Analysis: Adopted state budget faces long-term sustainability problems stemming from spending and revenue mismatch.

The Washington Research Council has released a thorough and clear analysis of the state’s 2021-2023 budget. Under the headline, With No Budget Shortfall to Address, Legislature Spent Heavily and Potentially Created Budget Challenges for the Future, the WRC tracks the revenue and expenditure choices made by lawmakers in the 2021 legislative session. After you’ve read the 11-page report, you might be inclined, as we were, to believe that the WRC included “potentially” in the headline out of an abundance of caution. The challenges ahead may well be inevitable.

The report’s overview summarizes the key points of concern:

The budget passed by the Legislature balances over four years. But there are seven particularly troubling aspects of this budget:

  • NGFO spending is increased substantially, even though federal relief money can be used to address many spending needs related to the pandemic.

  • The budget uses one-time federal relief money to start a new child care and early learning program.

  • The cost of the new child care program bow waves beyond the four-year budget outlook.

  • The budget misses an opportunity to deal with the unfunded liability in the Teachers’ Retirement System plan 1 by merging two closed plans (though putting money toward the problem is better than nothing).

  • It imposes a capital gains tax even as state revenues continue to rise beyond pre-pandemic levels and includes capital gains tax revenues in the balance sheet even though they may never materialize due to legal and ballot challenges.

  • It drains the budget stabilization account (the BSA, or the rainy day fund), despite strong revenue growth and large amounts of federal relief.

  • It creates a bad precedent in moving BSA funds to an unrestricted “shadow” reserve account.

All together,

These actions call into question the sustainability of the budget. By acting as if there was a budget problem this year, legislators may have created challenges for the years ahead.

This graph shows the remarkable trajectory of state revenue growth.

Spending in the budget relies on state revenues plus federal assistance, as the following graph shows.

The WRC points out some of that one-time federal money is used to support ongoing programs. For instance,

The Legislature passed E2SSB 5237, the Fair Start for Kids Act, which makes several enhancements to child care and early learning. For example, it expands eligibility for the Working Connections Child Care (WCCC) program and the Early Childhood Education and Assistance Program (ECEAP), and it increases provider rates. The budget appropriates $321.9 million for the bill in 2021–23. The bulk of the cost is paid for with federal relief funds. Just $9.0 million comes from the NGFO.

The outlook for the 2021–23 budget assumes that E2SSB 5237 will cost $303.4 million in 2023–25. This will all need to come from state funds.

There’s much more in the report, which we strongly recommend to those who want to understand the state budget and anticipate the challenges ahead. We would be remiss, however, if we didn’t again point to the problem posed by relying on the capital gains tax. The WRC writes,

Revenues returned to pre-pandemic levels and are expected to continue increasing. Nevertheless, the Legislature imposed a new capital gains tax. Lawsuits have already been filed regarding the constitutionality of the tax. If it is determined to be unconstitutional, or if it is repealed by initiative, the anticipated revenues would not materialize. Moreover, capital gains taxes are a volatile revenue source.

The bottom line:

The Legislature was highly fortunate in not having to address a budget shortfall this year. Thus, legislators did not face a choice between cutting spending and raising taxes. Nevertheless, they increased spending, raised taxes, and drained the rainy day fund.

The budget substantially increases spending, from both state and federal relief funds. The Legislature started new programs with one-time money, missed savings opportunities, and imposed a capital gains tax that may be unconstitutional or challenged at the ballot. On top of all this, it withdrew the balance of the constitutionally protected rainy day fund and created a troubling precedent by parking it in a shadow reserve account.

These actions call into question the sustainability of the budget. By acting as if there was a budget problem this year, legislators may have created challenges for the years ahead.

Well said.