House Budget Proposal

Chart 1: Annual Revenue Growth

Earlier this month I released the House budget proposal for 2011-13. Just before the end of the regular session, the Senate released their proposal. I asked for the job of chairman of the budget committee, but it’s clear my timing with the economy might have been better.

This budget is responsible, thoughtful, and sustainable. I’ve also tried to make it consistent with my values and the reason I ran for this job in the first place. I care about children – their education, their health, and their future – and I’ve tried to protect those as much as possible given the situation.

We were well-received critically:

Editorials | House budget passes key test: It balances | Seattle Times Newspaper

HeraldNet.com – Editorials: Serious response to crisis
Apr 05, 2011 · THE HERALD EVERETT, WASHINGTON … Worries that House Democrats were dragging their feet on a state budget … Generally, the House majority’s plan is serious …
www.heraldnet.com/article/20110405/OPINION01/704059973/-1/OPINION03

Any significant effort is the work of many people, and this budget is no different. I have two excellent vice-chairs (Reps Jeannie Darneille and Bob Hasegawa), three appropriations committees, and a Ways and Means committee of experienced members who added a lot of value, or at least a lot of opinion. The Ways and Means staff is uniformly amazing.

Nearly every state is in the middle of a major fiscal crisis. Unlike the federal government we can’t run deficits. Washington’s revenue is very dependent on the sales tax, and we’re oddly dependent on construction activity. Construction is about 4% of the state economy, but it accounts for 8% of our revenue in most years. The real estate crash has devastated that portion of our revenue stream.

Chart 1: Annual Revenue Growth

This chart shows the 25-year trend line of state revenue. The variation in the last two biennia has been very extreme and is causing major disruptions in the services we provide for citizens. Our projections have state revenue going up this cycle from $28.5 billion in 09-11 to $32.5 billion in 11-13. What’s the problem, you say? Revenue is up – why can’t you manage it?

Well, we are. Some things to consider though. The federal bailout of the states provided about $4 billion in last biennium that, because of our accounting system, looked like cuts instead of additional revenue. That revenue, plus our use of a variety of funds that are no longer available, means actual spending this biennium will be less than it was in 09-11, and even less than 07-09. I believe this is the first time this has happened since WW II. The accounting system sometimes seems deliberately obtuse. I’m sure I said things during the campaign about budgeting like families do, but families don’t have 400 accounts, don’t spend $70 billion every 2 years with much of it subject to arcane federal Medicaid spending rules, and don’t need 76 votes (50 in the House, 25 in the Senate, and 1 governor) to change anything – mostly they just need one or two.

One way (Chart 2) to look at the size of governments is to look at the revenue stream as a percentage of the economy. By that measure Washington’s state government is either getting a lot smaller, or the economy is growing a lot faster than state government.

Chart 2: WA Taxes as a Percentage of the Economy

Another way (Chart 3) to look at it is to look at per-capita state spending, adjusted for inflation. By this measure we’re back to 1987.

Chart 3: State Spending per Person

Responsible

We spend less this biennium than we raise in taxes.  In the long run a state has to do this, but for the last few biennia all the accounting tricks to enable programs to continue were used. If you really want to pick at a budget, anything this large will include things that people differ over, but we’ve tried very hard to be straight-up and simple about how we do the accounting.

We fund our pension accounts at 100% of the level recommended by the state actuary. A significant amount of pension liability has been pushed forward as we try to deal with a set of pension plans that were closed to new members in 1977 because they were not funded anywhere close to their actuarial requirements by either the employees or the state. We have a large amount of funds that have to be paid in over the next decade or so to make this up, but we are far, far ahead of most states who are still using California-style pension systems that we gave up 30 years ago.

Thoughtful

In this budget we make a significant effort to be thoughtful about what we’re doing. We don’t cut our early learning for at-risk kids programs because we have lots of empirical data that investments here save money in the long run. Lots of money. (They improve outcomes for kids too, but this note is about the budget.)

Another example is maintaining our prevention efforts in the Children’s Administration. Keeping families from getting to the point where the kids have to be removed for their safety takes money, but the foster care costs are much, much higher.

I can’t claim that we’re not cutting programs that are evidence-based and save money, because we don’t have enough cash for the investments needed. But we definitely focused on this metric in our decision-making.

Sustainable

We tried to make this budget “sustainable,” taking out a lot of the measures that grow the state budget significantly faster than our revenue grows. The chart (chart 4) immediately below shows what would happen in the ten years after the 11-13 budget if we made no policy level changes. Each of the areas of the budget grows at its own rate – K12 grows at inflation plus growth in the population of school-age kids, for example.

Chart 4: Pre-Budget Projected Spending

The changes we make in this budget reduce the starting point, and reduce the impact in the out years. It’s important to note that projections ten years from now are difficult to make. As the sage Yogi Berra said, “It’s tough to make predictions, especially about the future.” The assumptions in this model are reasonable, but don’t include a number of policy decisions like responding to the McCleary court case about education funding adequacy, etc.

Chart 5: Spending and Revenue after Policy Changes

The black line is our expected revenue at the 25 year historical growth rate of about 5%. Depending on your assumptions, these bars could move up or down significantly.

We still have work to do on sustainability. The growth rates of several programs significantly exceed the growth rate of our revenue stream. These are mostly medical or long-term care, and we are creating some study groups to propose answers to these over the interim. We cannot approach sustainability as solely an exercise in budget cutting – we need to decide what we want to do and ensure that funding is adequate for that service.

Structural Decisions

Some budget decisions flow across all parts of the system. Decisions we make about compensation for employees affect all parts of the budget.

We accept the collective bargaining agreements Governor Gregoire and labor organizations agreed to. I wrote about this decision on my blog several weeks ago. We have few options that make financial sense other than to do so. There are elements of the proposal I am less than enthused with, but not accepting them is an expensive proposition. The provisions include:

  • State/higher ed employees take a 3% salary reduction and in turn get unpaid leave.
  • State/higher ed employees will pay 15% of their health care premiums instead of 12% – state share is frozen at $850/month. This is a 25% increase in premium cost for employees and more similar to private sector situations.
  • Teachers don’t get the 3% salary cut, but their step increases are not funded. We try to have rough parity between the different employee groups. (The Senate proposal includes the salary cut for teachers.)

We also make a number of decisions about our pension system. As I said earlier, we are fully funding the actuarially-recommended pension contributions. Our current plans are among the better funded of state pension systems, but the original California-style plans that stopped accepting new entrants in 1977 were never funded adequately by either the state or the employees. We have been on a payment plan and have pushed out the payments in the past. This turns out to have been a bad decision – these folks eventually retire and if the pension fund is inadequate the state will have to pay pensions from the general fund, a multi-billion dollar mistake.

  • In 1995 the legislature added an automatic inflator to this pension plan, 18 years after anyone had been allowed to sign up for the plan. They clearly stated in law at the time that the legislature reserved the right to remove this feature, which we are doing. We are somewhat concerned about retirees who stopped working with very low salaries a long time ago and are raising the minimum benefit from $1100 a month to $1500 a month.
  • Retire-rehire is rolled back to original policy. This has been a consistent problem to enforce with frequent scandals. It does not seem like we can manage the program, so we are ending it.
  • Higher education retirement plans are modified to control growth and get more scrutiny. In particular, we’re requiring the higher ed system to create a pension fund to provide actuarial coverage for the defined benefit part of their program.
  • We’re also ending an early retirement bonus in the current plans for new employees – this is part of the effort to have a sustainable budget over the long-run.

Education

Our focus in this budget was on preserving our constitutional requirement to fund basic education. We do make significant cuts in this budget to education, though most of them were already implemented last year. Initiative 728 (class size), initiative 732 (teacher COLAs) and the K-4 class-size enhancement were eliminated in the last budget cycle. The law called for us to re-instate them in 2011-13 so the accounting system calls it a cut, though only the K-4 enhancement will be the only new cut.

Both the House and Senate proposals eliminate:

  • I-728, I-732: $1.16 billion (this is in both the House and Senate proposals).
  • K-4 class size enhancement: $215 million (the Senate preserves about $3.9 million)

The Senate proposal originally included a reduction that I was very concerned about. They had assumed $94 million in savings by calculating funding based on “average daily attendance” (ADA) which reduces funds going to districts when kids are absent. This happens much more frequently in schools with disadvantaged, at-risk kids – exactly the schools that need the resources the most. Since the district doesn’t reduce the number of teachers based on attendance during the year, this will result in other program cuts. Fortunately, the Senate has dropped that idea.

In committee they replaced it with a change to the way we send money to schools for purchasing school busses. This cut, like the  ADA cut above, takes money away from schools without changing what they have to do. They still have to replace school busses when they wear out – this will result in cuts to other areas of their program, areas that are part of their “basic education” responsibilities.

We are in the middle of a significant reform to the way we budget for K-12, requiring a school budget that is transparent and easy to understand. This is a multi-year effort and there are many “puts and takes” across the system to make this work. K-12 takes smaller cuts than anything else in the system which is appropriate given the constitutional mandate we have for it.

Higher Education

I’m concerned about the impact of this budget on higher ed, though most of the cuts will be back-filled with tuition increases. The House proposal reduces funding for our two- and four-year schools by about $521 million, though we authorize greater tuition increases to make up for most of the cuts. Both the House and Senate increase Student Need Grants by more than $100 million to help our lowest-income students continue to pay their tuition.

The reality is that in the past two years, we’ve completely changed the dynamic of how higher education is funded in this state. Just three years ago, the state subsidized more than half a student’s cost to attend school. In 2007, the total cost for an in-state undergrad at the UW was $15,622, with the state paying 65% of that.

Now, for the first time, it’s flipped. That same UW undergrad is now paying 52% of the $17,152 tab. This has especially worrisome implications for middle-class families who might not qualify for many aid programs but don’t have the means of covering rising tuition costs. It also has implications about how our colleges operate, as described in this excellent Seattle Times article.

One of the ways we’re trying to address the issues of access, affordability and quality is with House Bill 1795, which provides more flexibility for institutions to set tuition with corresponding requirements to provide aid for low- and middle-class students, creates strong new accountability measures to ensure students are graduating on time, and expands the ability for students to transfer to and between schools. We’ve passed this bill out of committee and hope to send it to the Senate as soon as possible.

We have to make this work somehow. Our kids need a college degree to be competitive and successful. Our state’s biggest employers – companies like Boeing, Microsoft, Amazon – need smart employees and won’t stay here if we can’t provide them.

Links

For those reading this document on paper, here are spelled-out copies of the links in the document.

House budget proposal: http://leap.leg.wa.gov/leap/budget/detail/2011/ho1113p.asp

Senate Budget Proposal: http://leap.leg.wa.gov/leap/budget/detail/2011/so1113p.asp

CS Monitor article on state financial condition: http://www.csmonitor.com/Business/2011/0119/State-budget-woes-How-much-will-they-drag-down-US-economy

Supreme Court McCleary (school funding) case: http://www.wasupremecourtblog.com/tags/mccleary-et-al-v-state/

Ross’ blog link on compensation issues: http://s485995026.onlinehome.us/2011/02/state-employee-compensation-and-benefits/

Seattle Times article on higher education: http://seattletimes.nwsource.com/html/localnews/2014670294_admissions03m.html

House Bill 1795 (higher education) info: http://apps.leg.wa.gov/billinfo/summary.aspx?bill=1795&year=2011

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.