State Treasurer warns against use of emergency funds in budget proposal

State Treasurer warns against use of emergency funds in budget proposal
Governor Jay Inslee’s proposed 2018 supplemental budget differed significantly from his 2017-19 budget. Although it calls for dipping into the rainy-day fund to pay for new education salaries and adding a state carbon tax, left out was a capital gains income tax. Photo: Between Wall and Main

Governor Jay Inslee’s proposed 2018 supplemental budget released Thursday brought forth mixed tidings of discomfort and joy. His operating budget would add $1 billion in spending to the 2017-19 biennium, raid nearly as much from the budget stabilization account to pay for teacher salary increases as part of the McCleary decision and add a new state carbon tax or fee.

However, equally worthy of note was what Inslee left out: the dismantling of the property tax swap approved earlier this year to pay for new basic education spending, along with a capital gains income tax included in his proposed 2017-19 operating budget.

“I was absolutely shocked that it (capital gains income tax) was not in the budget, but I will take it,” Washington Policy Center’s Government Reform Director Jason Mercier said. “I couldn’t tell you (why it wasn’t included).”

The tax was one Inslee had previously touted as a replacement for the property tax swap, and became a key discussion in the 45th legislative district race between Senator-elect Manka Dhingra and Republican candidate Jinyoung Englund. Its absence suggests there may not be a major push for it in the legislature, where both chambers are now controlled by Democrats.

When asked about it at a December 14 press conference, Inslee said: “We have found a way to do this in a different way that I believe responds to, as I’ve indicated, both to the needs of the education of our children and their long-term health. So, this is what I’m proposing.”

Mercier noted that “it’s not what he said; it’s what he didn’t say, and how long he didn’t want to address it.”

Within the context of the debate over a progressive income tax in Washington, the capital gains income tax poses a much more serious threat to the state’s constitutional ban. Although progressive income tax advocates have looked to the city of Seattle’s ordinance to offer an opportunity for the State Supreme Court to overturn 80 years of legal jurisprudence on the matter, government reform experts such as Mercier have pointed out that the ordinance has many more barriers to overcome before the constitutional question can be addressed, including a 1984 state law explicitly prohibiting local income taxes.

However, the same cannot be said for a capital gains income tax, which like Seattle’s law would have also provoked a lawsuit.

Inslee’s budget also adheres to the four-year balanced budget requirement, whereas last year his spending list “assumed” that rule would be suspended.

It’s a stance that Senate fiscal hawks are urging Inslee to maintain throughout the session. “While it’s promising that the governor finally proposed a budget that balances over four years, I call on him to publicly commit to veto any budget that doesn’t,” Senate Republican Leader Mark Schoesler (R-9) said in a statement.

Sen. John Braun (R-20) in a statement voiced a similar sentiment. “I’m glad he is finally adhering to the four-year balanced budget law in crafting his budget, and I appreciate that he is embracing the bipartisan work on the K-12 education funding structure enacted last session. I ask that the governor veto any budget that isn’t balanced over four years.”

Braun made a measured critique of Inslee’s carbon tax proposal. “We will see whether there are enough votes in the Legislature to pass these proposals.”

Schoesler wrote: “I also worry how the governor’s as-yet-unveiled ‘carbon pricing plan’ would affect family jobs in Washington. If he can’t explain the difference between a carbon tax and a carbon pricing plan, then it’s a tax. It IS an energy tax.”

Inslee’s supplemental budget highlights includes:

  • A $950 million transfer from the rainy-day fund to pay for the state’s new education salaries for the 2018-19 school year;
  • $42 million to cover higher-than-expected wildfire fighting costs from this year’s season;
  • $162 million for shortfalls in the state’s Medicaid program; and
  • $106 million for increased operating costs at the state’s psychiatric hospitals, as well as maintaining federal funding levels at Western State Hospital.

The $950 million transfer would leave $1.4 billion in the rainy day fund by 2019. At the press conference, Inslee said “We want to make sure we start on time, and our budget this year will fully comply with the McCleary decision on time this year.”

A supermajority vote is needed in the legislature to approve the use of those dollars for anything besides emergency spending. However, the legislature this session approved a raid on the fund to pay for state public pension liabilities.

Even if Inslee gets the votes needed, it’s a move State Treasurer Duane Davidson says could harm the state’s high credit rating. In a statement, he wrote that “with a robustly growing economy we should be adding to our reserves now – not pulling from them.”

“I firmly believe that the reserves need to be used prudently,” he added. “The Legislature should look for alternative ways to fund McCleary – other than using our reserves to pay for operating expenses.”

Davidson points to the state’s recent credit agency rating reports that were influenced by the reserves, as well as the state’s balanced budget requirement. That same month, his office held the biggest bond refunding series sale in state history, with nearly $138 million in debt service costs saved as the result of a $814 million bond sale.

A May 2017 study by Pew Trusts found that “while rainy day funds are one of several factors that inform ratings decisions, they are especially important because of the increasing volatility in state revenue.”

“Credit rating agency analysts pay attention to how states structure their reserves, whether policymakers are disciplined about controlling deposits and withdrawals, and how officials integrate rainy day fund policy with spending and revenue decisions,” the study concluded.

Further details on Inslee’s carbon tax will be released in January when the legislature convenes for session.

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