How prepared is Washington for a recession?

How prepared is Washington for a recession?
How well is Washington prepared for another recession? Better than last time, according to State Treasurer Duane Davidson. Photo: freepik.com

As the legislature begins negotiations over the Senate and House budget proposals, some state officials are gauging Washington’s readiness for a potential recession similar to the one that occurred from 2008-2013. During that time, 16 of the 17 fiscal quarters saw a decrease in state revenue projections, and the total revenue decline was more than $12.6 billion, according to a 2012 report from the state Office of Financial Management.

The scenario was mentioned by State Treasurer Duane Davidson at the Economic Revenue and Forecast Council’s Mar. 22 meeting and has been discussed several times in the past. However, Davidson told Lens that although the state’s financial condition has room for improvement, “we’re in better shape than we were.”

That opinion is shared by Deputy Treasurer Jason Richter. “I think all things considered…the state is ending fiscal year 2019 in a strong position. There’s always room for improvement, but compared to historical numbers, things are pretty good.”

One of the reasons for that is the budget stabilization account, also known as the rainy-day fund. Created in 2007 through a constitutional amendment, the account existed at the time of the recession but had no funds. The account receives a certain percentage of surplus revenue and is meant to pay for emergencies such as revenue shortfall. Unless the money is spent on that or other declared emergencies, a supermajority vote by the legislature is required to withdraw from the account.

The current 2017-19 budget leaves $1.65 billion in the rainy-day fund by the end of the biennium. Under the proposed Senate budget, there would be $2.97 billion at the end of the 2019-21 biennium, while the House budget would leave $2.45 billion. For comparison, the two budgets spend more than $52 billion. By the end of the 2021 fiscal year, the House budget would leave $209 million in the Near General Fund State (NGF-S), the primary fund used for the operating budget. The Senate proposal leaves $564 million in the account.

However, by the end of 2023 fiscal year, the two budgets leave what Davidson says is a relatively small amount of money in the NGF-S account. The Government Finance Officers Association recommends retaining at least two months’ worth of unrestricted reserves in the general fund. The Senate budget proposal would leave $77 million, while the House version would leave just $9 million; the House budget would spend $72 million per day, according to the Washington Policy Center.

“To prepare for a recession you’ve got to make sure that….they’re going to make a conservative enough budget that there are some funds in the bank,” Davidson said.

ERFC’s economic and revenue forecasts include both a baseline, optimistic and pessimistic forecasts. In the latest pessimistic outlook, the state would see a $770 million drop in revenue in 2020, $1.78 billion in 2021, $2.577 billion in 2022 and $2.951 billion in 2023.

Were Washington to experience a revenue drop comparable to that of the Great Recession, a estimate by Davidson and Richter would have the state lose $2.9 billion in 2020, $3.1 billion in 2021, $3.2 billion in 2022, and $3.3 billion in 2023.

If that happened, the state would likely be able to fund one year with existing money in the NGF-S and rainy-day fund before having to make substantial cuts.

However, the latest ERFC report shows that the state’s revenue streams are at an all-time high of $50 billion for 2019-21, $6 billion more than the previous biennium.

At the same time, “one can assume we’ll likely slow down at some point,” Richter said.

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