As the Legislature approaches critical budget decisions, two national credit rating agencies are pessimistic about Washington being able to maintain its good credit rankings.

When the state recently refinanced $978 million in bonds — resulting in $154 million in long-term savings — all three major national credit rating agencies retained Washington's good rating of AA Plus, which is just below a perfect AAA. But two agencies, Fitch and Moody's, downgraded Washington future outlook to keep an AA Plus rating from "stable" to "negative."

This week, both state Treasurer James McIntire, and Sen. Ed Murray, D-Seattle and chairman of the Senate Ways and Means Committee, said the possibility of a future credit downgrade could hurt the state because it could end up paying many millions of dollars more in extra interest when it adds to its bonded debt for construction projects. State construction has been used to pump extra money into the private sector, especially into the currently economically strapped construction industry.

At the same time, however, anticipated revenues have begun to improve, which could factor significantly into how the Legislature handles the budget decisions due by March 8. 

In a letter early this month, McIntire emphasized to Gov. Chris Gregoire and legislative leaders the seriousness of the warning sign from Fitch Ratings and Moody's. "This is a very difficult situation with no easy way out," McIntire wrote. Long lists of of state budget troubles contributed to the rating agencies' long-term pessimism, he suggested.

Those include Washington's struggles to raise revenue; depleted reserves; high fixed costs; the use of one-time budget fix-it measures; the state's above-average debt; borrowing against future revenues; reliance on an accounting measure to put off some payments from one year until the first month of the next fiscal year; and a need for a cushion if revenues continue to underperform. The agencies also noted Washington's revenue estimates tend to continually drop. Meanwhile, the Washington state Supreme Court has ruled that the state's basic education programs have been illegally underfunded. Also, taxpayers rejected a tax increase in 2010, while the Legislature needs an almost-impossible-to-reach two-thirds majority to raise taxes, the agencies noted.

When the state heavily trims programs, that increases the likelihood of lawsuits being filed to combat cuts, McIntire said in a Tuesday lunch meeting with Crosscut writers. Also too-heavy cuts could spook investors interested in buying bonds. "It sends signals to the market that you are cannibalizing," he said.

Meanwhile, Murray said Wednesday (Feb. 15) that the case is lessening for a tax increase this year to balance the 2011-2013 budget. In November, Gregoire proposed a five-year-long half-penny sales tax increase to raise $494 million with $411 million of that going to education. Because of the two-third's majority requirment for a new tax, Democrats would have to take that proposal to a public referendum, which they can do with a simple majority. 

Since Gregoire's proposal, though, "the budget situation has improved modestly." Murray said. Last week, state budget planners estimated that Washington's have been using $250 million less in state services this biennium, with that estimate increasing to $340 million this week, Murray said, shrinking the case for a sales tax increase.  

But a much better forecast will be possible Thursday (Feb. 16) when the Washington Economic and Revenue Forecast Council unveils its quarterly state income estimate. The Legislature has been awaiting the forecast as a needed step prior to unveiling its own state budget proposals. 

McIntire's letter noted that the state government plans to finance $6.8 billion in construction work between now and 2015. "Should our credit rating drop, these bonds will likely cost Washington taxpayers hundreds of millions more than necessary. ... Why send scarce funds (as extra interest payments) to Wall Street that could stay here and create jobs instead?" McIntire wrote.

McIntire contended the Legislature should take three steps to help maintain Washington's credit rating.

His first recommendation is that the Legislature combine budget reductions with increasing tax revenues, McIntire said. "Investors want to see our willingness to use both tools. That's a very powerful fact," McIntire told Crosscut. But the political climate is poor for tax increases currently, with McIntire expecting overall tax reforms to take years to nail down. 

The Republicans — who control more than one-third of both the Senate and House — are dead set against any tax increases. Senate Minority Leader Mike Hewitt, R-Walla Walla, said Wednesday that he has not seen a detailed plan from McIntire, so he could not comment on whether McIntire has a valid point on tax increases. Republican are expected to unveil thier budget propsoal Friday, which is likely to include raising more state revenue from gambling and proposing reforms on lawsuit financial judgments against the state.

McIntire's second recommendation is pushing several suggestions made in December by the Washington Commission on Debt. These included reducing the Constitutional debt limit from 9 percent to 8 3/4 percent with that new limit able to rise during a recession and fall depending on economic indicators. The suggestions also call for stretching long-term construction planning and potential costs farther into the future. 

McIntire's third proposed fix-it measure is to install a Constitutional amendment to require the Legislature to fully fund its pension obligations. 

Bipartisan pension reform bills — similar to each other — are in both the House and Senate's Ways and Means committees. However Murray said the Senate bill needs to be reworked, saying it has short-term benefits to the state budget, but has longer-range budget pitfalls.

McIntire's letter also warned against pledging future state revenues against immediate cash payments from investors, a tactic known as "securitazation" that House Speaker Frank Chopp floated last year.