The Final Budget Cuts, Part Two: Education and Opportunity

Broadly available education and opportunity is fundamental to the future of our state. Education opens doors to better job opportunities, higher wages, and greater job security. Success in today’s competitive, knowledge-based economy will require more than a basic education. Our children need schools that provide sophisticated, high-quality learning environments so they can graduate with the skills and knowledge to succeed in the global marketplace.

This year's budget process resulted in significant budget cuts in education, as shown in the table below (click on it to see a larger version).


In K-12 education, the largest cuts were to two voter-approved initiatives (I-728 and I-732). I-728 called for funding to school districts for specific quality improvements such as class size reduction, extended learning, early learning, or professional development. I-732 called for a cost of living adjustment for education professionals. This cut will diminish the state's ability to attract and retain high quality teachers, a proven factor in improving student performance in school. A number of other education reform efforts were also suspended, eliminated, or reduced.

Higher education will also suffer under the new budget. Despite federal stimulus efforts, community and technical colleges will have $226 million less in state support during a time when the need for workforce training is growing dramatically. In addition, the university system will receive $384 million less in state support. Tuition will rise and services will be cut as a result.

These cuts will harm the long-term economic competitiveness of our state as well as the availability of quality education for all of Washington's students.

* Note: Federal stimulus funds not directly affecting the near-general fund balance are not included.

When Will the Recession Be Over?

According to the Economic and Revenue Forecast Council, the end of the recession is in sight--as early as later this year. That's good news.

However, the end of the recession only means the economy as a whole will be growing again. It will take some time before the labor market rebounds. According to the Forecast Council, the unemployment rate in Washington will rise through the third quarter of 2010 and then only drop slightly.


The green line below shows one measure of the size of the state economy--personal income (an estimate of the total income received by all Washingtonians from all sources), adjusted for inflation. The purple line shows the projected unemployment rate.

The Final Budget Cuts: Part One

Last week on schmudget we posted on how we got to an $8 billion state budget deficit, what lawmakers did to address it, and the role of federal stimulus money in shoring up the state economy.

In the next few days we will take a close look at the $6.7 billion in state budget cuts that lawmakers enacted. We will explore the state budget in each of four core value areas: Education and Opportunity, Healthy People and Environment, Thriving Communities, and Economic Security. These values make up the framework for our Progress Index report and represent a shared vision for the state.

The table below sums up the total budget cuts signed into law by the Governor last week in both the current and upcoming biennia. It also shows the federal stimulus funding used to offset the budget cuts.


Stay tuned to schmudget for more detail. First up: Education and Opportunity.

The State Budget and Federal Recovery Funds

This post contains corrected numbers.

Deep cuts in state budgets during a recession can have a significant harmful impact on the economy. In recognition of this fact, the federal government passed the American Recovery and Reinvestment Act of 2009 (ARRA), which includes significant fiscal aid to Washington State.

The recently enacted state budget relies heavily on ARRA funding to partially offset the effects of cuts in health care, education, public safety, and economic security.*

Health care**
The largest component of federal stimulus funding is an increase in federal funding for Medicaid, the primary source of public health insurance for lower income families. The increased federal contribution allows lawmakers to cut state spending on health care without reducing total funding for the program. Washington State is expected to receive $1.8 billion in Medicaid funding from ARRA.

However, the state budget does not take full advantage of ARRA funding for Medicaid because it cuts too deeply. Examples of cuts that cause a loss of federal money include:

• A $33 million cut in reimbursements for providers of Medicaid and SCHIP managed care services will result in a loss of $44 million in federal money, more than doubling the total size of the cut.
• A $38 million cut in nursing home rates results in a loss of $56 million in federal funds.
  
• An $18 million cut in reimbursements for pediatric services results in a $25 million loss in federal funds.

Education
Another component of ARRA is the State Fiscal Stabilization Fund, which provides flexible funding for education and other programs. In education, this fund is being used to partially offset devastating cuts in three areas:

• $176 million for levy equalization, which assists property-poor school districts that have difficulty raising sufficient property taxes to fund local schools.
• $562 million for a voter-approved (I-728) initiative that provides funding to school districts for quality improvements such as class size reduction, extended learning, early learning, or professional development.
• $81 million for higher education institutions.

Public Safety
The remainder of the State Fiscal Stabilization Fund ($182 million) is appropriated to the Department of Corrections to offset cuts in public safety and rehabilitation programs.

Economic Security
ARRA also expands federal support for the state’s WorkFirst program, which provides temporary assistance to families with very low incomes. During the recession, the need for WorkFirst has grown significantly. TANF contingency funds ($193 million) is intended to help pay for the increased need. Another $12 million is made available to assist in the state’s child support collection program.

* ARRA also included significant fiscal relief that does not directly impact the near-general fund budget.
** Separately from ARRA, Washington State will benefit from the reauthorization of the State Children’s Health Insurance Program, which enhances federal support of state efforts to insure lower income children.

Update: How to Lower Costs of Climate Change Policies for Consumers

The Budget & Policy Center is releasing a new policy brief today on a federal climate rebate proposal. With cap-and-trade legislation currently being drafted in the U.S. House Energy and Commerce Committee, it is critical that lawmakers adequately address the regressive financial impact that any carbon-pricing policy will have on lower and moderate income households. The paper provides a framework for how a climate rebate assisting lower and moderate income households can be integrated into federal climate policy.

A climate rebate represents an effective and efficient strategy for mitigating the household budget impact of a cap-and-trade system. It would utilize existing benefit and tax structures to deliver a cash rebate to lower and moderate income families, would be fully funded from cap-and-trade emission permit revenue, and would reach virtually all eligible families.

An important strength of a climate rebate is that it would address the shortcomings of other consumer assistance proposals, such as a utilities approach. For more information on how a climate rebate would work, please refer to our paper.

Update: Yesterday, the U.S. House Energy and Commerce Committee concluded the markup of the American Clean Energy and Security Act of 2009 (H.R. 2454) by voting to move it out of committee. Introduced by Reps. Henry Waxman (D-CA) and Ed Markey (D-MA), the bill (commonly referred to as Waxman-Markey) would cap the emissions of greenhouse gases in order to curb climate change.

Importantly, the Waxman-Markey bill includes provisions to protect lower income consumers from the financial impact of climate policy, similar to the recommendations outlined in our recent policy brief (based on analysis by the CBPP). In particular, the bill would allocate 15 percent of emission permit revenue to fully offset the average loss in purchasing power for lower income consumers. For more information on the bill, refer to the Center on Budget and Policy Priorities’ recent report.

Closing the Deficit: An Unbalanced Approach

This afternoon, the Governor will take action on an operating budget that must close an $8 billion deficit, likely the largest in state history. Rather than take an approach that balances raising revenue and reducing spending, the budget passed by the Legislature relies heavily on deep budget cuts in education, health care, economic security, public safety, and the environment.

The graph below shows how the Legislature’s budget closes the three-year deficit. (The numbers may differ slightly once the Governor exercises her veto power.)

• Budget cuts: The budget makes a total of $6.7 billion in near-general fund cuts. We'll be providing more detail on these budgets cuts later in the week. Federal stimulus funds offset $3 billion of these cuts, however this number is somewhat misleading because other spending cuts reduce the federal funds the state is entitled to receive.


• Revenue: Actions on revenue are expected to raise a net $242 million. These include restructuring the resale certificate program, opening nine liquor stores on Sunday, and opening liquor stores in malls during the holiday season.


• Rainy Day Fund: $445 million is transferred from the Rainy Day Fund, leaving a balance in that account of $250 million.


• Capital budget resources: The budget uses $777 million of funds that are typically appropriated in the capital budget.


• Other transfers and changes: An additional $389 million in funds is accessed by transferring money from other accounts and making other marginal changes.


• Ending balance: These actions leave an estimated $573 million in an unrestricted balance, although recent revenue collections suggest the ending balance could actually be lower.

$8 Billion Deficit: What a Difference a Year Made

Tomorrow, the Governor is expected to sign a budget that has the unenviable task of closing an $8 billion near-general fund deficit, likely the largest shortfall in state history.*

How did we get to $8 billion? The graph below divides the deficit by 1) the shortfall that was anticipated in June 2008, 2) the increase in cost estimates since June 2008, and 3) the decrease in revenue expectations since June 2008.


About one quarter of the $8 billion deficit was already anticipated in June 2008, after the Governor signed the supplemental budget. In 2007 and 2008, the Legislature maintained long-term investments in key public priorities, but failed to enact revenue solutions that would ensure funding beyond that biennium. As a result, after passing the 2008 supplemental budget, state forecasters estimated there would be a nearly $2 billion deficit by the end of fiscal year 2011.

While the forecasters expected a weak economy, they were not prepared for the economic crises that hit last fall. As the economy plummeted, the state’s deficit forecasts quadrupled.

Here’s why: a suffering economy takes a toll on the state budget both in terms of costs and revenue. On the cost side, the recession increased the need for public supports that provide economic and health security. In total, between June 2008 and March 2009 the estimated price tag of continuing current commitments rose by roughly $600 million.**

But the biggest problem for the state budget comes from the loss of revenue. Between June 2008 and March 2009, the official state revenue projection fell by $5.5 billion, an eight percent reduction. The largest component was a $2.9 billion decrease in expected sales tax revenue because of a sharp decline in retail sales. In addition, the housing crisis took its toll; revenue from the real estate excise tax fell by 25 percent from what was expected in June.

So that’s how we got to $8 billion. Tomorrow we’ll discuss what this year’s budget writers did (and didn’t do) to close the gap.

* Often, projections of budget deficits use estimates of additional policy costs that are not generally included in the maintenance budget. For this analysis, we are only including the stricter definition of the maintenance budget, which results in a more conservative estimate of the deficit.
** $600 million is a rough estimate based on unofficial Senate Ways and Means projections from Summer 2008.

Series on the State Budget Crisis: Part Three, States Raise Taxes

States are struggling to balance their budgets during the current economic recession. As we discussed in yesterday's post, many have opted to cut spending as a result. But given the sheer size of state budget shortfalls, cuts alone will not be enough to solve the problem without long term harm to essential public services.

According to a new report from the Center on Budget and Policy Priorities, instead of a cuts-only approach, states are increasingly employing a combination of budget solutions that involves drawing down reserve funds, maximizing the use of federal dollars, and raising taxes.

As the map below shows, so far in 2009 sixteen states have raised new revenue through tax measures. Another 17 are giving serious consideration to doing so. These initiatives are in addition to revenue actions taken in states in late 2007 and 2008 as the recession’s effects began to be felt.


In addition, the report finds that states that raised taxes during the 2001 recession were just as fast to rebound from the recession as states that did not, even though they were typically climbing out of a deeper hole.

Series on the State Budget Crisis: Part Two, Cuts to Vital Programs

As we mentioned in yesterday's post, almost every state in the nation is facing budget deficits because of the weakened economy. The federal American Recovery and Reinvestment Act includes roughly $140 billion in fiscal relief for state governments. But the recovery act funding will only be enough to fill about 40 percent of the $350 billion to $370 billion shortfall that states will face in the next two-and-a-half years.

According to a new report from the Center on Budget and Policy Priorities, at least 36 states have addressed their shortfalls by cutting spending. As the report notes, cuts in state budgets worsen the recession by reducing overall economic activity. Reductions in state spending translate into fewer state jobs, canceled contracts with vendors, lower payments to businesses and nonprofits that provide services, and cuts in benefit payments to individuals.

Importantly, cuts in state spending also particularly hurt the most vulnerable residents in the state. The report outlines five areas in which states have made cuts. Washington State has made cuts in all of these areas.

• Public health programs: At least 19 states have implemented cuts that will affect low-income children’s or families’ eligibility for health insurance or reduce their access to health care services.


• Programs for the elderly and disabled: At least 21 states plus the District of Columbia are cutting medical, rehabilitative, home care, or other services needed by low-income people who are elderly or have disabilities, or significantly increasing the cost of these services.


• K-12 education: At least 22 states are cutting K-12 and early education.


• Colleges and universities: At least 30 states have implemented cuts to public colleges and universities, resulting in cuts in faculty and staff and tuition increases of 4 percent to 15 percent.


• State workforces: At least 39 states and the District of Columbia have made cuts affecting their state workforces. At least 27 states and the District of Columbia have instituted hiring freezes, 10 have announced lay-offs, 15 have reduced state worker wages, and several have delayed scheduled pay increases (including cost of living adjustments).

Click on the chart to see a state-by-state view of cuts in these budget areas.


Tomorrow we will post on states that have raised taxes to help close budget deficits during the current recession.

Series on the State Budget Crisis: Part One, The Big Picture

Most states, including Washington State, are facing deep fiscal troubles. A new series of reports from the Center on Budget and Policy Priorities analyzes the effects of the state fiscal crisis and how states are responding. Today’s schmudget post looks at the overall state deficit picture, tomorrow’s will look at budget cuts states are undertaking, and Friday’s will look at states that are considering tax increases.

Washington is not alone among states that are in deep fiscal trouble. According to a new report from the Center on Budget and Policy Priorities, at least 47 states are dealing with significant budget shortfalls. Combined budget gaps for the remainder of this fiscal year and state fiscal years 2010 and 2011 are estimated to total more than $350 billion, the report says.

As the graph below shows, in fiscal year 2009, total state budget shortfalls amount to $106 billion. The estimated budget deficits going forward show the problem is expected to get worse. The CBPP estimates that FY 2010 deficits will amount to $145 billion and FY 2011 deficits will be $180 billion.


According to this article in the TNT, Washington State Governor Gregoire told the paper's editorial board that she anticipates state revenue forecasts will be down in June and September as revenue collections continue to fall.

Here in Washington, as in many other states, the problem of inadequate revenue to meet the needs of normal growth in state spending is not going away. An honest conversation about how to move forward and preserve important progress that has been made through state investments in health care, education, communities, and economic security must continue.

Tomorrow we will look at the deep cuts in state investments that have occurred throughout the country.

High Cost of Subprime Lending Featured on KUOW

I was interviewed on KUOW this morning about our report "The High Cost of Subprime Lending in Washington State." The full transcript and audio are available here and the audio is also embedded below.



Among other findings, our report points out that over 40 percent of the mortgages lent to African Americans and Hispanics in 2006 were high-cost, compared to around 22 percent for non-Hispanic whites and Asians (see graph below). Even among borrowers whose incomes were twice the area median, 39 percent of African-Americans and 37 percent of Hispanics had high-cost loans.

Uninsurance High Among Unemployed

A new study by the State Office of Financial Management contains detailed analysis of health insurance by employment status. The report is rich with information, but unfortunately the latest data were collected in Spring 2008--before the bottom fell out of the state labor market. The state unemployment rate has risen dramatically since then, making it likely that the health insurance picture has also worsened.

The report illustrates the difficulty of obtaining and maintaining insurance for unemployed workers: 44 percent of unemployed adults ages 19-64 were uninsured, compared to 14 percent of employed adults.


As employment-based health insurance becomes less available, the need for public programs grows. Despite this growing need, the Governor is expected to sign a budget that will eliminate around 40,000 Basic Health Plan slots.

Washington TANF Caseload Increases Match State Forecasts

Temporary Assistance to Needy Families (TANF) caseloads have risen sharply in Washington over the last year. Since April 2008, total TANF caseloads in the state went up by 9,000. The increase to over 60,000 cases in April this year can be attributed both to rising numbers of people entering the program and decreasing numbers of people exiting.

Back in November, the Caseload Forecast Council predicted that TANF caseloads would remain under 60,000 through 2011. In March, the Council recalibrated its forecasting to include more recent economic trends and projections such as rising unemployment.

As the graph below depicts, the new forecasting seems to be working. In March, the Council predicted TANF caseloads would be 61,550 in April and the total caseloads were actually 60,809. Currently, the state predicts that TANF caseloads will rise by 13 percent this year and 11 percent in 2010. Caseloads are projected to decrease by less than one percent in 2011.


Washington is applying for the maximum allotment from TANF contingency funds, including funds from the federal stimulus bill to support increasing caseloads and other TANF efforts at the state level. The total amount for fiscal years 2009 and 2010 will be $190 million. All the funds received will be used to backfill rising caseload costs and help preserve basic services.

Note: TANF caseloads are affected by seasonal employment patterns. They tend to rise during the fall and winter and fall during spring and summer.

UPDATE: High Unemployment Across the State

Between March 2008 and March 2009, the state unemployment rate rose from 5.1% to 9.7%. Unemployment rates grew in every metropolitan area of the state as well, as shown by the table below:


UPDATE: I neglected to include the unemployment rate for the Washington side of the Portland-Vancouver-Beaverton metropolitan area. It went from 6.3 percent in March 2008 to 13.8 percent in March 2009.

March Mass Layoffs Are Worst on Record

In March, there were 2,933 mass layoffs across the country, resulting in close to 300,000 new unemployment insurance (UI) claims. A mass layoff, as defined by the Bureau of Labor Statistics, is when a single employer lays off 50 or more employees.

The number of mass layoffs and new UI claims were the largest on record; the data go back to 1995. The graph below shows the number of new UI claims due to mass layoffs over the last nine years. The previous peaks were associated with the 2001 recession and terrorist attacks and Hurricane Katrina in 2005.


Microsoft announced today that it will layoff about 1,200 workers in Washington State as part of its plan to eliminate 5,000 jobs this year. To follow that news, click here.

*The data in the graph have been seasonally adjusted, which means that the BLS has accounted for seasonal variations in employment.