Budget uncertainties ahead for Washington state

The Legislature got its work done but in its eagerness to be done with cutting, it left large questions for the future.

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Washington State Capitol

The Legislature got its work done but in its eagerness to be done with cutting, it left large questions for the future.

In its special session deliberations that ended in the early morning hours of April 11, lawmakers may have concluded one of the most difficult periods in recent state history. Over two biennial budget periods, beginning with the 2009 regular session, the legislature had previously cut state operating budget spending by more than $10 billion.

The worst recession since World War II took its toll on state employment, consumer demand, and the tax revenues needed to fund essential programs. Although the most conspicuous cuts were in higher education, numerous social safety net programs felt the knife as well.

So it may be understandable then that legislators, facing another $1 billion revenue shortfall in the current budget cycle, would seek to avoid more of the same. Measures to limit state employee pensions, consolidate school employee health plans, and require future budgets to be “balanced,” although described as reforms, were designed to steer clear of further budget cutting down the road. Some would say at the expense of public employees — and the public good.

Whatever the motives, and they were mixed, the state’s fiscal reality is that large areas of budgeting uncertainty remain, and the next several legislatures will face major funding challenges.

This is reflected in the most recent Economic & Revenue Outlook (April 12) from the Economic and Revenue Forecast Council (ERFC). It predicts that real per capita General Fund state revenue (principally sales, B & O, and property taxes) will be essentially flat over the next (2013-15) biennium. (See slide 38 on page 39.)

With inflation adjusted revenues growing at the same rate as population, the ability to increase funding for K-12 and higher education, as both candidates for governor have proposed, will remain limited. At least in the short-term.

The good news is that Washington’s manufacturing sector, with Boeing adding orders, is outperforming the nation. But balancing this is an ERFC observation that, “As in the national economy, recent employment growth suggests a possible slowdown in the Washington labor market recovery.” Unemployment is predicted to decrease yet remain high, above 7 percent, through at least 2015.

On top of this is considerable uncertainty; in the words of ERFC, “downside risks outweigh upside risks.” Any of several “outside” factors could have a large negative impact on Washington’s economy and tax revenue. These include the European sovereign debt crisis, which remains largely unresolved, and the possibility that Europe may also have entered a recession. The Eurozone is collectively the state’s second largest export destination. A possible slowdown in the Asian economies is an additional negative.

Then there is the potential of a major confrontation with Iran over its nuclear program that could lead to a disruption of Middle East oil supply lines and even higher gas prices.

And not to be forgotten are the federal deficit and debt reduction that Congress must soon address, something that will have an impact on the state budget. Almost half of Washington’s current operating budget is dependent on federal revenues that fund a wide range of programs and services.

In the vernacular of a former U.S. Defense Secretary, all are known unknowns. All make even short-term budget writing a difficult proposition.

In spite of these numerous uncertainties, a state Senate coalition of Republicans and three conservative Democrats held out for adoption of a balanced budget bill. Lead sponsor was Sen. Jim Kastama, D-Puyallup, who initially sought to amend the state constitution to require a six-year balanced budget.

After much negotiation, the final bill that passed (Senate Bill 6636) took a more measured approach, by requiring a four-year balanced budget in a statute and not a constitutional amendment. But it's still a dubious exercise in lawmaking that Gov. Chris Gregoire ought to consider vetoing. With all the real uncertainties ahead in the economy, the state does not need a new law that creates uncertainties of its own through its considerable complexity. 

The bill requires that beginning with the 2013-2015 biennium, the Legislature must enact a budget that leaves a positive ending fund balance in the state General Fund and related funds. And the “projected maintenance level” for the budget in the ensuing biennium may not exceed “available fiscal resources”.

The definitions of the terms “projected maintenance level” and “available fiscal resources,” although somewhat complex, are keys to an understanding of how future budgets will be constructed.

The “projected maintenance level” means estimated appropriations necessary to maintain the continuing costs of program and service levels that are either currently funded or mandated by state or federal law, plus the amount of any general fund moneys transferred to the constitutionally mandated budget stabilization account (“Rainy Day Fund”). At least 1 percent of state revenues must be transferred annually.

One example of a mandate that may add to the maintenance level is adequate security in our state prison system. Prisons funding cuts and increased inmate numbers have combined to create a serious safety problem, as The Seattle Times recently reported.

Although the bill presumes to balance future budgets, it postponed a reckoning with the large costs of fully funding basic education. It excludes from the 2013-2015 and 2015-2017 budgets the costs related to the enhanced funding that will be needed under the definition of basic education inscribed in a 2009 law and affirmed by the state Supreme Court's McCleary decision on inadequate state support for public schools.

“Available fiscal resources” are defined as the official revenue forecast for the ensuing biennium made by ERFC, or an assumed revenue increase of 4.5 percent for each year of the ensuing biennium, whichever is greater. The 4.5 percent figure is equal to the projected growth in state revenue for FY2015.

And it gets even more complicated. The balanced budget requirement does not apply to an "early action" budget bill that makes net reductions in appropriations and is enacted between July 1 and February 15 of any fiscal year; or to an ensuing biennium following a biennium in which monies are withdrawn from the Rainy Day Fund.

In addition to the official revenue forecast, ERFC must submit each November a “budget outlook” document for state revenues and expenditures for the General Fund and related funds for the current biennium and the next ensuing biennium. ERFC must also prepare a budget outlook document for the governor's proposed budget and for the budget enacted by the Legislature.

All of this seems to be more about reinventing the wheel than real reform. Gov. Chris Gregoire developed and used a six-year outlook for the purposes of vetting her 2011 supplemental budget. And ERFC has long forecasted revenue out four years.

The problems with extended year budget forecasts were pointed out by former ERFC director Dr. Arun Raha in a communication with Governor Gregoire prior to the vote on SB 6636. Senate majority leader Lisa Brown, D-Spokane, referenced Raha's advice in her floor remarks on the bill.

Raha indicated that “a four year ahead forecast will have a far greater margin of error than a two year ahead forecast, even if the distribution of risk were normal (at this time the environment is fraught with excess downside risk, which makes the potential error bigger). It’s worth doing if the resources are available to gain an understanding of structural trends going forward, but it would be unwise to hang our hat on it for budgeting purposes.”

But Sen. Kastama’s bill will put people to work: The services of one or more attorneys will likely be needed to ensure that the rules are followed.

The governor has not yet signed the bill, so there is still hope.


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About the Authors & Contributors

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Dick Nelson

Dick Nelson is a former Washington State legislator. He currently contributes to the public debate on state and local fiscal issues through research and commentary. As when he was in the legislature, he prefers the Democratic Party.