Washington state is expected to receive billions in unexpected revenue in the 2017-19 biennium, and the legislature’s intent via the 2018 supplemental operating budget is to spend every penny of it.
However, some of that spending is under legal challenge, and some state officials say a good opportunity to reduce the state’s financial obligations one way or the other is getting squandered.
Already the state will find itself in a precarious spot at the end of the 2021 fiscal year. That’s when the general fund’s projected end balance will be $103 million.
“For a state, that’s not much,” State Treasurer Duane Davidson said. “That’s the lowest it’s been in a long time.”
Deputy Treasurer Jason Richter agrees. “You have to go back to 2011 to get something lower than that. We just don’t feel that is a sustainable approach to our long-term fiscal year to be running the end balance to nothing when times are relatively good.”
Richter’s warning bears similarities to criticisms made by British politician Dan Hammond in the midst of the Great Recession of then-UK Prime Minister Gordon Brown’s administration in a speech that quickly went viral on Youtube. “Other nations used the good years to caulk their hulls and clear their rigging – in other words, to pay off debt. But you used the good years to raise borrowing yet further.”
During this year’s legislative session, lawmakers used an unusual technical maneuver to dip into the state’s budget stabilization account (rainy day fund) before the funds were even deposited to circumvent a three-fifths majority requirement. A lawsuit has now been filed against that provision, claiming it violates a constitutional amendment (Article 7, section 12) – overwhelmingly approved by voters – that has surplus revenue go into the rainy-day account.
Legal issues aside, the preemptive raid of the rainy day fund has greater fiscal implications that Davidson says could come back to bite if another economic downturn occurs.
“Our biggest concerns are our ability to handle an upcoming recession,” he said. “That’s the whole purpose of the budget stabilization account.”
The rainy day fund is projected to have $1.3 billion at the end of the fiscal year in June. However, that’s just six percent of the state’s $21 billion expenditure for the upcoming fiscal year, Richter said.
Interestingly enough, the legislature can raid the rainy day fund on a simple majority vote without resorting to questionable provisions, but only once the emergency reserves reach 10 percent of expenditures. That amount would have nearly been reached had lawmakers put the surplus revenue there, Davidson said.
“Our suggested target is that when times are good…we should really aim to fully fund that rainy day fund up to that 10 percent,” Richter said.
According to a 2018 Debt Affordability Study published by the Treasurer’s Office and provided to every state legislator:
- In the last 20 years, Washington’s outstanding general obligation debt has increased from $6.8 billion to $19 billion (almost 40 percent of it for transportation projects);
- Taxpayers will have spent $2 billion by the end of the 2018 fiscal year on debt payments;
- Washington is ranked by Moody’s and Standard & Poor’s (S&P) as sixth-highest in the nation for debt-per-capita. At $2,717 owed per person, the state debt ratio is higher than California’s, and more than twice the national median of $1,000 per-capita; and
- Despite this, the state’s credit remains high (Aa1 by Moody’s, AA+ by S&P, and AA+ by Fitch).
Yet, Davidson said Washington’s debt load – made possible largely due to historically low interest rates – is “decreasing our ability basically to borrow more” if need be on critical infrastructure issues such as a bridge collapse or damage caused by an earthquake.
With the era of low interest rates about to end, the state won’t have the same borrowing capacity as it has had in recent decades, he said. “We desperately need to develop policies at the state where we’re… a pay-as-you-go kind of state. We (once) had the reputation of being that kind of state. Debt becomes so appealing, because of the low interest.”
Also compounding the state’s finances is a provision in a recent federal tax reform bill that prevents states and cities from refinancing their debt. In November, Davidson held the largest bond refunding series sale in state history with $814 bonds sold, saving roughly $138 million in debt costs.
Granted, the debt affordability study also noted the state’s “high income levels, solid population and income growth, and a diverse state economy” as major contributors to its high credit rating.
Additionally, Richter says the state’s 25-year debt, in contrast to the 30-year debt issued by municipalities, makes Washington’s portfolio “quite conservative.”
But there are other issues at play in the state’s financial situation. On top of the $19 billion debt, the state also has $13 billion in unfunded pension liabilities. In fairness, it’s one of the best fund systems in the nation at 84 percent. Also, the 10-year average gain for those investments has been 5.5 percent, higher than the 3.6 percent for treasury bonds. However, that liability is $1 billion more than what it was in 2015.
An economic downturn could raise that figure higher, and a likely drop in state revenue would merely add insult to injury.
“We have to be ready and prepared for things to slow down a bit,” Richter said.
Davidson said: “You sometimes really just have to prioritize what you do (with revenue) and space that out over time. A saying my grandfather always had was: ‘There’s always more great ideas than there’s money to pay for them.’”