Washington state deficit grows by nearly $700 million

The wait is finally over. Now the cutting begins in earnest.

Washington state’s chief economist on Thursday tacked another $698 million to the state’s expected revenue shortfall for the 2011-13 budget cycle, pushing that biennium’s total spending deficit to about $5.1 billion.

State legislators also must act soon just to patch a $201 million funding gap through June 30, now $80 million higher.

o Read the council’s news release, explaining the “geopolitical uncertainties” that are hampering economic recovery in Washington, here.

o The full council report is available here.

Despite optimism engendered by upticks in job hiring and consumer spending, the double jolts of Mideast unrest and Japan’s devastating earthquake and tsunami have rattled the economic outlook.

The near future “remains clouded, with a great amount of uncertainty,” said Arun Raha, executive director of the Washington State Economic and Revenue Forecast Council, which issued its quarterly update.

Volatile oil prices in the wake of spreading Mideast turmoil and threats to Japan’s manufacturing and its trade in agricultural goods with Washington state drove down Raha’s draft estimate from only two weeks ago, he said.

“To quote Yogi Berra, ‘The future ain’t what it used to be,’ ” Raha said.

He doesn’t expect Washington housing prices will rebound before 2012. It will be October 2013, months after the next two-year budget cycle ends, before the state will regain the number of jobs lost during the harrowing 2008-09 recession, he said.

Until then, state tax revenues will slowly inch higher — unless more shocks arrive, Raha warned.

“The downside risks are still elevated, and twice as high as the upside,” he said. Foremost, he worries that soaring fuel prices could undercut consumer confidence and spending that has bounced back of late.

The sobering revised estimate heightens the pressure on state legislators to further cut spending for critical Washington programs: from K-12 schools and higher education, to the Basic Health Plan and other social services support for low-income, aging or disabled residents, to state parks, highway funding and other infrastructure needs.

“The problem has become more daunting,” said Rep. Ross Hunter, D-Medina, chairman of the House Ways & Means Committee, which is due to issue a budget plan soon.

Since they convened in January, lawmakers have mentally braced themselves for more bad budget news, he and colleagues said. That doesn’t make their choices any easier.

If one strips away previously authorized spending that’s already been suspended, the bottom-line target for fresh 2011-13 budget cuts just leaped almost 25 percent with Raha’s forecast, up from $3.5 billion, Hunter said.

Hunter couldn’t predict how soon House Democrats would issue a new budget plan (the Senate is due to release its version after the House), or whether the Legislature will adopt a final budget before its scheduled 105-day session ends on April 24.

“There are a lot of bad ideas” for cuts, Hunter said. “Some are worse than others.”

School impact

Months ago, local school districts began drafting budget-slashing contingencies. They’ve watched for the blow from Olympia, taking into account the worsening revenue estimates.

“It just makes a difficult situation that much more difficult,” said Mike Merlino, Evergreen district chief fiscal officer.

The Evergreen district and its advisory panel have posed staff and program reductions worth a potential $27 million. At stake with pending federal and state funding hits are as many as 130 teaching positions, music and athletic programs, school librarians, high school counselors and more.

The revised deficit means “not good times,” Merlino said. Balanced against social services, whatever discretionary school funding remains offers lawmakers a large target.

“If they add another $700 million or $800 million, and the education budget is 40 percent (of total state expenditures), I don’t know how that doesn’t push us toward the higher end” of reductions, he said.

Local educators’ biggest fear is that legislators strip away levy equalization funds, sent to Washington districts with below-average total tax values.

For Evergreen, that hit alone would be worth $13 million to 14 million next school year; in the Vancouver district, about $8.5 million; and in Battle Ground schools, about $6 million.

“Very disappointed,” Steve Olsen, Vancouver district budget director, said of Thursday’s forecast.

Like others, Olsen heard speculation the revenue forecast would drop between $500 million and $1.5 billion. “If you’re looking for a silver lining in a dark cloud, I guess it was that it was at the lower end,” he said.

Bob Williamson, Clark College vice president for administrative services, said he felt relief.

“These numbers are a little easier to swallow” than some dire predictions, Williamson said. That lends hope Clark won’t need to cut much more than $2 million already lopped from next year’s budget, once the state sets higher education funding, he said.

Legislators react

Reaction from Clark County state legislators was somber, and sometimes sharp.

“I’m no different from any other legislator or citizen … I continue to be very disappointed” in the revenue decline, if not surprised, said Rep. Jim Moeller, D-Vancouver.

Moeller vowed to press for “responsible decisions” to protect vulnerable children and adults and support the state’s constitutional mandate to “fully fund” education.

“We don’t turn our backs when our neighbors are in need,” he said.

Who stands to lose, in a final budget deal?

Already, the state on March 1 cut its Basic Health rolls by 28 percent, leaving nearly 15,400 people without coverage. Gov. Chris Gregoire’s initial budget plan from December called for complete program elimination, dropping health coverage for about 66,000 low-income adults and many children of illegal immigrants.

The latter could become legislators’ last option.

Rep. Ed Orcutt, R-Kalama, new chairman of the state Forecast Council, said what lawmakers could do best is to help people find new jobs. New legislation to remove roadblocks for employers has been ignored, he complained.

“I don’t see enough concern in the Legislature coming through to get Washington working again,” Orcutt told reporters at the Thursday briefing. “There are a number of bills languishing in committee right now that could get people back to work.”

Sen. Joe Zarelli of Ridgefield, top Republican on the Senate Ways & Means budget-writing committee and, this session, a consistent ally in Gregoire’s pronounced push for deeper reform, said the swelling deficit owes mostly to “an overabundance of spending commitments” rather than dropping revenue.

The state still expects to collect nearly $4 billion more in 2011-13 than during the current two-year budget cycle, Zarelli said.

A real solution will demand the “reset” of state government through major reform of services and programs to eliminate unsustainable outlays, he said.

There’s a chance “something new and innovative will come in the door” during budget negotiations, Zarelli said. “But I’d say most of the ideas for reforming government and reducing spending are already on the table.”

Gregoire: No shortcuts

In Olympia and beyond, battle cries — and battle lines — were issued and renewed.

Gregoire urged legislators to avoid “one-time fixes” such as borrowing or shifting dedicated funds, or crafting accounting “solutions” such as creating a “25th month” in the two-year budget cycle to defer some state costs.

“It took 16 years to buy back that quick-fix loan,” she said of the latter gimmick, adopted by the Washington Legislature amid recession in 1971.

She touted her own proposals to streamline and merge agencies and to reform the state’s pension and workers’ compensation systems — and reminded that voters’ emphatic rejection of tax-raising ballot measures in November leaves tax hikes off the table this time.

Left-leaning and right-leaning political and advocacy groups were happy to pitch their favorite suggestions once more.

There exist “hundreds of tax loopholes totaling about $6.5 billion every year that are going unnoticed and unexamined,” said Joel Ryan, leader of the Washington State Association of Head Start and affiliated early childhood learning programs.

“Not everyone in our state is sharing in the sacrifice,” Ryan said, calling it “the dirty little secret the middle-class voter does not know.”

On state contracts

It didn’t take long for news reporters on Thursday to probe Hunter, Zarelli and others about shared sacrifice of another kind.

Budget writers were asked whether legislators or Gregoire should push to reopen collectively bargained state worker wage and benefits contracts, to reduce spending obligations and find new savings.

Democrats Hunter and Ed Murray, the Senate Ways & Means chairman from Seattle, were cool to the idea.

The difficulty is as much logistics as politics, the two said. It would take weeks or longer to renegotiate with state unions while the clock ticks past the budget-writing deadline, even into the new fiscal year in July, they said.

“It’s just very practically difficult to do,” Hunter said. Likely savings would not be as great as some might imagine, he said. For instance, shifting medical benefit premiums from an 85-15 percent split (state employer pays-worker pays) to an 80-20 percent would save only about $40 million (per year), he said.

In the time spent haggling for compromise, more significant budget leaks would fester, Murray said. “I don’t see a way to do it and save money,” he said.

Zarelli, who recently floated renegotiations as a crucial piece of the budget puzzle, said the real issue is desire.

“It’s not that it can’t be done. It’s a matter of (political) will,” he said. “It’s something that the majority (Democrats) will have to deal with.”

Should unions walk away from any reopened bargaining, employees would continue under current contract terms for another year, Zarelli said. But the Legislature could then move to enact deeper changes to save more money in the second year of the 2011-13 budget, he said.