Article by Erik Smith. Published on Thursday, September 16, 2010 EST.

Recovery ‘Barely Noticeable,’ Says State’s Top Economist

Economist Arun Raha delivers his gloomy projection Thursday to the state Economic and Revenue Forecast Council. From left, Rep. Ed Orcutt, R-Kalama; Raha; Sen. Craig A. Pridemore, D-Vancouver; Rep. Ross Hunter, D-Medina; Department of Revenue Director Cindi Holmstrom.

By Erik Smith

Staff writer/ Washington State Wire

OLYMPIA, Sept. 16.—The bad news just keeps coming. The state’s top economist delivered a grim economic forecast Thursday, the governor ordered an immediate whack in state spending, and a $4.5 billion shortfall looms next year.

            State agencies are being told to slash their spending by 6.3 percent by Oct. 1, but that’s just the start. To bring things into line lawmakers will have to slash spending another 10 percent next year when they write a budget for 2011-13.

That’s if they don’t raise taxes – easier said than done.

            And everyone from the governor on down is wondering how on earth they’re going to manage. After two years of budget trouble they’ve made the easiest cuts. Now they’re saying something’s going to have to go over the side. Higher ed? Social services? The state’s Basic Health Plan? It’s that serious.

            In a conference call with reporters from China, where she is on a trade mission, Gov. Christine Gregoire said, “I don’t see us returning to the good budget times we’ve enjoyed anytime soon.”

            Recovery Delayed a Year

            Arun Raha, the state’s top economic forecaster, faced reporters Thursday morning and admitted he got it wrong in June. The state was supposed to be starting its slow climb out of recession right about now. But everything flatlined.

            So the recovery that was supposed to be in full bloom sometime late next year – it looks like that has been postponed until the fall of 2012.

            He’s not the only one who blew it – economists everywhere have been stumped by the rebound that never seems to come. And Raha said the real problem is that the country hasn’t seen a recession this deep and prolonged since the Great Depression. Economists weren’t keeping detailed statistical records back then, as they have since the late forties, and so the computer models have trouble recognizing the trends.

            “I wish I had better news to give, but I don’t,” he said. “These are difficult times and this recession is the worst since the Great Depression. Things will eventually get better, but at a slow and uncertain pace. That cannot be entirely reassuring, but that is the best I have at this time. When we use forecasting models to mimic the future, you cannot mimic what does not exist in your data system, so we are in uncharted territory.”

            A $1.4 Billion Problem

            Here’s how the math works. What the new budget projection really means, in dollars and cents, is that the state is about $1.4 billion short of the amount it thought it was going to get just a few months ago. Sales taxes, real estate taxes, property taxes, business and occupations taxes – none of them are producing as much money as expected. Revenue for the current budget period, through June 2011, is down $770 million. For the next budget period, 2011-13, it’s down $669 million.

            So there’s an immediate problem. Lawmakers spent just about every penny available to them the last time they patched their budget. They left a small reserve, but that kept shrinking every time new numbers came out. And now it’s totally gone.

            Right now, to balance the budget, the state needs to cut $520 million in spending.

            The majority Democrats in the Legislature are leaving that problem to the governor.

            Democrats Punt

            Here’s how the politics work. The Legislature could come back into session and start carving its spending plan with an X-acto knife. It could cut the programs that are least essential and let the others stand. But the Democrats who hold the majority in the House and Senate aren’t interested. Last spring, when they faced a similar problem, leaders and members couldn’t agree. A special session dragged on for a month. And a repeat performance during election season wouldn’t help their chances at the polls.

            That’s one version, anyway. Some Dems see it differently.

            “I would take exception to the idea that we are sitting on our hands,” said state Sen. Craig A. Pridemore, D-Vancouver. “I think there is a huge and tremendous concern about where the discussion is going. There is a reason that the state constitution provides for a 105-day session for a full budget review, and that’s because it is a complicated and difficult thing to go through. If we were to go into a special session to resolve these problems, we would need a period of time to bring people up to speed on what the trade-offs are, what kind of cuts are on the table. I think we need more time to do that.”

            Said Rep. Ross Hunter, D-Medina, “The action needs to be taken right now, and the quickest way to do that is to have the governor take action. It takes a long time to build consensus.”

            Another Call for a Special Session

The way the Republicans see the matter, it’s a sign that the Legislature just doesn’t have its act together. Once again, they pleaded for the Democrats to return for a special session. Sen. Mike Hewitt and Rep. Richard DeBolt, the Republican leaders in the House and Senate, delivered a letter to their counterparts on the other side of the aisle:

            “Waiting until January or later to pass a revised budget will only make our situation worse,” they wrote. “The longer we wait, the bigger the hole becomes. We know where we’re at – so why not act sooner, rather than later? And let’s be clear: The fact that we are in the middle of an election cycle is not a good reason to avoid coming to Olympia to do what taxpayers have hired us to do.”

            The response?
            No way. It’s just too big a job, said Senate Majority Leader Lisa Brown and House Speaker Frank Chopp in a joint statement. “The fact is, the current budget situation clearly demonstrates that state government must be rescaled to fit the new fiscal reality,” they said. “It will take more than just a quick special session to do that right.”

            Whether they’re unable or just unwilling, Gregoire could call a session anyway and make them come back. But she won’t do it. “We can’t afford to have them come in and flounder,” she said. “This calls for quick, decisive action.”

            The Blunt Axe Approach

            Here’s how the law works. The governor can order across-the-board cuts in state agency spending, but she doesn’t have any discretion. Every agency gets the same whack. The only exceptions are expenditures for basic K-12 education, pensions, and debt service.

            The brunt of the cuts fall on the Department of Social and Health Services, which accounts for about half the state budget. Some $280 million will come from there. Corrections comes next – about $52 million. Every other state agency gets the same percentage hit, no matter whether they spend wantonly or efficiently.

            Agency directors get to decide where the cuts go. Already there’s debate within state government about how quickly the cuts can be accomplished, or whether they can legally be done at all. But whatever mopping up needs to be done will have to be accomplished by the Legislature when it returns in January.

            “My heart goes out to everyone who will be impacted by these cuts,” Gregoire said.

            Future Even Worse

            Next year the Legislature faces an even worse problem. Until now, lawmakers had been figuring on a $3 billion shortfall for 2011-13. Now state budget director Marty Brown says it’s just shy of $4.5 billion. That number might come down a little, depending on how the latest round of cuts are implemented, and whether the Legislature makes further adjustments to its current budget when it returns in January.

            But Gregoire said tax increases aren’t going to get the state out of its hole. She noted that Initiative 1053, on the ballot in November, would restore a requirement for a two-thirds vote for tax increases. Democrats suspended a similar requirement this year imposed by 2007’s I-960. But lawmakers wouldn’t be able to touch 1053 for two years, and practically speaking, the measure makes tax increases all but impossible, she said, because Republicans have enough votes to block tax hikes.

            “I am not under any illusion that the ‘Son of 960’ won’t pass,” she said. “Calling for a two-thirds vote in our state Legislature is an uphill battle.”

            And no tax increase means more cuts – roughly 10 percent of the state budget. Every penny the state doesn’t have to spend is on the table. Among the programs on the chopping block are some of the state’s “crown jewels,” like the Basic Health Plan, which provides subsidized health insurance for the working poor, she said.

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