Gregoire said that the state cannot "cut our way out of" the $1 billion that will be needed as a down payment for education funding in order to comply with a state Supreme Court ruling, as well as the $3.4 billion needed by 2018.
"We cannot save our way out of this," she said.
In its decision on the lawsuit brought by a coalition of school districts, parents and education groups - known as the McCleary case for the family named in the suit - the high court last year ruled the state is not meeting its constitutional obligation concerning education funding.
"Today is the day," Gregoire said in prepared remarks. "Now is the time. We must invest in our children and their future."
She also said that transportation "is the backbone" of the state and funding is needed for several projects, including the Columbia River Crossing, Spokane's North-South Freeway and Snoqualmie Pass.
Gregoire said that a viable transportation infrastructure must exist if "we want to remain a vibrant economic competitor in the years to come."
She specifically asked the Legislature to commit $450 million for the Columbia River Crossing, a new bridge to connect Vancouver with Portland, to "make certain that this critical West Coast economic corridor moves forward."
"If we step up to our commitment to build a new Columbia River Crossing with Oregon this year, the federal government will too," she said.
In her speech, Gregoire looked back on her two terms with pride, noting her creation of Department of Early Learning and her work on strengthening international trade.
"Our trade economy kept us going through the hard times and it is our future," she said. "It unites Eastern and Western Washington, impacts every community and provides the jobs we need."
Gregoire noted that Washington state was among the first to implement the new federal health care law and urged the Legislature to accept the Medicaid expansion, saying it will save the state $140 million in the next biennium.
"Every Washingtonian deserves an open door to the doctor when they need one," she said, receiving a standing ovation from the Democratic side of the chamber, as well as from Republican Attorney General Rob McKenna, who had joined in on the lawsuit against the law.
Most of the Republican lawmakers side stayed seated and didn't applaud.
She also celebrated the voter-approved law that recently allowed same-sex marriage in the state, saying that her two daughters were responsible for "showing the way and helping me realize that their generation understands that who you are is not about who you love."
Lawmakers returned to the Capitol on Monday for the 105-day session. They face a roughly $1 billion budget shortfall for the upcoming two-year budget, not counting the money they will need for education funding. Some legislators say new taxes are on the table as an option while Democratic Gov.-elect Jay Inslee says general tax increases are unnecessary.
Gregoire arrived in the House chambers to a bipartisan standing ovation by the joint session of the House and Senate, where lawmakers were joined by all nine members of the state Supreme Court and statewide elected officials. She was introduced by Democratic Lt. Gov. Brad Owen, who called her "one of the most outstanding governors in the history of our state."
Gregoire, a Democrat, leaves office on Wednesday after eight years as governor. Inslee will be sworn in and give his inaugural address on Wednesday.