New Slideshow on State Economic and Fiscal Outlook

Watch the 12-minute slideshow (audio included) below to get a better understanding of the state economic and fiscal outlook, including ideas for a balanced solution to the budget shortfall.

Click on the green “play” button on the bottom to begin the narrated slide show. The large black arrow on the right-hand side just skips forward to the second slide.

Note: if you cannot see the presentation try using the Firefox browser instead of Internet Explorer.

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.

The House and Senate Budgets: Different Priorities?

Like the Senate budget, the House budget contains deep cuts to core public investments. Much of the focus of the conversation today has been about the differences between the two. One emphasizes access to workforce training programs. The other, helping maintain a basic standard of living for people who cannot work due to disability. And so on.

But the differences in priorities are less striking than the fact that they both demonstrate one prominent priority: budget cuts over tax increases. On that, they agree.

As the graph below shows, the budgets are essentially identical in terms of the total size of the cuts, the total amount of new resources, and the size of the ending fund balance.*


So maybe the differences between the two budgets is a distraction from the real question: is either one consistent with Washington State's values? Policymakers should offer a third option, one where we agree together to sustain smart investments in education, health, community, and security.


*These graphs show the change in the near-general fund balance sheet. They do not include federal recovery funds. The two budgets use different assumptions about federal money that will have to be ironed out; more on that tomorrow.

Senate Budget Proposes Devastating Cuts to Basic Health

Basic Health is a core component of the state's commitment to ensuring affordable access to health insurance for all Washingtonians. It is more important than ever in this economy.

The Senate budget proposes reducing the number of people receiving health insurance through Basic Health from 100,000 to 60,000 (see graph).


Often, cuts in Basic Health are reached by closing enrollment; when people leave the program, the state does not open that slot for new applicants. By doing so, the state restricts the availability of public health insurance, but does not immediately kick people off the program.

Contrary to some claims, it is unlikely that limiting new enrollments and other measures will be enough to cut enrollment to 60,000. The Senate budget documents acknowledge this by giving the Health Care Authority the ability to "disenroll" members with incomes as low as $18,310 (for a family of three).

Senate Budget Does Not Take Full Advantage of Federal Funds

The Senate budget contains $2.7 billion in cuts for the Department of Social and Health Services, the primary agency responsible for health care and economic security programs in the state. These cuts are partially replaced by new federal funding. However, the Senate proposal cuts too deeply, resulting in a budget that does not fully take advantage of federal funds.

In order to keep from losing available federal recovery funds, the state must avoid deep cuts such as these by raising new revenue.


Federal increases
Of the $2.7 billion in cuts, only 63 percent is offset by increases in federal funding. This includes an increase in the federal government's share of Medicaid spending, a boost in food assistance funding, and money available to pay for caseload increases in TANF.

Lost federal money
Federal recovery funds are contingent on continued state investments in these areas. Fully 25 percent of the cuts in DSHS are associated with loss of federal money. Many of these cuts are in the Medicaid program. Some examples:

• 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 $46 million cut in reimbursements for inpatient hospital stays results in a loss of $61 million in federal money.
• A $38 million cut in nursing home rates results in a loss of $56 million in federal funds.
  
• A $18 million cut in reimbursements for pediatric services results in a $25 million loss in federal funds.
  

Other cuts not replaced by federal funding
Aside from those mentioned above, there are $311 million cuts in funding for health care and economic security programs that will not be replaced by federal dollars and are therefore real cuts that affect the health and economic security of Washingtonians. The largest include severe restrictions on GA-U eligibility and reductions in mental health services.*

* A $69 million cut in TANF is listed in the LEAP documents as not having a direct federal impact. However, this may not fully account for limitations on federal TANF money. We'll update this as we find out more.

Source: fiscal.wa.gov

Senate Budget: Bold Action Needed

The Senate budget will be released today, three months after the Governor’s proposal. The Senate version is unlikely to offer a new vision for solving our state’s historic budget deficit in a way that is consistent with the state’s values. Rather, it is expected to be a new version of the same all-cuts strategy.

Our state’s fiscal problems are too big to be solved with an all-cuts approach. The lasting damage to Washington families and infrastructure by deep cuts will harm our ability to recover when the economy bounces back. The path to a just and equitable society is not paved by dramatic budget cuts that leave hard working Washingtonians with no health insurance, ambitious students with less access to college, and people who are unable to work with few options for financial security.

Instead, we need leadership from our policymakers that includes bold action on raising the revenue necessary to invest in education, community, health, and security. Washington’s households and businesses need these public investments in order to weather the economic storm and prosper as the economy recovers.

We'll be posting analysis on schmudget throughout the day, so stay tuned.

Eight Point What? Your Guide to the Deficit Numbers

Senate leadership has announced that they will release their budget proposal on Monday morning. There's much confusion over the size of the deficit they will need to close. The slideshow below will hopefully make things easier.



As noted in the slideshow, the total shortfall (the difference between revenue and the maintenance budget) is about $8.1 billion. This does not include additional baseline items often included in deficit estimates.

The legislature has already made about $600 million in cuts.* Assuming they also use the Rainy Day Fund and take the necessary policy steps to access all the available federal funds, the remaining deficit that will need to be closed through spending cuts, revenue increases, or budget gimmicks is roughly $3.9 billion. This estimate does not include leaving a modest account balance.

We will update our numbers once the Senate releases the budget on Monday.

* Immediate cuts from HB 1694 were $635 million. However, federal recovery funds offset $338 million of those cuts, so those cuts are included in the $2.9 in federal funds. The reduction in baseline spending for 2009-11 is estimated to be about $300 million.

Sources: Senate Ways & Means and Office of Policy Research (in particular, see http://www.leg.wa.gov/documents/opr/2009/WAYS_BriefingBook.pdf). Many thanks to Kriss Sjoblom from the Washington Research Council for his help with these numbers.

Official Forecast Out, Now What?

The legislative session is halfway over and the discussion over what to do about the unprecedented deficit is not much further along than when the session started. Lawmakers have been waiting to hear the final shoe drop on the budget deficit, and today it did.

Earlier this morning, the Economic and Revenue Forecast Council released the official revenue forecast upon which budgeting decisions will be made. It includes an additional reduction in revenue of $553 million for fiscal years 2009 through 2011. Now that we have this number, the caseload forecast, and more clarity on the federal stimulus package, policymakers should have the information they need to write a budget.

That budget will most certainly include deep cuts in public programs and services. Hopefully the budget process will provide a basis for a broader public discussion about the importance of those investments and the need to have an open conversation about revenue.

One of the most striking things about the forecast released today is that the ERFC now expects general fund revenue to remain flat from 2007-09 to 2009-11. This means we will have more children to educate, more elderly to care for, and more unemployed families in need of health insurance, but no additional money to pay for that growth.

We can change that outcome by considering other ways to increase revenue. Thirty Washingtonian economists and public policy experts signed a letter last month agreeing that revenue options should be on the table. "Implementing deep cuts in government spending and declining to raise revenue through tax increases is not an effective strategy to guide Washington State out of this recession," the letter said. We have all the information we need. Now it’s time to act.

$2.3 billion of bad news

I'm in Olympia at a session of the Economic and Revenue Forecast Council. The Executive Director, Arun Raha, is releasing a "early guidance" revenue forecast. As expected, the news is bad.

For the current biennium, the Council is now expecting $721 million less in general fund revenue than projected in November. For the 2009-11 biennium, they're expecting almost $1.6 billion less. That's a total decrease of $2.3 billion.

What does it mean? It means that our ability to continue our investments in education, communities, health, and economic security is threatened. It means the federal stimulus money may be swamped by declining state revenue. It means the conversation about what kind of revenue increase we should consider is even more urgent.

What's the total deficict? The number that has been used since December is $6 billion. Revenue is down by $2.3 billion. But adding those together doesn't give the complete picture. The need for public structures from health insurance to community colleges has increased since the $6 billion was published.

I'll post more details and maybe a graph or two tomorrow.

Note: Dr. Raha emphasized that this forecast is preliminary and unofficial. Economic conditions could change significantly before the official forecast on March 19. He also emphasized that the bad news is offset by the return of Ken Griffey. Jr.

House Proposal Makes Deep Cuts; Comparison With Governor's Proposal Difficult

The House Ways and Means Committee will hear the House Democrats' supplemental budget proposal (PSHB 1694) this afternoon.

Three important things to note:

• The House proposal does not assume any maintenance level changes, making comparisons with the Governor's proposal potentially misleading.

• The House proposal reduces the current budget by $172 million more than the Governor’s supplemental budget.

• Both budgets assume the same level of federal stimulus money (assumptions that may be too low given recent developments in D.C.); the House proposal assumes less total federal contribution.

The table below summarizes the key big-picture components of the House Democrats' proposal and the Governor’s proposal. Details follow.


The House proposal does not assume any maintenance level changes

Caution should be exercised when comparing the House proposal with the Governor’s supplemental proposal. Here’s why: the Governor’s budget follows the standard maintenance level approach to supplemental budgets while the House proposal does not.

The maintenance budget is intended to account for changes in the cost of doing what we’ve committed to doing in the current budget. The most significant maintenance budget changes are public school enrollment, enrollment in medical assistance programs, and corrections caseloads.

For example, the state now expects over 1,700 more students in the current school year then was expected when the current budget was passed. Because the House proposal does not account for the increased enrollment, it already starts with a reduction in services. The same money has to be spread between more students. So, for example, while neither budget explicitly proposes cuts in the general apportionment (the primary pot of state money for local school districts), the House proposal would actually spend $21 million less than the Governor’s proposal. In total, the House proposal would spend $44 million less on K-12 education than the Governor’s budget.

In medical assistance, the House Democrats propose $160.1 million in cuts, compared to $164.7 in the Governor’s budget. But that difference is misleading. Because of the lack of a maintenance level in the House proposal, it would spend $70 million less than the Governor’s proposal.

The House Democrats propose deeper cuts in total than the Governor's proposal

While there are important differences within certain programs, the 2007-09 state budget would be $172 million lower under the House proposal than under the Governor's budget. The bulk of the difference is in the three areas where the Governor responds to caseload increases and makes significant maintenance changes: medical assistance, public schools, and corrections. (see graph below).


Both budgets assume federal stimulus; the House proposal assumes less total federal contribution

Both budgets assume that $205 million in state Medicaid spending will be replaced by federal funds made available in a federal stimulus package. Prospects for significant federal funding are good and funds may be much more than initially anticipated. We'll be posting more on that soon. See Joe Turner's post in the meantime.

Both budgets also assume that $133 million in federal contingency funding for TANF will be available to allow for an equal reduction in state spending.

While both budgets assume the same new Medicaid and TANF funding, the House proposal assumes $92 million less in total federal funding. This seems to be largely because lower health care spending in that proposal would result in lower federal contribution.

Data comes from the Washington Fiscal Information website. The title of this post has changed since first published.

Five Facts About the Economy and Deficit Fact 5: The Deficit Is Already Here

Most of the focus around the budget deficit has been on the next biennium (the two-year budget cycle that will begin on July 1). It’s easy to overlook the fact that we have a deficit right now, estimated to be about half a billion dollars.

It's time to stop overlooking the current deficit. Despite the fact that the legislature has not yet passed a supplemental budget to deal with the current deficit, the Governor has already been ordering cuts in spending. And legislative leaders are weighing in. Yesterday, Senate Democrats proposed $105 million in cuts for the current biennium and House Democrats have signaled that they are working on $300 million in cuts.

When the Governor released her budget proposal in December, the documents outlining the supplemental budget were light on details, with most cuts being grouped into very large categories. For example, in the budget for the Department of Social and Health Services, there was a $55 million cut labeled only "Governor-Directed November Reduction."

Additional information is becoming available. Not surprisingly, the details are important. Hiding in the "November Reductions" are numerous cuts like the elimination of funding for Adult Day Health and an increase in child care co-pays for lower income working parents.

A good place to find the details on the Governor's supplemental proposal is on my new favorite website: Washington Fiscal Information. It's not for the faint of heart (and doesn't seem to work well in Firefox), but you can create spreadsheets with detailed budget comparisons by accounts, sources, and agencies. We'll keep putting up more information on the supplemental budget as it develops.

Well, that's the end of our first "special series." Let us know what you think and what you'd like to see next.

***

As an aside, Adam Wilson's blog has a video that you won't see in other coverage of the Senate Democrats' press conference.