Article by Erik Smith. Published on Wednesday, December 21, 2011 EST.

The Dirty Little Secret of This Year’s Budget Debate – At the Rate the State is Going, Next Year it Happens All Over Again

State Sen. Jim Kastama, D-Puyallyup, does his best to explain the problem in one of a series of videos he has posted on YouTube.  

By Erik Smith

Staff writer/ Washington State Wire

OLYMPIA, Dec. 21.—The way folks are talking at the state Capitol these days, you might get the idea that Washington’s $2 billion nightmare is the budget crisis to end all budget crises.

            It’s a shortfall that ranks with the biggest of all time, they say. The state hasn’t seen anything like it since the Great Depression. After three years of big budget cuts, state spending is still out of whack. And now they’ve reached the end of the line. They just can’t cut any more. And so they’re going to have to do something to jack up taxes next year.

            That’s the story of next year’s session, in a nutshell. But here’s the dirty little secret – or at least the one that really isn’t well understood, once you get a few feet beyond the Capitol building. It’s not a shortfall to end all shortfalls, because there’s no end to it. State spending is so far out of line with tax revenue that even if lawmakers pass a dilly of a tax increase this year, they’re going to be back again next year facing the same problem, and the next, and the next.

            There’s a little disagreement right now about the projections, but among those who understand the state budget, it’s not a question of whether there is a problem but how big it will be. At the rate the state is going, by the year 2017, Washington will face an annual shortfall of $3.3 billion, according to state Sen. Jim Kastama, D-Puyallup, who is doing his best to sound the alarm. And lest that sound small, you have to double it to get the two-year figure that the Legislature likes to use – a number written in red ink that approaches $7 billion.

            The governor’s office uses the same figures but does the math a little differently, and it presents them in a way that puts the state in a little better light. But still – it’s a big number, in the billions and billions. And it’s the kind of thing no tricky accounting tactics can erase.

            Which leads naturally to what might be the biggest debate of next year’s legislative session – what can the state do about it?

            “Let me tell you why this is important,” Kastama says. “It is important because if we are going to ask voters to vote for taxes, we have to be able to tell them that we have our house in order. We have to show them and demonstrate to them that we have a sustainable budget. And that in the future we won’t have people coming forward year after year, testifying against the cuts that we will have to make in government, and the impact that will have on their lives.”

            It’s a matter of being honest with voters, he says.

            Problem is Well Known

            Here’s the basic problem. Every year the state’s existing taxes generate a little more money than they did the last, because of the growth of the population and the economy. The last couple of years have been a bit of a hiccup, of course – tax revenue actually fell when the economy tanked. But it’s on the way back up again, and on average, most observers feel confident in saying that tax revenue will increase about 4.5 percent a year.

            The problem is that state spending will increase at a rate of 5 percent a year. That’s even after all of the cuts lawmakers have made over the last three years, some $10 billion in all – most of it to projected spending, but some of it real. 

            Right now that difference amounts to about a billion bucks a year. That explains why the Legislature right now is trying to plug a $2 billion hole in the budget, because the state writes its budgets on a two-year cycle.

            But if lawmakers don’t do anything to close the gap between taxes and spending, it gets bigger and bigger every year.

            That’s how Kastama gets his $3.3-billion figure for 2017. He’s taking all the expenses the state expects, and he carries them forward and draws a straight line.

            If lawmakers don’t do anything to fix things this year, he says that little protest lawmakers saw earlier this month, when the Legislature convened a special session and the very noisiest activists in Washington state came to town – that’s going to look like nothing. “Even if we do pass more taxes in Olympia next year, those same people will have to come back to Olympia and talk about the same kind of cuts we are going to give them at that time. The fact of the matter is that the budget is unsustainable.”

            Numbers Check Out

            Last week the governor’s budget office, the Office of Financial Management, released its own six-year budget projection and it looked considerably rosier. By 2017, it said, the state would have a cumulative deficit of $2.8 billion. That’s the total of all deficits up to that point, and even if the projection points to a problem, it is an enormous difference, to be sure.

            At a news conference, Gov. Christine Gregoire used those numbers to make a political point. Things might have been considerably worse if it hadn’t been for the budget crisis of the last few years, and all that hacking and cutting. “Four years ago I said to the people of our state we cannot waste this crisis,” she said. “I can come before you today and say we did not and we will not.”

            The thing is, both Kastama and OFM are using the same basic numbers. The biggest differences are these. Kastama uses the current budget as the starting point, and OFM assumes passage of the governor’s budget proposal, which adjusts it downward by about $1.4 billion. OFM also expects a historic turnaround in health-care inflation – something that certainly hasn’t happened yet.

And in the most eyebrow-raising assumption of all, OFM assumes that state employees will not get a pay increase over and above anything currently on the books. Its estimate is based on “current law,” and doesn’t speculate about what future salary negotiations might bring. But it is a rather dubious proposition, given the fact that there hasn’t been a cost-of-living adjustment since July 1, 2008. To make the governor’s figures work, state employees will have to go without a pay increase for nine straight years.

Kastama’s numbers assume that state employees will get 2 to 3 percent annual pay raises after 2013.

            “Telling state employees that they will get no salary increase for the next six years probably would not go over very well,” Kastama says drily. “I think that will turn them into some of the greatest advocates for reform that the state has ever had.”

            Fuels Call for Reform

            The whole thing might seem like a rather dry discussion of budget projections, but really it is the biggest explainer for the debate that is about to erupt in Olympia in January. For his part, Kastama has been doing his best to explain the problem in a series of videos he has posted on YouTube, in terms that your average high schooler might be able to understand. He is a prominent member of a faction of moderate Democrats, the self-described “Roadkillers,” who are demanding big reforms in state government before the Legislature even starts talking about putting a tax referendum on the ballot. And if they work with Republicans, they have the votes to make it stick.

            Among other things, they are calling for the repeal of hugely costly education initiatives that remain on the books a decade after voters passed them. Initiatives 728 and 732, which mandate class-size reductions and teacher-pay increases, have rarely been funded by the Legislature – it just hasn’t had the money. In 2017, those two initiatives alone will cost $1 billion annually. Time to get rid of them, the Roadkillers say.

            Then there’s the K-12 reform bill lawmakers passed in 2009, without any money to pay for it. By 2017, OFM says it will cost $1.3 billion a year. Time, perhaps, to rethink that one.

            And after that you have fast-rising health care costs, both in the state’s Medicaid programs and in the health insurance programs it provides for public employees. Other management reforms in state government, popularly known as “lean management” and “six sigma” practices, might also bring costs down, they say – though it should be noted the governor’s office has already put some of that into play.

            Of course, there’s another way lawmakers might deal with the problem once and for all. They could avoid changing a thing by passing the mother of all tax increases, something that might gallop forward every year and gobble an increasing share of the income of Washington-state residents. Income tax, anyone?
 

            Echoes Business Community Concerns

            Really, what’s going on is that lawmakers are beginning to talk about an issue that has energized the state’s business community for years. Business has been crunching the same numbers and coming to the same conclusions. Even before the economy tanked, business groups like the Washington Roundtable and the Washington Research Council were warning that the state had made unsustainable spending decisions when the economy was booming, and that eventually there would be hell to pay. 

            “It doesn’t get much more fundamental,” says Roundtable president Steve Mullin. “Is the state going to have a predictable financial environment or not? What you see in states that are really underwater in terms of sustainability, like California, is a deep uncertainty about what that means for the viability of businesses that are located in those states.”

            To the Roadkillers’ prescription, Roundtable president Steve Mullin adds one other suggestion – a more robust rainy-day fund that would require the Legislature to sock away a larger percentage of unusual one-time bursts of tax revenue, against the day that the economy inevitably turns downward.

But he says the biggest problem is the fast-rising amount that the state spends for health care programs – nearly double the rate of increases in tax revenue. For years it has been squeezing out other programs, particularly higher education. State schools have raised tuition dramatically in recent years, forcing students and parents to turn increasingly to loans, and raising concerns that a college education is becoming unaffordable.

            “The Legislature is going to have to enact a whole variety of reforms in order to get the projected revenue and the projected expenditure lines to meet, with or without a sales tax increase,” he says. “That is the most important point.

            “You cannot raise taxes fast enough and high enough to meet the gap between long-term spending growth and current projected revenue growth. A one-half-cent sales tax puts a bit of a dent in it but it is a modest dent in a very big problem.”

Same Figures but a Different Point

 

The two charts below show how the same figures can be used to make different political points. You might say they show the difference between a half-empty glass and a half-full one. But they demonstrate basically the same thing – a fundamental problem with the state budget, a widening gap between state tax revenues and expenditures – even if lawmakers pass a sales-tax increase next year or send one to the voters.

 

The first chart was produced by state Sen. Jim Kastama, D-Puyallyp, using data generated by the Senate Ways and Means Committee. It shows that at the rate the state is going, Washington will face annual deficits that will rise to $3.3 billion in 2017.

 

The second was produced by the governor’s Office of Financial Management, and it presents a slightly less dire picture. You still see that the state is cruising for a bruising in 2017 – it’s just that the thrashing isn’t quite so bad. It also shows that things would have been much worse if there hadn’t been big cuts to projected and actual spending over the last three years, thus making the governor’s point that the state already has done an outstanding job of reform. In 2017, the cumulative total of all deficits would be $2.8 billion. But OFM’s six-year outlook makes a few assumptions that reduce the scope of the long-term problem. It uses a lower starting point, assuming passage of the governor’s supplemental budget, which makes big cuts. It also assumes that state employees won’t get any pay raises, and that the state will be able to control fast-rising health-care costs. Anyone want to take those bets?

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