State lawmakers since May have been calling for a special session to address a significant operating budget revenue shortfall for the current biennium. Framing overall discussions could be the various perspectives regarding the current state and root cause of Washington’s financial situation. Some legislators caution against an “austerity” budget, others express optimism, and some economists blame the state tax system – while still others highlight unsustainable levels of operating budget spending in recent years and previous raids of the rainy day fund.
Although the state has experienced a cash flow deficit in recent months, actual tax revenue collections are still expected to be not only higher than the prior two years but are also expected to increase over the next two biennia.
The state Economic and Revenue Forecast Council’s (ERFC) June revenue forecast estimated general-fund state (GF-S) revenue for the current biennium will be $46.1 billion – a $2 billion increase from 2017-19. The forecast also anticipates GF-S revenue will grow to $50 billion in the 2021-23 biennium and $54.5 billion in 2023-25.
A new ERFC report found that GF-S revenue in the past three months was $3.92 billion, which is $643 million higher than the June forecast. It’s also higher than revenue collected during the same time period last year.
However, ERFC Executive Director Steve Lerch told colleagues at a Sept. 3 meeting that the revenue discrepancy compared to the June forecast was due to an unexpected surge in retail sales, possibly from businesses reopening after the initial shutdown. It’s unknown whether the revenue will remain that high in the long-term.
“How much of that is sustainable, and how much of that represented pent up demand?” he said.
Nevertheless, fiscal hawks say the state’s budget problem isn’t a matter of insufficient revenue, but rather an economy that is no longer able to sustain state spending increases. Although Governor Jay Inslee vetoed $445 million from the 2020 supplemental budget before its signing, it still represented a $555 million increase for the 2019-21 baseline budget.
Washington Policy Center Government Reform Director Jason Mercier told Lens “even before the pandemic, you had questions about whether this was a sustainable thing to do. At some point you’re going to have a recession. You knew it was coming up.”
Senate Ways and Means Chair Christine Rolfes (D-23) told Lens that financially the state is well prepared to handle the current shortfall, citing the state’s $3 billion in total reserves, in addition to $200 million tapped from the budget stabilization account (BSA) for the 2020 supplemental budget to address COVID-19. She added that the state’s unemployment insurance trust fund prior to COVID-19 outbreak was fully funded, while other states were still paying back their loans.
“I think we’re in a phenomenal place,” she said. “The problem is phenomenal isn’t good enough.”
Former House Speaker Frank Chopp (D-43) argues that the state should pass new progressive taxes “to avoid austerity budget cuts,” an argument also made by some economists. While even key Republican lawmakers concede that at this point it’s unfeasible to merely cut spending, an outright $4.5 billion reduction in the 2019-21 operating budget spending would still represent a $3 billion spending increase compared to 2017-19 levels.
“There’s nothing austere about our budget,” Senate Ways and Means Committee Ranking Member John Braun (R-20) said.
Last year the legislature enacted a $52.2 billion operating budget; a roughly 18 percent increase compared to the $44.7 billion 2017-19 budget. In addition to a variety of new taxes, the spending increases were made possible by $1 billion in unanticipated state revenue. At the time, Rep. Drew MacEwen (R-35) cautioned colleagues on the House floor prior to approving the budget that the new spending would inevitably result in cuts if a recession occurred.
For Braun, last year’s session represented a pivotal moment when the budget became unsustainable. State spending has increased since the 2013-15 biennium from $33.9 billion to roughly $54 billion for the current operating budget – a 59 percent spending increase, though much of that spending was in K-12 to comply with the 2012 State Supreme Court’s McCleary ruling.
At the time, Braun was chair of the Ways and Means Committee and the Majority Coalition consisting of Republicans and one Democrat controlled the Senate. He said the new spending for basic education served a specific purpose.
“We had legitimately not been funding K-12,” he said.
However, Braun points out that the spending increases accelerated even after the state high court found the legislature in compliance and more than half the operating budget by then was dedicated to K-12. During debate over the 2018 supplemental budget, then-Rep. David Taylor (R-15) told colleagues on the House floor that “we are due for a recession. It’s just a matter of time. We’re living high right now, but instead of saving…we’re spending that money.”
Braun said that in 2019 “they (Democrats) were given the best budget situation the state has seen in this century—probably in our history. The response was ‘It’s a budget crisis – we’re going to have to raise taxes.’ (It) made it clear that there was no point at which there’s enough money.”
House Minority Leader J.T. Wilcox (R-2) shares a similar perspective. “Who would think the economy could sustain that? What people are unwilling to understand is that need is infinite. It never stops growing.”
Rolfes argued that the increased spending in the current budget reflects higher demand on public services due to a larger state population, with almost 200,000 new residents between 2017-2019.
“The state was growing, so more kids in kindergarten and more people in hospitals,” she said. “I wouldn’t argue that we shouldn’t have done that.”
She added that the budget also sought to restore prior investment in areas such as behavioral health. “My goal with this pandemic is we don’t eviscerate it again. We at least hold steady until we can continue to rebuild it.”
That said, Braun notes that state spending in just two years far outpaced that of statewide personal incomes per capita, one of the fastest growing in the nation. Since 2017, personal incomes have increased from $60,628 to $64,898 – a seven percent jump. While state spending has grown by 60 percent since the 2013-2015 biennium, personal incomes grew by 24 percent during the same time period.
“Growth of the economy limits what the state can finance,” Wilcox said. “You should never outrun that. Absent this unsustainable rate of increase, we would have the dollars necessary, that just a few years we thought was sufficient.”
When it comes to the rainy day fund, Rolfes said she considers reserves to be at healthy levels, while Wilcox contends they would be even stronger if the legislature hadn’t raided the fund in 2018. The money was from unanticipated property tax revenue and used to provide a one-time property tax reduction.
“We wouldn’t have to worry about the current biennium,” Wilcox said. “I have no problem with spending the rainy-day fund, now that we have a rainy day.”
Rolfes says the move was an act of “transparency” after finding the property tax increase enacted the year prior was higher than originally thought.
At that time, State Treasurer Duane Davidson warned that the move could backfire if that money was needed during an economic recession.
Going forward, Rolfes said it’s hard to know whether future operating budgets will grow or not because the long-term effects of COVID-19 on public services such as K-12 and childcare aren’t known, and telecommuting for work and online learning could also add pressure for further state investment in expanding broadband access.
“If we can maintain what we have, we’re doing well,” she said. “I think the state economy is going to transition and our budget…will have some transitioning. It’s just so hard to know, because it’s happening so fast.”
However, Braun said: “We need to push back on additional spending. At some point, it’s going to have to come down to the voters to say: ‘We don’t want more taxes.’”
Of the state’s current financial situation, Mercier notes that the state could be operating from a stronger position: “Would Washington be having a problem right now? Yes, but we would be addressing it through our reserve, rather than budget cuts or tax increases.”
ERFC’s next economic forecast will be released Sept. 23.
This story is the first in a series that will examine Washington state’s budget and financial situation.