A placard outside the Majority Caucus Senate offices Wednesday tells one side of the story.

OLYMPIA, March 20.—Lawmakers were stunned Wednesday as the state’s top economist announced his new numbers and let them know how much they will have to spend when they write their new budget. Stunned because the forecast really made no difference at all.

They’ll have an extra $40 million – but in the scheme of things it doesn’t matter in the slightest. It’s a fraction of a percentage point, a mote of dust over the next two years as lawmakers prepare to write a budget that will allocate $32.5 billion in expected tax revenue. But it came as a surprise nevertheless to House and Senate budget-writers who had been figuring tax revenues would plummet hundreds of millions of dollars, as a result of the automatic federal spending reductions known as sequestration and the expiration of federal payroll tax cuts.

What it really means is that lawmakers now know for sure that they will have an extra $2 billion to spend when they write a biennial budget for 2013-15. The current budget, for 2011-13, stands at $30.5 billion, meaning that the state will see a 6.6 percent increase in revenues over the next two years. It’s not that things have gotten any easier – lawmakers still must find a way to pay for a Supreme Court decision that requires them to beef up spending for public schools by $1 billion or so, or somewhere north of that. And they have to wedge that new money in on top of all the other competing demands for new spending. On the other hand, things haven’t gotten any harder, either.

“Flat is the new up,” declared House Appropriations Chair Ross Hunter. For the last week he said lawmakers have been convinced that the new revenue forecast would present a $200 million to $300 million hit. “So yeah, from my point of view, we have a hard problem to resolve. But this doesn’t make it worse.”

At the traditional meeting and news conference of the Economic and Revenue Forecast Council Wednesday, state economic forecaster Steve Lerch said he is adjusting his forecasts upward by $59 million for the 2011-13 biennum, which ends June 30, and downward by $19 million for 2013-15, for a net gain of $40 million. He offered all the usual caveats. European financial troubles are a worry, if the Chinese economy has a hiccup Washington will get sick, and you never know about Congress. But for now – no real change at all.

Full Speed Ahead for Budgeting

State economist Steve Lerch offers his prognostications at a meeting of the Economic and Revenue Forecast Council. He is flanked by Reps. Terry Nealey, R-Dayton, and Ross Hunter, D-Medina.

With the numbers in hand, budget-writers in the House and Senate now can roll up their sleeves and get to work, and the real fun of this year’s legislative session can finally begin. Unless lawmakers go into overtime, they have until April 28 to reach agreement on a budget and settle all the policy debates that were launched during the first half of this year’s session. Key question right now is whether there will be a tax increase. Majority Democrats in the House maintain it will be next to impossible to balance the budget without one. The Republican-leaning majority caucus in the Senate says of course it can be done. The Senate makes the first move this year – it will reveal its budget proposal sometime in the next five to ten days, according to Ways and Means Chair Andy Hill, R-Redmond. So that means the Senate will have a chance to prove it.

“I think those that want to raise taxes really, really bad were probably disappointed that the revenue forecast wasn’t worse today,” said Senate Republican Leader Mark Schoesler, R-Ritzville. “From what I saw, we are at neutral for all practical purposes, which was better than many expected. I think that is good.”

Official Shortfall Now Stands at Over a Billion

Members of the House Republican Caucus and the Senate Majority Coalition Caucus hold a media availability Wednesday. Left to right, Sen. Barbara Bailey, R-Oak Harbor, Sen. Michael Baumgartner, R-Spokane, Senate Republican Leader Mark Schoesler, R-Ritzville, House Republican Leader Richard DeBolt, R-Chehalis, and Rep. Terry Nealey, R-Dayton.

At the starting gate, the state has an official shortfall of somewhere between $1.2 and $1.3 billion before K-12 spending is considered, said David Schumacher, director of the Office of Financial Management. That includes a $300 million miscalculation in medical expenses that was revealed last week during a meeting of the state Caseload Forecast Council. But that shortfall figure should be taken with a grain of salt. It means that the state might have $2 billion more to spend but it has more than $3 billion in additional obligations. The figure basically assumes lawmakers will pay the full cost of maintaining every state program that is currently on the books. But no one expects that to happen. They have routinely found ways to ditch many of those big-ticket obligations during the last four years of budget trouble. For instance, the state might safely again ignore Initiative 732, the 2000 ballot measure mandating teacher salary increases, as it has most years since the measure passed. That saves $360 million.

In her final budget proposal last December, former Democratic Gov. Christine Gregoire urged lawmakers to do exactly that. She identified other cost savings and budget maneuvers that basically wiped out that official shortfall and brought the state a little ahead of even. But then came proposals for new K-12 spending that put her plan deep in the red zone and led her to propose $1.2 billion in new taxes. Members of the Majority Coalition say you can count on them to use an even sharper pencil, find even more efficiencies, and make the books balance. Schoesler said it is hard to justify a tax increase when the state knows it will have an additional $2 billion to spend. “We’ve said it time and again. There is approximately $2 billion more money, and some programs are not going to grow as much as people would like when they see the budget. But that is the way any other business readjusts their business plan. We can’t be any different.”

A key decision for the Senate majority will be how much it will spend to satisfy the Supreme Court’s McCleary decision, the Jan. 2012 ruling that held the state isn’t spending enough on K-12 schools. Last week House Republicans declared that $800 million would be sufficient. House Democrats say they will stake out a position somewhere around $1.4 billion. And that vital spending decision in the Senate will help determine whether a tax increase can be dodged. At Wednesday’s news conference, Hill wasn’t providing any clues. “I have heard everything from $200 million to $8 billion, so it is something we are working through,” he said.

Political Challenges

Gov. Jay Inslee is expected to weigh in sometime soon with a list of priorities he would like to see reflected in the final budget – something far short of an actual budget proposal. At the same time he will present a list of tax exemptions he would like to see ended. After years of agitation about tax “loopholes,” lawmakers say they have learned it is politically difficult to end any of them, and they say they are not counting on much.

The tax-revenue forecast doesn’t count on any money from Washington voters’ recent decision to legalize and tax the sale of marijuana. Because the feds still haven’t said whether they will allow the state to proceed, Lerch said he considered it unwise to include any revenue from that source.

Also worth noting is that the tax-revenue forecast assumes a loss of $160 million as the result of another Supreme Court ruling known as the Bracken decision, which held that the state improperly configured its estate tax in 2005. The decision retroactively invalidated taxes for married couples who use a common estate-planning technique, while estate taxes for single individuals remain intact. A bill that would apply a retroactive fix is being considered in the House, though it poses a political problem. At least technically speaking, it represents a tax increase, and that may be a hard thing for the majority caucus in the Senate to swallow. Leaders were noncommittal Wednesday.

There’s another political challenge on the Democratic side – the effort to minimize expectations among those who are counting on new revenue for spending plans. Forty million dollars is a drop in the bucket, said Senate Democratic budget lead Jim Hargrove, D-Hoquiam, and it’s hardly time for anyone to begin celebrating. “The way I roll up these numbers is that everything got $500 million worse since the start of the session and we got $40 million back. So I think the problem here is that we are going to have to manage people’s expectations. …It really isn’t that big of a change from what we were dealing with and in fact it is still worse than when we started the session.”

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