With federal pandemic relief funds in much doubt, isn’t it time for Legislature to address budget crisis?

Waiting on the feds to provide the funds needed to address a multibillion dollar budget shortfall seems like an increasingly risky gamble. Yet, the governor and legislative leaders have said that the prospects of federal aid and a relatively healthy rainy day fund mean there’s no need for a special legislative session.

The Associated Press reports federal action remains a long way off. 

Hopes that talks on a huge COVID-19 relief deal would generate an agreement soon are fizzling, with both the Trump administration negotiating team and top congressional Democrats adopting hard lines and testy attitudes.

Now that President Donald Trump has issued a series of executive edicts and the national political conventions are set to begin, consuming the attention of both Trump and top Democrats, the talks seem to be on an indefinite pause. The urgency has evaporated now that rank-and-file lawmakers have been set free for the August recess, and while both sides still want an agreement — and pressure is likely to remain high — it’s looking more like a September legislating effort than an August one.

The article points out the lack of agreement on aid to state and local governments.

Governors in both parties and a slew of local officials are the driving force behind a massive Pelosi-driven aid plan for state and local governments, which have been starved of tax revenues as the economy slumps. They are pleading for help and have panned Trump’s recent executive moves as confusing and inadequate.

But the distance between negotiators on state and local aid is vast. The two sides are hundreds of billions of dollars apart…

It’s clear that Pelosi recognizes she’ll have to go far lower than the $900-plus billion aid package that she built into the Democrats’ bill. It’s equally clear that Republicans know some level of funding will have to be included. So long as the issue is unresolved, an agreement will be out of reach.

Governing magazine also reports on the challenges of getting federal aid to state and local governments, even though the arguments for the assistance are persuasive.

Estimates vary, but states and localities may end up collectively falling about $500 billion short of revenue projections over the next couple of fiscal years. A half-trillion dollars – the midpoint between the Democrats’ $1 trillion and the GOP’s zero – would stave off major economic damage, says Dan White, director of government consulting at Moody’s Analytics, an economic research group.

“$500 billion is not a bad place,” White says. “Quite frankly, I would be shocked if we don’t end up somewhere around this point.”

Economists almost universally agree that direct aid to states and localities is one of the best tools the federal government has at its disposal to avoid a weak recovery or a dip back into recession.

With the state budget projected to fall into a cash deficit this month – a situation that statutorily triggers across-the-board budget cuts – it’s time for that special session. 

Washington Research Council looks at the state’s costly past experience with budget shortfalls and borrowing.

The state budget reportedly goes into a cash deficit this month. We dedicated much of yesterday’s newsletter to the problem and also wrote about it here. State law requires the governor to make across-the-board spending cuts to bring the budget into balance. A special legislative session is the better way to handle the problem.

The Washington Research Council takes a look back to the 1980’s, when the state borrowed to cover a revenue shortfall. Emily Makings writes

As I wrote in April, the state can borrow to balance the budget, but the ability is limited and costly. I gave the example of the early 1980s, when state borrowing led the bond rating firms to reduce Washington’s credit rating. Now that the Office of Financial Management (OFM) is projecting a cash deficit in the general fund–state (GFS), I’ve been reading more about what happened back in the ‘80s.

The GFS went into cash deficit in October 1980. According to the Legislative Evaluation & Accountability Program (LEAP) Committee, to address the problem, the state used interfund loans beginning in October 1980. (Interest is due on these interfund loans.)

It’s a detailed and fascinating piece of fiscal history that we encourage you to read. In a series of hiring freezes, budget cuts, loans, and more the state finally got things sorted.

Eventually the shortfalls and cash-flow problems were resolved, but the history shows that borrowing (whether from private banks or from other state funds) is costly and tends to compound.

If there’s a silver lining here, it’s that the situation in the early ‘80s forced the state to establish “a much better money-management and -forecasting system,” as Seattle Times columnist Richard W. Larsen wrote in 1985 (Larsen, “State budget problems – they were worse four years ago,” Seattle Times, Jan. 16, 1985). Indeed, on Jan. 17, 1984, Gov. Spellman established a Forecast Council: “The importance of economic and revenue forecasting has become very evident in recent years.” (Later in 1984, the Legislature acted to create the Economic and Revenue Forecast Council.)

Washington does have better systems in place now. As a result, state leaders know that the budget faces a multi-billion budget shortfall. And, as Makings writes, they know the projected cash deficit requires action. So, now it’s time to act.

Seattle sees revenues drop. City Council makes budget cuts, loses police chief.

The Washington Research Council reports the latest revenue forecast for City of Seattle confirms the toll taken by the pandemic. 

t…he Seattle City Budget Office (CBO) released an updated revenue forecast for the city. General fund revenues for 2020 are now expected to be $1.194 billion—15.0 percent below the level of revenues assumed in the adopted 2020 budget ($1.404 billion) and 2.1 percent below the June forecast. General fund revenues for 2021 are now estimated to be $1.254 billion (10.7 percent below the adopted 2020 budget).

Ben Noble, the director of the CBO writes, “recovery to pre-virus levels cannot be reasonably anticipated until 2023 and 2024.”

WRC analyst Emily Makings points out that Mayor Durkan vetoed the City Council’s bill to use emergency reserves to sustain new spending. Her veto may be overridden tomorrow.

The one area the City Council seems serious about targeting for budget reductions is the city’s police department. But they seem to struggle there, too. The Seattle Times reports,

The City Council took votes Monday to rebalance Seattle’s battered 2020 budget and start reducing the size and scope of the Police Department. It also promised to make more dramatic changes to public safety services next year.

Budget amendments passed by the council are intended to shrink the force by up to 100 officers through layoffs and attrition this year; dismantle a team that removes some homeless encampments; and cut the wages of Police Department command staff between September and December, among other actions.

As the ST reports, the council’s cuts to the Police Department budget have less to do with declining revenues than with the council’s political orientation.

Mayor Jenny Durkan and Best opposed some of Monday’s moves, asking the council to hold off on changes they said would be hard to carry out quickly. The Seattle Police Officers Guild (SPOG) campaigned against layoffs, collecting petition signatures from people across the country and rallying Sunday.

But Councilmember Teresa Mosqueda described Monday’s amendments as first stepstoward achieving the demands by many Black Lives Matter protesters that Seattle defund the Police Department by 50% to invest in community programs. Since May, large crowds have repeatedly taken to the streets and advocates have put pressure on the council to rethink public safety.

After Monday’s vote, Police Chief Carmen Best announced her resignation.

Seattle Police Chief Carmen Best will step down, she has announced, in the wake of protests against police brutality, criticism over the Police Department’s response and votes by the City Council to shrink the police force and cut her wages.

Crosscut also reports on the budget actions.

The measures that passed Monday represent the collision of two unprecedented moments in Seattle history: the economic devastation wrought by the coronavirus and the protests calling for radical change to public safety. 

The council and the mayor face a roughly $400 million shortfall in this year’s budget, a hole so deep that City Hall was forced to revisit its 2020 budget. On Monday, the city’s budget office released new 2020 projections that were $26 million worse than previous, already dismal forecasts. 

While some of the pain will be eased through rainy day, emergency and state and federal funding, the city also will slash dollars this year from projects in transportation, parks and elsewhere, with more cuts certain to come next year.  

The council also recently passed a new tax on large businesses, which it hopes will buoy the city’s finances in coming years, although Mayor Jenny Durkan has been skeptical. 

More skepticism is warranted. What with the protests, the pandemic, and the punitive tax on successful business, it’s been a rough several months for the city.

Before the pandemic, the state budget faced a sustainability problem.

As lawmakers confront the current cash deficit and revenue shortfall – soon, we hope, in a special session of the Legislature – they should also recognize that state spending growth before the pandemic increased budget risk. The Washington Research Council provides a useful reminder of that fact in a blog post by Emily Makings. 

State spending has increased substantially in recent years. Much of this growth was driven by the increases in school funding made to comply with the state Supreme Court’s McCleary decision. The Court found the state in compliance in 2018, but state spending hasn’t slowed.

Including the 2020 supplemental (and the governor’s vetoes), 2019–21 appropriations are $9.016 billion (20.2 percent) higher than in 2017–19.

As this WRC chart shows, expenditure growth has been dramatic.

Makings writes,

We have previously argued that the 2019–21 spending level is unsustainable. Now, with revenues expected to be much lower than previously estimated, the enacted level of spending is no longer even attainable. The Legislature should cut spending to bring it more in line with expected revenues.

The post suggests that spending reductions could be done thoughtfully, if the governor and Legislature acted now.

To balance the budget, the Legislature could cut spending at the maintenance level and from new policies enacted this biennium.

This could be done through a Priorities of Government process. As the Office of Financial Management describes it, “the administration conducts a government-wide assessment of services to establish a clear set of results that citizens expect from state government and then reprioritizes state spending to focus on services most instrumental in achieving those results.” This process was used by Gov. Gregoire in response to the Great Recession and by Gov. Locke in response to deficits in the early 2000s.

There’s more in the WRC blog post.

It’s time to act.

Washington Research Council reports that the state’s cash deficit could result in double-digit budget cuts.

As lawmakers continue to resist going into a special session to address the state’s multi-billion dollar budget shortfall, the state budget will experience a cash deficit this month. The Washington Research Council explains

The Office of Financial Management (OFM) estimates that the general fund–state (GFS) will be in cash deficit this month. Jason Mercier of the Washington Policy Center first posted OFM’s calculations earlier this week.

According to OFM, the cash balance of the GFS will be negative $277.1 million this month and the deficit will continue to grow through the end of FY 2021. Whether or not the GFS is in a cash deficit matters because state law (RCW 43.88.110(7)) requires the governor to make across-the-board cuts to spending allotments if a cash deficit is projected in a particular fund. (Terms are defined here.)

In July, the WRC released a policy brief showing that delayed budget action limits the options availability to lawmakers, increasing the pain of deep budget cuts or sharp tax increases. The cash deficit, the WRC now points out, also places the governor and Legislature in a very difficult position. The magnitude of across-the-board cuts varies, depending on a couple of choices, but all of them are unpalatable.

WRC analyst Emily Makings notes that in September 2010, Gov. Gregoire made across-the-board cuts as the Great Recession put the state in a cash deficit position. She writes,

It appears that any across-the-board cuts this year will have to be deeper than those made in 2010. In ordering the 2010 across-the-board cuts, Gov. Gregoire protected basic education, debt service, and contributions to retirement (citing constitutional obligations for these programs).

If these areas are protected, I estimate that the cuts to the rest of the budget would need to be 33.5 percent given OFM’s calculation of the deficit (including the CRF, which, as noted above, has a number of issues), assuming the cuts would be effective in September. Using the deficit calculation that includes the CRF and our other adjustments, the cuts would need to be 24.2 percent.

She concludes,

At this point, Gov. Inslee has not indicated that he will order across-the-board cuts in response to the cash deficits projected by OFM. Moreover, there are no plans for a special legislative session to deal with the budget shortfall. By waiting, any necessary spending cuts will have to be even deeper. Additionally, the governor cannot unilaterally use the rainy day funds to soften the blow of the spending cuts. To access those funds (currently $1.693 billion, according to OFM), the Legislature will have to go into session and appropriate them.

A special session made sense in June. It makes much more sense now.

U.S. added 1.8 million jobs in July, better than anticipated, but the jobs recovery remains slow.

Today’s jobs report shows an economy that continues to recover, but slowly. The U.S. Bureau of Labor Statistics reported 1.8 million jobs were added last month. 

Total nonfarm payroll employment rose by 1.8 million in July, and the unemployment rate fell to 10.2 percent, the U.S. Bureau of Labor Statistics reported today. These
improvements in the labor market reflected the continued resumption of economic activity that had been curtailed due to the coronavirus (COVID-19) pandemic and
efforts to contain it. In July, notable job gains occurred in leisure and hospitality, government, retail trade, professional and business services, other services, and
health care.

Calculated Risk adds,

This was above consensus expectations of 1.58 million jobs added, and May and June were revised up by 18,000 combined.

Reactions were mixed. 

CNBC reports,

July’s report “confirms that the resurgence in new virus cases caused the economic recovery to slow, but also underlines that it has not yet gone into reverse,” said Andrew Hunter, senior U.S. economist at Capital Economics. “With new infections now trending clearly lower again and high-frequency activity indicators showing tentative signs of a renewed upturn, employment should continue to rebound over the coming months.”

MarketWatch has a roundup of economists’ opinions, including these:

:The jobs recovery continues, and at a moderately faster-than-expected pace in July. That’s the good news. The bad news is the pace of recovery is slowing. The easy job gains are behind us and it will be an increasingly slower slog from here unless/until a vaccine allows the economy to fully reopen.” — Chris Low, chief economist at FHN Financial

And, 

“The real surprise in this report is that the number of permanent job losers held roughly steady in July from June. That means for every person laid off (with no expectation of being recalled) between June and July, someone else who had been permanently unemployed was hired.” — Betsey Stevenson, professor of public policy and economics at the University of Michigan and former chief economist at the Labor Department

Bloomberg reports,

“There is some moderation in the pace of job creation, naturally, as you get past the initial bounce in activity upon reopening,” said Michelle Meyer, head of U.S. economics at Bank of America Corp. “It’s still a long road ahead in terms of fully recovering the labor market, but progress is being made.”

Overall, slow progress.

Employment Security Department reports 25,000 Washingtonians filed for unemployment this week.

The state Employment Security Department reports  a decrease in all unemployment claims from the previous week.

During the week of July 26 through August 1, there were 24,985 initial regular unemployment claims (down 13.4% from the prior week) and 656,556 total claims for all unemployment benefit categories (down 3.1% from the prior week) filed by Washingtonians, according to the Employment Security Department (ESD).  

  • Initial regular claims applications remain at elevated levels and are at 346 percent above last year’s weekly new claims applications.
  • Regular Unemployment Insurance, Pandemic Unemployment Assistance (PUA) and Pandemic Emergency Unemployment Compensation (PEUC) initial claims as well as continuing claims all decreased over the previous week.

ESD paid out over $575.5 million for 444,580 individual claims – an increase of $2.2 million and 2,394 more individuals compared to the prior week.

The head of ESD comments on the numbers.

“Getting benefits to all eligible Washingtonians has been, and continues to be, our agency’s top priority,” said ESD Commissioner Suzi LeVine. “As we turn the page on Operation 100%, more than 81,500 individuals who had applied by mid-June and not received payment now have resolution on their claims. You can see this reflected in this week’s data, as claims went down but dollars out went up.”

Seattle Times business reporter Paul Roberts writes,

Workers in Washington state filed fewer claims for jobless benefits last week, but it’s far from clear whether that’s a blip in the data or the sign of economic recovery…

It’s probably too early to say whether Washington’s dip in claims represents a longer term shift in the state’s job market. Recent layoffs in the airline industry and other industries suggest some sectors may only just now be reaching the point that retailers and other consumer-facing businesses hit months ago.

Nationally, 1.2 million claims were filed.

Nationally, 1.2 million filed for unemployment benefits last week, lowest weekly filing since March.

The U.S. Department of Labor reports 1.2 million Americans filed for benefits last week.

In the week ending August 1, the advance figure for seasonally adjusted initial claims was 1,186,000, a decrease of 249,000 from the previous week’s revised level. The previous week’s level was revised up by 1,000 from 1,434,000 to 1,435,000. The 4-week moving average was 1,337,750, a decrease of 31,000 from the previous week’s revised average. The previous week’s average was revised up by 250 from 1,368,500 to 1,368,750.

The advance seasonally adjusted insured unemployment rate was 11.0 percent for the week ending July 25, a decrease of 0.6 percentage point from the previous week’s unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending July 25 was 16,107,000, a decrease of 844,000 from the previous week’s revised level.

As Calculated Risk notes,

This does not include the 655,707 initial claims for Pandemic Unemployment Assistance (PUA).

The Associated Press writes,

The government’s report Thursday did offer a smidgen of hopeful news: The number of jobless claims declined by 249,000 from the previous week, after rising for two straight weeks, and it was the lowest total since mid-March…

Rubeela Farooqi, chief U.S. economist at High Frequency Economics, called the drop in weekly claims “a move in the right direction.” But in a research note, she added:

“Repeated shutdowns for virus containment remain a threat to the labor market, which is already weak. The possibility of mounting layoffs that could become permanent is high. Without effective virus containment, the recovery remains at risk from ongoing job losses that could further restrain incomes and spending.”

With respect to the shutdowns, Dr. Anthony Fauci told Politico,

“There seems to be a misperception that either you shut down completely and damage a lot of things, mental health, the economy, all kinds of things, or let it rip and do whatever you want,” Fauci told POLITICO’s “Pulse Check” podcaston Wednesday. “There’s a stepwise fashion that you can open up the economy successfully.

“You don’t have to lock down again, but everybody has got to be on board for doing these five or six fundamental public health measures” like masks and social distancing, Fauci added.

Right. Stay Safe, Stay Open. Wear a Mask.