to 17.3 percent, said Kathy Peckard, Department of Administration human-resources director.

State Rep. Marian McClure, R-Tucson sits on the Joint Legislative Study Committee on State Employee Compensation, but was unable to attend a Thursday meeting in Phoenix at which the salary issue arose. McClure suspects that with the economic outlook uncertain, the committee's original recommendation of 7 percent raises is unlikely to proceed.

"I would suspect, somewhere in the neighborhood of 3 percent" is more likely, she said. "If we really tank out, we'll be lucky to maintain."

State Rep. Lena Saradnik, D-Tucson, says Arizona may be paying the price of too many tax cuts.

"There are so many critical issues that we are dealing with here in Arizona and we keep doing tax cuts and tax cuts and tax cuts, and at some point, when the economy takes a downturn, it becomes difficult," she said. But she held off on a prognosis: "The worst thing we can do is knee-jerk reactions right now."

That was the same message from others, including UA lobbyist Greg Fahey. "We know the revenue situation for the state has gone down, but I think it's too soon to know what things are going to look like," said Fahey.

The current budget provided a 3 percent raise to base salaries and allowed performance pay raises up to 2.75 percent. The previous budget provided a flat $1,650 base-salary raise and instituted performance pay.