State revenues take another hit

A new state revenue forecast released Thursday predicts that tax collections will fall short of projected levels by $482 million over the next two years. If the projections prove accurate, the Legislature might have to dip into its rainy day reserve fund to balance the budget, leaving a balance of just $53 million.

Gov. Chris Gregoire said she will direct most state agencies to cut employment-related spending by an additional 2 percent to deal with the negative forecast, with the goal of saving an additional $200 million over the next two years.

"This means there is a hiring cap in place, which may necessitate furloughs, reductions in force, and reductions in overtime," Gregoire said Thursday in a letter to state employees. Though an existing spending cap expires June 30, "I will expect that agencies will continue to exercise the same discipline on spending decisions," she said.

Lawmakers, who slashed $4 billion from the 2009-11 budget and used federal stimulus dollars and fund transfers to plug a $9 billion budget hole during the 2009 session, reacted swiftly to the new report.

"The new budget doesn't take effect for almost two weeks, and it's already projected to be in the red two years from now," said Sen. Joe Zarelli, R-Ridgefield, a member of the state Economic and Revenue Forecast Council.

"The governor's budget staff believes it can find another $200 million in savings to move it back toward positive territory," Zarelli said in a statement. "I hope they bring those actions forward sooner rather than later, because if there's one lesson that should have been learned from the 2009 session, it's that making reductions sooner rather than later is the fiscally responsible thing to do."

Senate Democratic budget leaders said they will continue to monitor the state's financial situation closely but have no plan to convene a special session this summer to deal with the revenue forecast.

"Leaving $850 million in the ending fund balance gives us the flexibility that we need to absorb the kind of shocks that we knew might be coming down the road," said Sen. Rodney Tom, D-Bellevue, vice chairman of the Senate Ways and Means Committee.

Tom noted that legislative committees will meet in Olympia at the beginning of October, soon after the September revenue forecast, and could amend the budget then if the economic recession worsens.

Despite the gloomy forecast, the state's chief economist, Arun Raha, said it appears that the end of the recession is in sight.

"Initial claims for unemployment insurance appear to have peaked and monthly job losses are diminishing," he said in a statement. "However, the bottom in this recession will be lower than assumed in March, particularly with respect to the labor market. Job losses will likely continue through the end of this year, and the unemployment rate will peak even later."

"When the economy does turn around, the recovery is more likely to be a gradual U-shaped upturn rather than a strong V-shaped rebound," he said.

Both housing starts and car sales have stopped declining, according to the new forecast. "Home sales have ticked up modestly, but home prices are still expected to decline further," Raha wrote. "Consumer spending appears to have stabilized, albeit at low levels."

The state now expects to receive $27.2 billion in the 2007-09 biennium, which ends June 30. That's $185 million less than was projected in the March forecast.

It expects to receive $29.8 billion in the 2009-11 biennium, which ends June 30, 2011. That's $297 million less than was projected in the March forecast.

The numbers could have been far worse, Raha noted. The new forecast includes $226 million in additional revenue that will come to the state in the next budget cycle as a result of legislation passed this year. Without that offset, the new forecast for the 2009-11 biennium would have been $523 million lower than projected.

Kathie Durbin: 360-735-4523 or kathie.durbin@columbian.com.