The wise heads of the state Economic and Revenue Forecast Council gather in Olympia Thursday. Left to right, Brad Flaherty of the Department of Revenue, Stan Marshburn of the Office of Financial Management, House Ways and Means Chairman Ross Hunter, D-Medina, state Rep. Ed Orcutt, R-Kalama, state economist Steve Lerch, and state Sen. Dino Rossi, R-Issaquah.

OLYMPIA, Nov. 15.—On the books, Washington will face a $900 million problem next year, state officials say, but when you include a big court-mandated increase in K-12 spending, it’s a lot bigger than that – somewhere in the $3 billion to $3.5 billion range, according to House Ways and Means Chairman Ross Hunter, D-Medina.

That’s the worst-case scenario, and there’s plenty of squishiness in the figures. But a long-range outlook released Wednesday by the state Economic and Revenue Forecast Council makes it plain that lawmakers are in for another round of trouble when they return to Olympia for their 2013 legislative session. The problem this time isn’t tax revenue – a revenue forecast released at the same time shows that the economy has stabilized and is growing again after four years of recession. Taxes are right on track. It’s just that the spending plans are so much bigger.

Same old story, said state Rep. Ed Orcutt, R-Kalama: “We can’t sustain this kind of growth. That’s where we got into trouble.”

Six Percent Growth

The story this time out really isn’t in the quarterly forecast, the last one that will be released before the 2013 session starts in January. For the last four years it seems as though every forecast has brought awful news, slashing millions and even billions from the amount the state will have to spend. Since recession began four years ago, 17 of the last 20 revenue forecasts have cut money from the previous one. This is the first time since 2007 that two consecutive revenue forecasts have added money to the pot – albeit a small amount this time, just $8 million for the current budget cycle. State economist Steve Lerch said the state will have $2 billion more to spend in the next budget. Revenues will grow from $30.5 billion in 2011-13 to $32.5 billion in 2013-15. That’s six percent growth.

With revenue finally on the upswing, what’s the downside? It’s just that it’s going to take a lot more than that to do everything the state is planning. The new four-year outlook, mandated by this year’s Legislature, illustrates the problem.

$900 Million Shortfall From the Start

According to the state Office of Financial Management, the state is $900 million short of the amount that will be required in order to maintain current spending plans during the next two-year budget period, which starts on July 1. That figure includes everything already on the books, like restoration of a pay cut for state employees, but it doesn’t include pay raises, and it doesn’t include the massive new spending on schools that will be required by the Supreme Court’s McCleary decision, which held that the state isn’t meeting its constitutionally mandated “paramount duty” to fund the public schools. It assumes the state won’t cut anything and that it won’t spend the half-billion or so in the state rainy day fund.

The $900 million shortfall estimate is a little less than the figure OFM released over the summer, somewhere between $1 billion and $1.1 billion, and the main difference is that a caseload forecast expected Friday will show that expenses for the state’s prisons, schools and social-services programs are on the decline. The forecast also shows that the state will run short by $1.1 billion in 2015-17, though that number will be considerably altered by whatever the Legislature does in the next three sessions.

The immediate problem is the shortfall that looms ahead in the next biennium. But $900 million is just the beginning.

Can’t See Way Around Tax Increase

The cost of the Supreme Court decision is going to be immense, warned budget-writer Hunter. Most lawmakers have been assuming, in round numbers, that they will have to spend about $1 billion on K-12 schools in order to meet the Supreme Court mandate in 2013-15. They’ve been using that figure ever since Gov. Christine Gregoire cited it at a news conference last spring. But Hunter, who sits on a legislative education-funding task force, says it is likely to be considerably higher than that – perhaps $1.9 billion. And then you have the traditional matter of fiscal prudence – leaving enough money unspent that the state can deal with unanticipated problems, an ending fund balance of perhaps $350 million. Then if you leave the rainy-day fund unspent, you get a figure in the $3 billion to $3.5 billion range.

“I certainly don’t have a solution I’m ready to roll out right now,” he said.

And he tossed a bit of cold water on the no-tax campaign promises made by the two candidates for governor this year, victorious Democrat Jay Inslee and unsuccessful Republican Rob McKenna. Hunter said he is working on such a plan right now. But without new taxes he said the state may not be able to do everything it is legally required to do.

“I have been reasonably consistent throughout this whole cycle, leading up to last Tuesday, that I didn’t think it was numerically possible to have a budget that doesn’t have revenue increases.” Even if the economy is on the rebound it is unlikely that it will generate much more tax revenue, he said. And the growth that can be expected won’t keep pace with the growth of caseloads in social services and other areas.

Republicans Support Inslee Vow

It’s not as if there is any surprise involved. Ever since the last session ended lawmakers have been predicting big trouble around the bend. But because lawmakers have been using a lower figure for the cost of the McCleary spending, it hasn’t looked quite as dire as the picture Hunter laid out Wednesday. The situation puts Republicans in an interesting position. They point out the problem is never as bad as it sounds on first blush, because shortfall estimates alway are based on projected spending, and lawmakers always have the ability to change their plans. And at least for now they find themselves standing with the newly elected Democratic governor, unlike the legislative Democrats who favor new taxes. State Sen. Dino Rossi, a onetime Republican candidate for governor himself, put himself firmly on record as supporting Inslee’s vow to hold the line. “I agree with Gov.-elect Inslee that we should not be raising taxes in this environment. …It is not less money [in the new forecast], it is more money, and it is going to come back to the question of priorities and getting back to what the real numbers are, not the numbers that people fantasize about.”

Of course there are places where the state can trim its sails, Orcutt said. There always are. “I think we really have to take a look at why it is that we are getting a $2 billion increase in revenue and finding $1 billion, or two, or three in budget deficits.”

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