State Budget

Washington State Budget Important Components: A Citizen’s Summary

State spending must reflect economic realities
In today’s economy, jobs and money can be moved around the globe instantly. In such an environment, state tax levels or regulatory costs that are too high on employers and individuals may cause businesses to re-locate to more tax-friendly states, robbing Washington residents of job opportunities. In this increasingly global economy, uncompetitive levels of state taxation and regulation usually result in declining tax revenues and, thus, fewer state services to those most in need. This reality underscores the need for a healthy state business climate that retains and attracts employers. For elected officials in the legislative process it is easier to see opportunities to spend more taxpayer dollars than it is to identify where job and business losses will occur if legislators spend too much state revenue.

State operating budget
In odd-numbered years the Washington State Legislature must pass a state operating budget and present it for the governor’s signature. This biennial or two-year budget creates the mechanism for the state to pay for its responsibilities.
With the exception of separate budgets for transportation expenditures and capital improvements, the state operating budget covers all aspects of state government operation, including education, social services, the state corrections system, the judicial system, natural resources, government agency and legislative operations, debt repayment and any special appropriations.

The operating budget is funded through a variety of taxes, including a state retail sales tax on all sales except food; a business and occupation (B&O) tax, property taxes, real estate excise taxes, user fees, public utility taxes and estate taxes.
The Washington Constitution requires the Legislature to present a balanced operating budget. That means that every dollar approved by elected officials to be spent on state programs must be matched by another dollar collected in taxes from state residents.

Supplemental budget
In each even-numbered year, midcourse adjustments are made to the state operating budget in the form of a supplemental budget. This has traditionally meant addressing unanticipated changes in state caseloads, correcting technical errors in the original operating budget, and paying for emergency situations. No such budgeting challenges were presented in 2006, yet the Governor and legislative majority added heavy policy changes and unprecedented new spending.
For example, about $70 million in the 2006 supplemental budget was necessary policy-level additions. The rest of the allocations for the supplemental budget—around $468 million—were not absolutely necessary, but rather desirable spending on programs that may not be fiscally sustainable or viable in the future.
This is like purchasing a large luxury item for your family because you can afford the down payment now, but not contemplating the monthly payments in the future. And, one thing is for sure when studying state spending, once a state government program is established, rarely does it ever go away.

Priorities of government
The state operating budget spells out the priorities of state government. These are the programs for which elected officials have decided to spend taxpayer dollars. The state constitution states that the primary responsibility of state government is to fund K-12 public education, a mandate upheld by the State Supreme Court. But the exact level and method of funding education and the levels of spending for other areas of government are decisions made by the elected officials involved in the legislative process.

Gov. Gary Locke established a Priorities of Government (POG) program that attempted to establish greater clarity and public visibility for state spending. This effort identified program priorities, and balanced all requests for funding of new programs against the priorities.

This kind of spending discipline has been absent in the recent budget cycle. It needs to be reinstated.

A tale of two budgets: Differences in the last two state operating budgets

2003-05 biennium: Leadership courage, priorities of government and fiscal discipline
In 2003, the Governor and Legislature closed a budget gap estimated between $2.3 and $2.8 billion. The budget did not raise taxes while protecting services to our state’s most vulnerable citizens. This was accomplished through the leadership of Gov. Locke, Sen. Dino Rossi and others and was especially remarkable considering the state’s economy was in a fragile recovery.

This budget, guided by priorities of government process, forced state government to live within its means and helped put the state back on a track of economic recovery. This took leadership, courage and fiscal discipline, and acted as a blueprint for future biennia.

In 2005, unfortunately, this blueprint was abandoned for failed budget practices and gimmicks from the past, much to the detriment of taxpaying working families. The state is now headed down a road of expensive promises that threaten the balance of state government, including jeopardizing important services and weakening our state’s economic strength. Stay tuned to see how this plays out for our state in the next biennial budget.

2005-07 biennium: New taxes, increased spending and budget gimmicks
To say the state government has been on a spending spree since 2005 would be a gross understatement. Here are some facts about the 2005-07 state operating budget to illustrate this point:

At a time when our state was in a fragile economic recovery, state spending increased by 17.4 percent – or around $4 billion. This is the largest spending increase in state history.
There were $1.1 billion in spending additions, with only $252 million in reductions and efficiencies. This means hundreds of millions of dollars for future budget obligations were added at a time when the state cannot fully afford its current obligations.
Economic realities were ignored. For example, our housing market and its revenue for the state are cooling. If the state continues to make budgeting decisions based on actual revenue as opposed to what it forecasts, it will face billion-dollar shortfalls every budget cycle.
A dangerously small amount was left in reserves—just $238 million or less than 1 percent of the state budget. Some people argue this amount was higher, but they cannot spend a dollar and at the same time claim to save it. A true emergency reserve is for a rainy day or disasters.
New state accounts were created, giving political cover for creative accounting and protecting the ability of legislators to spend more in the future. The state operating budget, if used properly, should pay for priorities of government. When the state abandons this approach, as it did in 2005, it is time to re-focus on our priorities for government.
The increasing state pension funding responsibility was ignored. Our state pension system is a growing problem that could cost taxpayers billions of dollars in the future if it continues to be underfunded.

The bottom line on the 2005-07 state operating budget is that it is not fiscally sound. The principles on which the budget is based jeopardize our state’s future. State leaders should never finalize a state budget knowing that it could result in a significant deficit.

Fortunately, in part due to federal tax cuts, state revenues have been larger than anticipated and budgetary constraints have been avoided so far. But, why should we be at the mercy of the peaks and valleys of the national economy? State budgeting is about determining priorities of government and funding those obligations; it is should not be about saying “yes” to every good idea and creating spending levels that are unsustainable in the future.

Budget-drivers for state government

State spending pays for responsibilities such as public K-12 schools, social services, higher education, debt services, corrections, government operations, natural resources, judicial operations, legislative operations, and other special appropriations. Some of these expenditures hold steady over time and are easy to forecast, while others are more volatile. The following are areas that drive the state budgeting process and what can be done to address their impact:

Health care costs
State health care costs are rising faster than inflation, with some Washington residents having trouble accessing the health care system at all.
The Washington State Legislature has done little, if anything, to address these problems in 2005 and 2006. However, the governor did create a Blue Ribbon Commission to look into the affordability and access problems of our health care system. It is hard to say what will evolve from this effort. At this point in time, many believe it will be too little too late, and will simply clear the way for calls for universal or government-run health care.

Performance of the state economy
Washington is especially reliant on its business and occupation (B&O), real estate excise and property taxes, in addition to other economy driven revenue sources. This reliance puts a premium on the strength of our economy as it has a direct correlation to the amount of state revenue. Our state economy is not as strong as it could be due to a poor business climate that stifles entrepreneurial spirit and discourages employers from relocating to Washington.

Collective bargaining contracts
Collective bargaining contracts negotiated directly between the governor and public sector unions, with the Washington State Legislature relegated to a rubber stamp status, are increasing the costs of running state government. This is a direct result of 2002 civil service reform and the new found strength of unions in the public sector. These contracts are often determined before other state spending obligations, such as education, are addressed and those union contracts then drive the budgeting process.

Pension costs
State pension costs are rising sharply. Pension system problems in the private sector are well known, and government is not immune from these same challenges. This problem has been gathering momentum as payments for the state’s pension system have been put aside or under-funded.

Changes in federal funding
While the state relies heavily on the revenue its internal mechanisms create, it is also reliant on the federal government for funding. Changes in various federal funding formulas and programs have the state adjusting appropriations each year, whether it is an operating or supplemental budget year. Some of these changes are out of the state’s control, while others are more manageable.

The Forward Washington Foundation will continue to monitor Washington’s budget process and share with you our observations. We will also be making our own recommendations for improving Washington’s fiscal practices.

This isn’t just about money. It is about ensuring quality education for future generations and protecting valuable programs for those who need help the most. It is about preserving our quality of life and growing a strong, stable economy.