New Budget Forecast Details Challenges Ahead

The economy isn’t done taking a toll on the state budget. According to the detailed budget forecast released today by the Office of Financial Management (OFM), current revenue expectations will be $3 billion short of the amount needed to continue our current commitments to education, communities, health, and economic security.

Revenue

On the revenue side, the projection shows the importance of the revenue increases passed this year. Without those revenue increases, the gap through fiscal year 2013 would be $2.4 billion larger. In fact, the revenue increases account for more than one-fifth of all revenue growth in the next three fiscal years (see graph below).

Spending

On the spending side, the forecast projects the cost of continuing to meet our current commitments. Baseline expenditures are expected to rise by a modest three percent annually due to inflation, population, economic trends, and so on. However, this does not include the need for additional funding to:

• Replace the temporary federal recovery funding that is currently paying for health care, education, and public safety programs normally funded by the state ($2.0 billion)
• Implement improvements in basic education mandated in 2010 ($700 million)
• Meet statutory requirements to fund voter approved measures including I-728 (which funds school district efforts in class size reduction, extended learning, early learning, and professional development-$811 million), I-732 (which provides cost-of-living adjustments to education professionals-$225 million), and I-1029 (which provides training for homecare workers-$43 million)
• Cover an expected shortfall in the Education Legacy Trust Fund, which funds education efforts from kindergarten to higher education ($139 million)
• Fully pay pension obligations ($702 million)

Aside from the statutory requirements of the initiatives listed above, the budget projection does not assume any restoration of the more than $4 billion in cuts enacted in the last two years.

Balance

The general fund balance is expected to be $3 billion in the red with $311 million in the rainy day fund. If that deficit and current policies were carried forward through the 2013-15 biennium (a scenario which is not possible given the requirement to balance the budget), the deficit would increase to $8.8 billion by the end of fiscal year 2015.

Risks

The budget projection assumes that the state will receive a six-month extension of federal Medicaid funding in the current fiscal year. If Congress does not act, Washington State will lose up to $480 million in anticipated revenue, necessitating immediate cuts in the current budget. The outlook for this funding is looking gloomy at present. (Just today, the Senate failed to pass a scaled-back version of the bill that would have provided an estimated $338 million for Washington State.)

In addition, a number of ballot initiatives expected to be on the ballot this November could cost the state hundreds of millions of dollars in revenue in the coming years.