Tracking the Economy…

On Thursday of last week, Governor Gregoire asked all her agencies to prepare for budget cuts of between $300 and $500 million. She is planning to take action on October 1st, immediately following the revenue forecast that will be released in late September. In her address she suggests that she and the legislature work together on a plan to make cuts of around $500 million in a supplemental budget. In this budget we might make more targeted cuts, or leave some areas untouched.

The Seattle Times writes about it here: http://seattletimes.nwsource.com/html/localnews/2012605452_budgetcuts13m.html

To understand why this particular set of actions is happening it’s worth understanding how the Legislature and the Governor share power over the budget. The Legislature is granted the authority to set budgets in the constitution, but the Governor has power to make adjustments when necessary. The Governor cannot make arbitrary changes to the budget, or the constitution’s assignment of that power to the legislature wouldn’t mean anything. She can make  across the board cuts to everything except areas that are constitutionally protected. The protected areas include basic education, debt service, and required constributions to pension funds. She can only make these cuts if the official forecast determines that the state would be in a negative cash flow position.

Washington State has a bi-partisan, bi-cameral Economic and Revenue Forecast Council (ERFC) charged with making predictions about the economy and about the amount of revenue we can expect over the next few years. I represent the House Democrats on the committee. We hire a professional economist to do the actual predictions. The committee typically acts unanimously, and has done so at every single one of the meetings I’ve attended quarterly for a number of years. There is huge value in having predictions done by a group that is as non-political as possible. We usually have pretty accurate predictions. This lets us agree on the facts and argue about what we should do about them.

Our budget was predicated on the revenue forecast in February.  In June the ERFC lowered that prediction by $200 million because the revenue wasn’t behaving as we expected. Since then the monthly reports about actual collections have lagged our predictions – by $85 million in July and by another $40 in the collections report that came out on Tuesday of last week. See the links at the end of this post for details.

Some of the national economic data we used to make these projections has since been revised downward, and if we re-run the forecast model with the revised data we get a prediction much closer to our actual experience. Based on this I believe that we will need to lower the revenue projection again in September by around $500 million.

These changes in the predictions happen a lot, but not usually of this large a magnitude this close to the end of the biennium. Normally, these changes don’t matter that much, but the continuing drops create the need to make changes in our budget so that it balances in June of next year. The earlier changes are made the less extreme they need to be. The quickest way to make changes in the budget is to have the Governor make across-the-board cuts of the same percentage in all programs. A few are exempted, including basic education, debt repayments, and contributions to pension funds, all legally required.

The governor cannot act until she has an official forecast showing the state in a negative condition at some time during the current biennium. Starting the necessary agency planning after the forecast is delivered in late September would likely result in November 1 as the start date of the cuts. The Governor is starting the planning now, allowing an earlier start to the cuts.

If the September forecast turns out better than we expect, we can ease off on the cuts, but having a plan in place so that action can be taken as soon as possible makes the cuts more humane when they do occur. A cut of this magnitude would be about 4-5% of the remaining expenditures in the biennium. The alternatives are worse.

Sources                                           

Quarterly Forecasts:

Monthly Collection Reports:

About the Author

Ross
I am the Director of the Department of Early Learning for Washington State. I formerly represented the 48th Legislative District in the State House of Representatives, chairing the Appropriations committee and spent many a year at Microsoft.