State revenues are growing, but controversial budget forecast projects 2017-19 deficit

In more good news for the state, the Economic and Revenue Forecast Council adopted a new revenue projection identifying yet another increase for the current and next biennia.

The General Fund-State (GF-S) revenue forecast has been increased by $215 million for the 2015-17 biennium and increased by $137 million for the 2017-19 biennium.

The Washington economic forecast is similar to that in September, but includes slightly stronger personal income and employment but lower housing permits. Risks to the forecast include slow global and U.S. economic growth, weak labor productivity growth and uncertainty regarding fiscal and trade policy.

General Fund-State revenues are expected to grow 12.8% between the 2013-15 and 2015-17 biennia and 6.7% between the 2015-17 and 2017-19 biennia.

The state economy continues to perform well. The forecast bump was foreshadowed by the latest economic and revenue update, which indicated employment strength.

Total nonfarm payroll employment rose 6,000 (seasonally adjusted) in Sep- tember, which was 2,900 more than the 3,000 expected in the September forecast. The manufacturing sector accounted for much of the variance in job growth with no net change in jobs in September; the September forecast had expected a reduction of 1,200 manufac- turing jobs. The aerospace sector was expected to shed 1,500 jobs but instead added 200. Construction employment increased 1,000 and government payrolls expanded by 800 jobs. As is usually the case, the bulk of the job growth was in private, service-providing sectors which added 4,000 jobs in September.

As well,

Major General Fund-State revenue collections for the October 11 – November 10, 2016 collection period came in $101.8 million (6.8%) above the September forecast. The forecast expected $15.3 million in large refunds to occur during the period. Had the refunds occurred as forecasted, collections would have been $86.5 million (5.8%) higher than fore- casted. Cumulatively, collections are now $132.3 million (4.7%) higher than forecasted. Had the refunds occurred as expected, collections would have been $117.0 million (4.1%) higher than forecasted. The refunds are still expected to occur at a later time.

But, as the Washington Research Council writes, the McCleary decision requiring full funding of basic education makes the 2017-19 budget negotiations anything but easy. And the new forecast only provides slight comfort to budget writers.

The updated outlook for the current biennium, 2015–17, expects an unrestricted ending balance of $943 million and total reserves (including the rainy day fund) of $2.134 billion. For 2017–19, the unrestricted ending balance is estimated to be negative $1.489 billion, with total reserves of $138 million. For 2019–21, the unrestricted ending balance is estimated to be negative $7.444 billion, with total reserves of negative $5.283 billion. 

The projected shortfalls are a result of the forecast council’s decision to include a plug figure of $3.5 billion for meeting McCleary requirements. The decision was controversial and resulted in a divided vote.

The $3.5 billion estimate has been a relatively standard one thrown around in recent years. But state Sen. John Braun, R-Centralia, and state Rep. Terry Nealey, R-Dayton, objected to the budget outlook, saying lawmakers don’t yet agree on how much money is necessary to fully fund basic education.

Braun cited a consultant’s report delivered Tuesday that was supposed to help legislators home in on that number by illustrating how much local levy money goes toward basic education. But when the report was delivered, it became clear lawmakers still need to agree on what is considered basic education to figure out the final price tag of McCleary.

“Why are we making a number at all when we know we have more work to do?” Braun said of the budget outlook’s estimate. He argued that the forecast council’s move was a partisan attempt to sway discussion on the subject. 

[State budget director David] Schumacher said while nobody knows if meeting McCleary will cost “exactly” $3.5 billion, “I think there’s broad agreement that we’re in that neighborhood.”

 While observers and players alike hope for a consensus on the cost of meeting the obligation before the session begins in January, the Seattle Times reports,

I’m an optimist, but I think that will be tough,” Braun said after a meeting of the state Economic and Revenue Forecast Council, of which he’s a member. “There will be a legitimate effort by both sides to try to reach a consensus.”

“Whether we get there or not,” he added, “I can’t say.”

The governor releases his budget proposal next month.