Summary of Washington State Accounts for Transportation

Heres the General Ledger accounts in the WA State budget for Transportation. The numbers in parentheses are G/L account numbers

Board of Pilotage Commissioners

* Pilotage Account (025)

Utilities and Transportation Commission

* Grade Crossing Protective Account (080)

Washington State Patrol

* State Patrol Highway Account (081)

Traffic Safety Commission

* School Zone Safety Account (780)

Department of Licensing

* Motorcycle Safety Education Account (082)
* Highway Safety Account (106)
* Licensing Services Account (201)

Department of Transportation

* Essential Rail Assistance Account (02M)
* Aeronautics Account (039)
* Transportation Infrastructure Account (094)
* Highway Infrastructure Account (096)
* Recreational Vehicle Account (097)
* Puget Sound Capital Construction Account (099)
* HOT Lanes Operations Account (09F)
* Transportation Partnership Account (09H)
* Motor Vehicle Fund (108)
* Puget Sound Ferry Operations Account (109)
* Regional Mobility Grant Account (118)
* Passenger Ferry Account (203)
* Special Category C Account (215)
* Multimodal Transportation Account (218)
* Tacoma Narrows Toll Bridge Account (511)
* Transportation 2003 (Nickel) Account (550)
* Puyallup Tribal Settlement Account (736)

County Road Administration Board

* Rural Arterial Trust Account (102)
* County Arterial Preservation Account (186)

Transportation Improvement Board

* Small City Pavement and Sidewalk Account (08M)
* Urban Arterial Trust Account (112)
* Transportation Improvement Account (144)

Freight Mobility Strategic Investment Board

* Freight Mobility Investment Account (09E)
* Freight Mobility Multimodal Account (11E)

Wa State Budget Expenditure Limits

The Committee

The state General Fund budget and five related funds subject to a spending limit defined in RCW 43.135: State Expenditures Limitations.

The Expenditure Limit Committee was established in 2000 for the purpose of determining and adjusting the state expenditure limit. The members of the Expenditure Limit Committee are

• The Director of the Office of Financial Management
• The Attorney General or the Attorney General's designee
• The chair of the Senate Ways & Means Committee
• The chair of the House Appropriations Committee
• The ranking minority member of the Senate Ways & Means Committee
• The ranking minority member of the House Appropriations Committee

The spending limit applies to the State General Fund, the Health Services Account, the Student Achievement Fund, the Water Quality Account, the Public Safety and Education Account (including the Equal Justice Subaccount), and the Violence Reduction and Drug Enforcement Account. Each November, the Expenditure Limit Committee adjusts the limit for the previous and current fiscal year, and projects a limit for the following two years. Generally speaking, the expenditure limit is the actual spending level from the prior year multiplied by the fiscal growth factor, plus or minus any adjustments required by statute. The fiscal growth factor is the average growth in state personal income for the prior ten fiscal years.

November 2007 Meeting Materials

• 2007 Presentation (pdf)
• Detail of Adjustments to the Initiative 601 Expenditure Limit (pdf)
• Minutes, November 2007 (pdf)
• 2007 Ballot Measures Affecting the Expenditure Limit (pdf)

Spending Limits November 30, 2007
Fiscal Year	Spending Limit
FY 2007*	$14,154.1 million
FY 2008**	$16,002.1 million
FY 2009** (Preliminary)	$16,839.0 million
Total 2007-09 Biennium	$32,841.0 million
FY 2010*** (Preliminary)	$17,746.6 million
FY 2011**** (Unofficial)	$18,660.5 million
Total 2009-11 Biennium	$36,407.1 million
Note: Totals may not tie due to rounding. * Actual GFS spending for FY07 ($14,143.6 million) used to calculate the limit for FY 2008. ** FY 2008 and subsequent years include GFS and "related" accounts. ***Preliminary projection. ****Unofficial calculation for planning purposes, not adopted by the ELC.

Fiscal Growth Factors

Section 8 of Initiative 601 requires that any percentage increase in fees that exceeds the fiscal growth factor must be approved by the Legislature. These factors are also used in the calculation of the spending limit.

Beginning with the 2007-09 biennium, the fiscal growth factor is the average growth in state personal income for the prior ten fiscal years.

Through the 2005-07 biennium, the fiscal growth factor was calculated as a three year moving average of population growth and inflation, lagged two years. Inflation was based on the "Implicit Price Deflator for Personal Consumption" as estimated by the federal Department of Commerce. Population growth was based on estimates by the state Office of Financial Management.

Fiscal Growth Factors

Fiscal Year	Fiscal Growth Factor	Status
FY 1994	7.18%
FY 1995	6.21%
FY 1996	5.13%
FY 1997	4.45%
FY 1998	4.05%
FY 1999	4.18%
FY 2000	3.32%
FY 2001	2.87%
FY 2002	2.79%
FY 2003	3.29%
FY 2004	3.20%
FY 2005	3.03%
FY 2006	2.82%
FY 2007	3.38%
FY 2008	5.53%
FY 2009	5.57%	Final
FY 2010	5.39%	Preliminary
FY 2011	5.15%	Unofficial

• Committee Bylaws (pdf)
• Chronology of Initiative 601 Amendments (pdf)
• 2007 Ballot Measures Affecting the Expenditure Limit (pdf)
• Changes in Spending Limit by 2005 Legislature
• Changes in Spending Limit by 2000 Legislature
• Revised Code of Washington (RCW) 43.135: State Expenditures Limitations
• Archives
• Links to Additional Resources Related to the State Spending Limit

Washington State Increases Budget by 33% in 4 years

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.

Citizens Guide To WAshington State Budget

Page 1
Budget
A Citizen’s Guide to the
Washington State
Budget
January 2006
Page 2
i
T
ABLE OF
C
ONTENTS
Subject
Page
Introduction...................................................................................1
How Big Is The State Budget?......................................................2
Where Does This Money Come From?........................................3
How Are These Funds Spent By Function?..................................4
How Are These Funds Spent By Object?.....................................6
How Many State Employees Are There?......................................8
What Is The State General Fund?...............................................10
How Is State General Fund Money Spent?.................................12
Why Does The Budget Go Up Year After Year?.......................14
How Is The Budget Created?......................................................14
How Significant Is Government In The Economy?....................17
Why Does The State Borrow Money To Pay For The
Capital Budget? ..........................................................................20
How Does The 601 Spending Limit Work? ...............................26
Glossary Of Commonly Used Budget Terms.............................27
Page 3
1
I
NTRODUCTION
The 2006 Citizen’s Guide to the Washington State Budget is offered
as a resource for citizens, members of the Senate, their staff, and other
interested persons; to provide a clear and simple overview of the state
budget and state revenues. It describes the three basic state budgets and
their interrelationships, the sources of revenue that support those
budgets, how the money is spent, how many staff the state employs, the
timeline for budget decisions and information about state debt and the
Initiative 601 spending limit.
This guide was developed as a response to requests received by the
Senate Ways and Means Committee for a brief and easy-to-understand
document that would explain the state budget to the general public. The
Legislature produces a number of documents and reports that provide
highly-detailed information regarding budget and revenue actions and the
many programs and tax sources contained therein. This guide provides a
pamphlet-style brief introduction to the state budget and taxes.
The 2006 Citizen’s Guide to the Washington State Budget was
prepared by staff of the Senate Ways and Means Committee (within
Senate Committee Services) and the Legislative Evaluation and
Accountability Program (LEAP) Committee, with invaluable assistance
from staff in several state agencies, notably staff of the Budget and
Accounting divisions of the Office of Financial Management (OFM).
Questions regarding the guide or requests for additional copies should be
addressed to:
Senate Ways and Means Committee
101 Modular Building 2
Olympia, Washington 98504-0482
Telephone: 360-786-7715
Fax: 360-786-7615
http://www.leg.wa.gov/senate/scs/wm/default.htm
Page 4
2 How Big is the State Budget?

As of the 2005 Legislative Session, the State of Washington will
spend a total of $58.6 billion for the 2005-07 biennium. That is an
average of $80 million per day during the two-year spending period. This
$58.6 billion includes amounts from three different budgets, which are
plans of how the state will spend the money. The relative size of each of
the three state budgets is shown in the following chart:
2005-07 State Budgets
(Dollars in Billions)
Operating Budget
$49.4
Transportation Budget
$5.9
Capital Budget*
$3.3
Total 2005-07 State Budgets
$58.6
*Excludes Capital Re-appropriations (approximately $2.0 billion).
Sources: Winsum and Buildsum budget development systems for the 2005 Session.
Operating
Budget
84.3%
Transportation
Budget 10.1%
Capital Budget*
5.6%
• The budget that pays for the day-to-day operations of state
government (including federal funds and dedicated funds) is called
the Operating Budget ($49.4 billion).
• The budget that pays for transportation activities, such as designing
and maintaining roads and public transit, is called the
Transportation Budget ($5.9 billion). This budget includes
amounts for both transportation operating activities ($2.2 billion)
and transportation capital activities ($3.7 billion).
• The budget to acquire and maintain state buildings, public schools,
higher education facilities, public lands, parks, and other assets is
called the Capital Budget ($3.3 billion).
Budget-related materials frequently refer to the “state general fund”
or General Fund-State (“GF-S”), which is the largest state fund; it
represents more than half of the $49.4 billion operating budget. A
discussion of the GF-S budget begins on page 10.
Page 5
3

Where Does the Money Come From?
To pay for its activities in 2005-07, the state will tax citizens and
businesses $30.2 billion; receive federal and other grants of $15.8 billion;
collect fees and assess charges for licenses and permits of $9.2 billion;
and borrow $2.9 billion. Other sources, including transfers, account for
$0.9 billion. The relative size of each of these sources is shown in the
following chart:
2005-07 Sources of Revenue
(Dollars in Billions)
Taxes
$30.2
Federal & Other Grants
15.8
Licenses, Permits, & Charges for Services
9.2
Borrowing
2.9
Other Sources (including Transfers)
0.9
Total 2005-07 Sources of Revenue
$59.0
Source: OFM Revsum database for 2005-07 as of December 2005.
Taxes
51.2%
Licenses, Permits, &
Charges for Services
15.6%
Borrowing 4.8%
Federal & Other
Grants 26.8%
Other Sources 1.6%
Most of the money the state uses to pay for services comes from state
taxes. Washington’s major tax sources include the sales tax, the property
tax, and a rather unique tax called the Business and Occupation (B&O)
tax, which is a tax on gross receipts rather than on profit or income.
Washington is one of seven states that do not levy a personal income tax.
When the state projects that expenditures will exceed revenues, it
must take action to address the imbalance. The actions it may take
include: spending reserves; reducing expenditures; increasing revenues;
borrowing money; or some combination of these four actions.
Page 6
4
How are these Funds Spent?
?
The following chart shows how the $58.6 billion 2005-07 total funds
budget is allocated:
2005-07 All Budgeted Expenditures*
(Dollars in Billions)
Human Services
$21.7
Public Schools
$13.8
Higher Education
$9.0
Transportation
$5.6
Governmental Operations
$4.2
Natural Resources
$2.1
Debt Service/Other
$2.3
Total 2005-07 All Budgeted Expenditures*
$58.6
*Excludes Capital Re-appropriations (approximately $2.0 billion).
Sources: Winsum and Buildsum budget development systems for the 2005 Session.
Human Services
37.0%
Public Schools
23.5%
Higher Education 15.4%
Transportation 9.5%
Gov't Operations 7.1%
Natural Resources 3.5%
Debt Service/Other 3.9%
Human Services, such as medical and public assistance, long-term
care, other health care, and prisons, represents 37% of total budgeted
expenditures. Most human services programs are partnerships between
the state and the federal government, with the federal government
providing about half of the money and the state providing the rest. The
state provides human services to one out of every five citizens, including
services to over half a million children residing in Washington.
Public Schools--state funding of kindergarten through twelfth grade
(K-12) school districts--comprises the next largest category of total
budgeted expenditures at 23.5%, although it represents the majority of
the state general fund budget (see page 12).
Higher Education continues at 15.4% of total budgeted spending.
Higher education includes support for state four-year schools and
community and technical colleges.
Page 7
5
Almost $5.6 billion was planned to be spent for Transportation
services and construction in the 2005-07 biennium. These services and
construction include highways, state ferries, and other transportation
programs in the Washington State Department of Transportation (DOT);
the Washington State Patrol (WSP); and the Department of Licensing
(DOL), to name the three largest. Of that $5.6 billion, transportation
operating activities account for more than $2.2 billion (3.8% of statewide
spending), and transportation capital activities account for $3.7 billion
(nearly 6.3% of total spending).
Other major spending categories include Natural Resources
(agencies for environmental protection, management, and recreation);
Governmental Operations (administrative, judicial, and legislative
agencies); and other expenditures, such as the payment of Debt Service
(the interest and principle costs of facilities and services funded through
general obligation bonds).
Page 8
6

How are the funds spent by type of sp-ending
Another way to look at state spending is to identify what the state
purchases. For example, payments to contractors and vendors for
services rendered, and to school districts for K-12 education; salaries and
benefits for state employees; and payments for buildings and lands,
among others. These classifications are called “objects” of expenditure.
The following chart shows large objects of expenditure for fiscal
year 2005, the latest period for which complete object data are available:
Fiscal Year 2005 Expenditures by Object*
(Dollars in Billions)
Grants, Benefits & Client Services
$15.3
Salaries and Benefits
$6.4
Goods and Services
$2.9
Capital Outlays
$1.8
All Other
$1.1
Fiscal Year 2005 Expenditures by Object*
$27.5
*Includes Operating and Capital Budgeted Expenditures.
Source: Monitor database from statewide accounting system.
Percentages do not add due to rounding.
Grants,
Benefits &
Client
Services
55.5%
Salaries & Benefits 23.1%
Goods & Services
10.6%
Capital Outlays 6.7%
All Other 4.0%
As the chart shows, more than half of state spending--nearly 56%--is
for Grants, Benefits and Client Services. Spending on this object
occurs mainly in two agencies: $6.7 billion in the Department of Social
and Health Services (DSHS), as payments to hospitals, nursing homes,
other service providers, and as welfare and child care payments; and $6
billion in the Office of the Superintendent of Public Instruction, as
apportionment and grants to K-12 school districts. Many other federal
and state grant programs have expenditures in grants, benefits and client
services.
Page 9
7
The $6.4 billion Salaries and Benefits expenditure in FY 2005
provided compensation to the nearly 107,000 full-time equivalent (FTE)
staff that the state directly employs. In addition to salaries and wages,
this amount includes health, life, and disability insurance; Old Age and
Survivors Insurance (OASI is sometimes referred to as “Social
Security”); retirement and pensions; and other employee benefits.
The $2.9 billion Goods and Services expenditure in FY 2005 paid
for things like supplies, medications at state-operated hospitals, food at
colleges and universities, and small equipment (valued at under $5,000
per item), as well as services such as data processing, security, rentals
and leases, communications, utilities, printing, insurance, training, and
vehicle maintenance.
The $1.8 billion Capital Outlays expenditure in FY 2005 paid for
highway construction ($561 million), buildings ($424 million), and
furnishings, equipment, and software ($358 million), among others. The
Washington State Department of Transportation (DOT) accounted for
not quite half (47%) of these expenditures, while higher education--the
four-year institutions and the community and technical colleges--
accounted for more than one quarter (28%).
The All Other category of objects includes debt service, personal
service contracts, travel, and transfers for approximately $1 billion.
Page 10
8

How Many State Employees are There?
For budget purposes, the state counts its employees in terms of full-
time equivalent (FTE) staff. One FTE equals 2,088 paid hours per fiscal
year. Generally, one FTE is thought of as one full-time position, although
an FTE may be composed of multiple part-time positions. As the
following chart shows, for the 2005-07 biennium, the state’s budgets
anticipate approximately 106,000 annual FTEs.
Average Annual FTE Staff for 2005-07*
Higher Education
46,231
Human Services
33,404
Transportation
11,052
Governmental Operations
9,419
Natural Resources
5,905
Other
627
Total*
106,639
*Includes FTEs from Omnibus Operating, Transportaion, and Capital Budgets.
Sources: Winsum and Buildsum budget development systems for the 2005 Session.
Higher
Education
43.4%
Human Services
31.3%
Gov't Operations 8.8%
Transportation 10.4%
Natural Resources 5.5%
Other 0.6%
Higher Education represents the largest category of state
employees. The budget for the University of Washington includes nearly
20,000 FTEs and there are over 15,000 FTEs in the budget for the
community and technical colleges. The next largest area is Human
Services. More than 17,900 FTEs work for the Department of Social
and Health Services and almost 8,100 FTEs work for the Department of
Corrections.
Three agencies in Transportation employ 99% of the staff in this
area of state government: Washington State Department of
Transportation (7,344 budgeted FTEs), Washington State Patrol (2,385),
and the Department of Licensing (1,256).
Similarly, in Natural Resources, the largest employers are the
Departments of Fish and Wildlife (1,514 budgeted FTEs), Natural
Resources (1,442 FTEs), and Ecology (1,485).
Page 11
9
In this display, Other includes the Office of the Superintendent of
Public Instruction (OSPI); at 291 budgeted FTEs, it is the only agency in
this category with a budget that exceeds 125 FTEs .
Of the approximately 106,000 budgeted FTEs, the state general fund
will pay for 39%, Higher Education non-appropriated funds will pay for
approximately 26%, federal funds will pay for 13%, and numerous
dedicated funds will pay the remaining 22%.
The nearly 100,000 FTEs of K-12 local school districts are not
included in the FTEs that the state directly employs. However, the state
pays for approximately 70% of the maintenance and operations budgets
of the 296 school districts throughout the state via funds disbursed
through the Office of the Superintendent of Public Instruction.
Page 12
10

What is the state General Fund?
The state general fund is the largest single fund within the state
budget. It is the principal state fund supporting the operation of state
government. All major state tax revenues are deposited into this fund.
The sources of tax revenue for the state general fund are shown in the
following chart:
2005-07 Sources of
State General Fund Revenue
(Dollars in Billions)
Retail Sales
$13.6
Business & Occupations (B & O)
4.8
Property*
2.8
Real Estate
1.6
Public Utility
0.7
All Other
2.9
Total
$26.3
*Excludes transfers to the Student Achievement Account required by Initiative 728.
Source: Economic and Revenue Forecast, November 2004 (Cash Basis).
Numbers do not add due to rounding.
Retail Sales
51.5%
B & O 18.3%
Property 10.6%
Real Estate 6.1%
Public Utility 2.5%
All Other 11.0%
For the 2005-07 budget period, the state general fund will receive
$26.3 billion in revenues. More than half of that amount is from the state
retail sales tax. The second largest tax is the Business and Occupation
(B&O) tax, which accounts for approximately 18%. The third largest tax
is the state property tax, which accounts for nearly 11% of the total.
The state sales tax, the B&O tax, and the state property tax account
for more than 80% of all state general fund revenues. In addition, the
general fund relies on real estate excise taxes, use taxes, a public utility
tax, insurance premium taxes, and a number of other smaller taxes. (For
a description of these and other state taxes, refer to the Washington State
Department of Revenue web site at http://dor.wa.gov.)
Page 13
11
Contrary to popular belief, the state lottery does not pay for a large
share of K-12 education. Currently, the lottery brings in about $200
million per biennium. Initiative 728 (enacted by the voters in November
2000) requires the transfer of these funds to the Student Achievement
Account and the Education Construction Account. Since fiscal year
2005, all lottery revenues have been deposited into the Education
Construction Account. The total state budget for public schools is about
$13.8 billion for 2005-07. This means the state lottery, even if entirely
dedicated to K-12 public schools, would represent only about 2% of the
state budget for K-12 education.
The major difference between the state general fund revenues ($26.3
billion) and the total of all budgeted funds revenues ($59 billion) is the
dedication of revenue sources to specific uses. Most of the difference can
be attributed to four types of funds:
• Federal funds for specific federal programs ($13.2 billion);
• Higher Education-specific funds such as the Grants and Contracts
Account, Higher Education Dedicated Local Accounts, the Tuition
and Fees Account, and the University of Washington Hospital
Account ($5.7 billion);
• Bonds for capital purposes ($2.9 billion); and
• Gas taxes for transportation purposes ($2.1 billion).
These four sources account for 73% of the difference between
revenues available for all state government budgets and the state general
fund budget.
Page 14
12
How is State Money Spent?
Because of the nature of its tax sources, the state general fund
receives the most attention during the budget-building process. During
the 2005-07 biennium, the state will spend about $25.7 billion (or about
$35 million per day on average) from the state general fund. The
following chart shows how the state general fund budget is allocated:
2005-07 General Fund-State Expenditures
(Dollars in Billions)
Public Schools
$10.9
Human Services
9.5
Higher Education
2.9
Governmental Operations
0.7
Natural Resources
0.4
Debt Service/Other
1.6
Total
$26.0
Source: Winsum budget development system for the 2005 Session.
Human Services
36.4%
Public Schools
42.1%
Higher Education 11.2%
Gov't Operations 2.7%
Natural Resources 1.4%
Debt Service/Other 6.2%
The largest single state general fund program is Public Schools,
which includes state support for K-12 education. Public schools account
for 23.5% of total budgeted expenditures, but that share increases to
42.1% when examining only the state general fund. By the end of the
2005-07 biennium, the state will provide public education funding for
more than 1,000,000 children.
Human Services state general fund spending consists primarily of
the operating budget for the Department of Social and Health Services,
the State’s umbrella organization that provides medical, social, and
income assistance to citizens in need. It also includes spending for the
Department of Corrections and the Department of Health.
Higher Education spending includes funding for six public
universities, and thirty-four community colleges and technical schools
serving almost 217,000 FTE students. It also includes financial aid to
Page 15
13
nearly 146,000 students attending both state supported and private
colleges. Expenditures for higher education represent 15.4% of all
budgeted funds and 11.2% of the state general fund. In addition to money
from the state general fund, higher education receives $5.5 billion of
dedicated revenues, principally grants and contracts, and tuition and fees.
Other general fund spending categories include Natural Resources,
Governmental Operations, and other expenditures such as the payment
of Debt Service.
Page 16
1
W

Why does the budget increase annually?
The budget increases each year primarily because there are either
more citizens to serve, those services cost more, and/or because citizens
may request new or different services. Public education may be the
easiest example of these trends.
• Article IX, Section 1 of the Washington State Constitution declares
“It is the paramount duty of the state to make ample provision for the
education of all children residing within its borders ...” The cost of
meeting this constitutional requirement takes nearly half of the state
general fund budget. In 1990, there were about 800,000 children in
Washington state K-12 public schools. By the end of 2003-05, the K-
12 system will educate more than 1,000,000 children. The education
of these additional 200,000 children will cost hundreds of millions of
dollars. Over the same period, the population of the state as a whole
is expected to increase nearly 1.4 million people, so there will be
more taxpayers to shoulder these costs.
• Teaching supplies, materials, equipment and energy all will cost
more in 2006 than they did in 1990, so the overall cost of educating
each student will increase.
• Finally, in 1993, the legislature passed new requirements for public
education. Referred to as “education reform,” these requirements
continue to change the cost of education for each child. This too will
cause the budget to increase.
HOW IS THE
BUDGET
CREATED
?
Through the budget process, the Legislature and the Governor decide
how much money to raise and spend. State agencies, the Governor, the
Legislature, citizens, and interest groups are all involved in this process.
Washington State operates on a two-year (biennial) basis, beginning on
July 1st of each odd-numbered year. For example, the current budget is
for the period July 1, 2005 through June 30, 2007.
Agency Requests - In late summer and early fall of each even-
numbered year, state agencies submit budget requests to the Office of
Financial Management (OFM). The Governor reviews the requests and
makes the final decisions for his or her budget proposal.
Page 17
15
The Governor’s Budget - By law, as the chief executive officer of
the state, the Governor must propose a biennial budget in December of
even-numbered years, the month before the Legislature convenes in
regular session. The Governor’s budget is his or her proposed spending
and taxation plan for the biennium.
The Legislative Budget Process - After receiving the Governor’s
budget proposal, the Legislature reviews it and formulates its own budget
during the legislative session which begins in January. The chairs of the
Senate Ways and Means Committee and House Appropriations
Committee work with their respective members and staffs to analyze the
Governor’s budget and develop recommendations and alternative
proposals. The transportation portions of the budget are developed by
separate committees in the House and Senate. By tradition, the initiation
of the budget alternates between chambers each biennium.
After each chamber has passed its version of the budget, the
differences between the two must be reconciled in the budget conference
process. Generally, six fiscal leaders representing both chambers and
both political parties meet as a conference committee to prepare one
legislative budget that is submitted to the full legislature for final passage
and then ultimately delivered to the Governor for his or her signature.
The Governor may veto all or part of the budget, thereby eliminating
funding for certain activities; however, the Governor cannot add money
for an activity for which the Legislature provided no funding. Only after
the Legislature passes a budget and the Governor signs it has the state
created a real budget.
Supplemental Budgets - Each year, the Legislature considers
changes to the biennial budget in what is called a Supplemental Budget.
Generally, such changes represent mid-course corrections to the two-year
spending plans to account for changes in school enrollments, prison
populations, public assistance caseloads, or significant changes in the
economy of the state.
Page 18
16
Timeline of Budget Decisions
(2005-07 Biennium)
State agencies prepare budget
requests and submit them to
the Office of Financial
Management
The Governor reviews the
requests and makes decisions
about what goes in the
Governor's proposed budget.
The Legislature reviews the
Governor's proposed budget,
develops its own budgets, and
approves revenue bills. The
budget is signed or vetoed by
the Governor.
July 2005
Agencies execute the enacted budget.
January 2006 -
March 2006
January 2007 -
April 2007
The Biennium Begins
July 1, 2005 -
June 30, 2007
Supplemental
Budgets
The 2005-07 biennial budget
may be adjusted in the 2006
and 2007 legislative sessions.
Formulation of
the Governor's
Budget
July 2004 -
December 2004
Legislative
Action on the
Budget
January 2005 -
April 2005
Page 19
17
How significant is state government to the economy

State governments, the federal government, and local governments
represent about 28% of all the economic activity in the country, with the
federal government financing more than two thirds of the public amount.
Government Spending as a share of U.S. gross domestic product (GDP), 2000.
Source: A Citizen's Guide to the Federal Budget, Fiscal Year 2002,
http://www.whitehouse.gov/omb/budget/fy2002/guide.pdf
Private Sector
72%
State & Local
Governments 9%
Federal
Government
19%
nalysis of state and local taxes per capita provides one comparison
of tax burdens among the states. As the following chart shows, for FY
2002 (the most recent year for which all data are available), the amount
FY 2002 Per Capita State and Local Taxes
$954
$971
$740
$598
$1,522
$776
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
Washington
U.S. Average
Property Taxes
Other Taxes
Sales Taxes
Income Taxes
$3,216
$3,149
$804
Page 20
18
for state and local taxes per capita for Washington State is $3,216,
which is 2.1% higher than the national average of $3,149.
The chart on page 17 shows that the components of the tax structure
of Washington State differ noticeably from national averages.
Washington is one of only seven states that does not impose a personal
or corporate income tax; at the same time, Washington has relatively
high sales taxes and other taxes. According to the Washington State
Department of Revenue, in FY 2002 Washington ranked 20th in the
nation with property taxes per capita of $954 (the national average was
$971).
The chart on page 19 shows the total state and local taxes per capita
for Washington compared to the other 49 states and to the U.S. average.
This chart shows that Washington ranks 16th in state and local taxes per
capita and that 32 states rank below the U.S. average of $3,149.
By comparing taxes to personal income, it should be possible to take
into account differences in wealth among states when comparing tax
burdens. However in recent years, the incredible increase in Washington
State personal income, due in large part to the explosion of stock options
during the late 1990s and 2000, distorted this measure and made it less
useful as a yardstick of the overall tax burden.
Page 21
19
Alabama
Tennessee
Mississippi
Montana
South Carolina
Arkansas
South Dakota
Idaho
Oklahoma
Oregon
West Virginia
Utah
New Mexico
Kentucky
Arizona
Missouri
Florida
Texas
North Carolina
Louisiana
North Dakota
Indiana
Georgia
New Hampshire
Iowa
Kansas
Nevada
Virginia
Michigan
Pennsylvania
Nebraska
Colorado
Ohio
Vermont
Alaska
Illinois
Delaware
Rhode Island
Hawaii
Wisconsin
California
Maine
Wyoming
Maryland
Minnesota
Massachusetts
New Jersey
Connecticut
New York
WASHINGTON
$3,216
U.S. Average
$3,149
0
Why does the sTate borrow money to pay for captial budget
?
The capital budget uses borrowed money to fund projects that benefit
future tax payers. For example, the benefits of a new higher education
facility will last for 30 years or more. Financing that facility with bonds
paid off over thirty years spreads the cost over the life of the building and
on future tax payers who benefit from it.
How Is The Capital Budget Money Spent?
The following chart shows how the 2005-07 total funds capital
budget is allocated:
2005-07 Capital Budget, Total Funds
(Dollars in Millions)
Higher Education
$910
Natural Resources
782
Public Schools
620
Corrections
243
Other*
715
Total
$3,269
Sources: Winsum and Buildsum budget development systems for the 2005 Session.
*Includes agencies in Government Operations, Human Services (excluding Corrections),
Other Education, and some transportation capital projects.
Higher Education 27.8%
Other* 21.9%
Natural Resources
23.9%
Corrections 7.4%
Public Schools 19.0%
The capital budget funds construction and maintenance of state
buildings such as higher education facilities and prisons, provides grants
to local school districts to help build new schools, and pays for
acquisition and maintenance of public lands, parks and other assets. The
capital budget also provides grants and loans to local governments and
community groups for public works projects such as water and sewer
Page 23
21
systems, environmental projects such as toxic waste clean-up and salmon
habitat restoration, and for cultural and recreational projects such as
youth athletic fields and community service projects.
Where Does Capital Budget Money Come From?
The following chart shows the history of size of the capital budget
for bonds and the total appropriation:
Biennium
Bonds
Total
1985-87
518
695
1987-89
604
988
1989-91
923
1,858
1991-93
1,260
1,885
1993-95
1,011
1,712
1995-97
809
1,627
1997-99
961
1,974
1999-01
1,209
2,508
2001-03
1,142
2,641
2003-05
1,499
2,985
2005-07
1,561
3,269
Source: Buildsum budget development system for the 2005 session.
Capital Budget & Bonds
(Dollars in Millions)
0
500
1,000
1,500
2,000
2,500
3,000
3,500
1
9
8
5
-
8
7
1
9
8
7
-
8
9
1
9
8
9
-
9
1
1
9
9
1
-
9
3
1
9
9
3
-
9
5
1
9
9
5
-
9
7
1
9
9
7
-
9
9
1
9
9
9
-
0
1
2
0
0
1
-
0
3
2
0
0
3
-
0
5
2
0
0
5
-
0
7
$ Millions
Other Funds
State Bonds
About half of the money appropriated in the capital budget comes
from the sale of bonds. The State Treasurer is responsible for selling and
Page 24
22
refinancing bonds. The money to pay the debt is appropriated in the
operating budget. These debt service payments, funded with general
taxes, pay for schools, prisons and college facilities authorized and
constructed through capital budgets adopted in previous legislative
sessions. Bond-funded capital projects authorized in a particular
legislative session will be paid for with taxes appropriated in future
operating budgets. Other funds in the capital budget include federal
grants; loan revolving funds, such as the public works assistance account
and the water pollution control revolving account; and trust land
revenues for common schools and higher education facilities.
Different parts of the capital budget are more or less dependent on
borrowed money. Eighty percent of capital projects for higher education
and nearly all projects for corrections are funded with bonds. Only about
a third of the rest of the capital budget is paid for with bonds. The
following chart shows the major parts of the state bond portion of the
2005-07 capital budget:
2005-07 Capital Budget, State Bonds
(Dollars in Millions)
Higher Education
$678
Natural Resources
255
Corrections
241
Public Schools
139
Other*
249
Total
$1,561
Source: Buildsum budget development system for the 2005 Session.
* Includes agencies in Government Operations, Human Services (excluding Corrections),
Other Education, and some transportation capital projects.
Higher
Education
43.4%
Other* 16%
Natural Resources
16.4%
Corrections 15.4%
Public Schools 8.9%
Page 25
23
What is the Debt Limit and How Does it Control the Capital
Budget?
The Washington State Constitution indirectly limits the amount of
debt the state can incur. Annual debt service payments cannot exceed
nine percent of the average general state revenues in the preceding three
years. Taxes and fees for specific purposes, such as the gas tax and
property tax, are excluded from the definition of general state revenues.
The following chart show the constitutional and statutory debt limits
and the actual debt service payments applicable to each limit.
Debt Limit vs Actual Debt Service Payments
(Dollars in Millions)
Fiscal
Year
Limit
Actual
Limit
Actual
1992
489
275
380
271
1993
532
309
414
302
1994
558
371
434
330
1995
583
415
454
360
1996
612
458
476
390
1997
635
477
494
410
1998
656
510
511
444
1999
680
551
529
471
2000
713
588
554
511
2001
748
630
581
548
2002
779
648
606
575
2003
794
650
622
575
2004
799
643
639
568
2005*
807
695
695
614
2006*
840
723
774
643
2007*
918
768
863
684
*2005, 2006, & 2007 are estimates based on current appropriations.
Sources: Debt models from State Treasurer's Office (11/22/2005)
Constitutional
Statutory
0
100
200
300
400
500
600
700
800
900
1000
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
*
2
0
0
6
*
2
0
0
7
*
Fiscal Years
$ Million
s
Actual Debt Service Subject
to Constitutional Limit
9% Constitutional Debt Limit
Page 26
24
State law also limits debt. The statutory debt limit is seven percent,
but is based on revenues that include the lottery, real estate excise tax,
and property tax. These additional revenues were added by legislation in
2002 and 2003. The debt service payments limited by state law are also
somewhat different from the payments limited by the constitution. The
statutory limit excludes debt on general obligation bonds reimbursable
from money other than general revenue and several specific projects, but
includes voter-approved debt. The effect of these revenue and payment
differences results in a statutory debt limit that now allows about the
same amount of borrowing as the constitutional debt limit.
How Does the Capital Budget Fund Community Projects?
The capital budget funds a variety of community projects. Some of
these projects are first reviewed and prioritized by a state agency. The
following are some of the larger categories of community projects
funded in the capital budget.
Washington Wildlife and Recreation Program
2005-07 Funding – $50 million
Application/Funding Process - Applications are prioritized within
the following types of projects: local parks, state parks, trails, water
access, critical habitat, natural areas, and urban wildlife. The
legislature then specifies how far down the priority list projects will
be funded.
Administrative Agency & Contact – Interagency Committee for
Outdoor Recreation (http://www.iac.wa.gov/iac/grants.asp)
Community Service Facilities
2005-07 Funding – $5.3 million
Application/Funding Process – Applications are prioritized by a
citizens’ advisory committee based on the level of improved
efficiency and service quality the project would provide to the
community. The grant can’t exceed 25 percent of the total project
cost. The legislature then determines which projects will be funded.
Administrative Agency & Contact – Department of Community,
Trade & Economic Development
(http://cted.wa.gov/DesktopDefault.aspx?tabid=475&tabindex=61)
Page 27
25
Building for the Arts
2005-07 Funding – $5.4 million
Application/Funding Process – Applications are prioritized by a
citizens’ advisory committee. The grant can’t exceed 20 percent of
the total project cost. The legislature then determines which projects
will be funded.
Administrative Agency & Contact – Department of Community,
Trade & Economic Development
(http://cted.wa.gov/DesktopDefault.aspx?tabid=475&tabindex=61)
Heritage Capital Projects
2005-07 Funding – $4.6 million
Application/Funding Process – Applications are prioritized by the
Washington State Historical Society in consultation with others. The
grant can’t exceed 33 percent of the total project cost. The
legislature then determines which projects will be funded.
Administrative Agency & Contact – Washington State Historical
Society (http://www.washingtonhistory.org/wshs/contact.htm)
Other Categories of Community Projects
2005-07 Funding – Varies
Application/Funding Process – In addition to the programs above,
the legislature may fund community projects directly, without an
administrative agency reviewing and prioritizing applications.
Contact – Your legislators
Page 28
26
HOW
DOES
THE
601 SPENDING
LIMIT
WORK
?
In November 1993, the citizens of Washington State passed an
initiative to limit the growth in state government spending and taxation.
Initiative 601 (I-601) put a “cap” on state spending for activities funded
by the state General Fund. The expenditure cap was based on the
amount of state spending in 1990, with annual adjustments for
subsequent population growth and inflation. When General Fund
revenues grew faster than the I-601 spending limit, the extra revenue
could be used to reduce taxes or be put into the “emergency reserve
fund,” which could only be used if two-thirds of the legislature agreed to
use it. When revenues grew more slowly during economic recessions,
the emergency reserve fund could be used to allow spending up to the
state spending limit.
Initiative 601 also requires a two-thirds vote of the Legislature to
approve any legislation that increases state revenue, such as a tax
increase. (However, the 2005 Legislature suspended this requirement
until June 30, 2007.) A vote of the people is required if the tax increase
will result in spending in excess of the state expenditure limit.
Legislation enacted in 2005 made several significant changes to
Initiative 601, to take effect in 2007. Beginning in 2007, the state
General Fund expenditure limit will be expanded to include expenditures
from five additional state funds: the Health Services Account; the
Violence Reduction & Drug Enforcement Account; the Public Safety &
Education Account; the Water Quality Account; and the Student
Achievement Fund. In addition, the annual adjustment to the state
spending limit based on population growth and inflation will be replaced
by a formula reflecting the ten-year average growth in state personal
income.
Page 29
27
G
LOSSARY
O
F
C
OMMONLY
U
SED
B
UDGET
T
ERMS
Appropriation - A legislative authorization for an agency or other
governmental unit to make expenditures and incur obligations: (1) for specific
purposes, (2) from designated funding sources, and (3) during a specified time
period.
Biennium - The 24-month period from July 1st of odd-numbered years to
June 30th of odd-numbered years, such as the 2005-07 biennium, which runs
from July 1, 2005 to June 30, 2007.
Capital Budget - The budget that pays for the construction and renovation
of state facilities, including public schools, prisons, state hospitals, higher
education institutions, parks, etc. Revenues to support capital spending come
primarily from bonds and dedicated cash accounts.
Debt Service - The interest and principle costs of facilities and services
funded through general obligation bonds.
Dedicated Funds - The product of reserving certain tax revenues for a
specific purpose or purposes. Generally, any fund other than the general fund or
a federal fund is referred to as a dedicated fund. There are literally hundreds of
dedicated funds in the state treasury. Two of the largest are the Motor Vehicle
Account, which receives gas tax revenues and is restricted to roads and
highways, and the State Lottery Account, which accounts for revenues from
ticket sales and is reserved for the cost of lottery operations and prizes.
Federal Funds – Monies provided by the federal government to support
state programs. Major operating budget federal programs include Medicaid and
the Social Services Block Grant.
Fiscal Year (FY) - The 12-month period from July 1st to June 30th,
expressed in terms of the first six months of the next calendar year. For example,
the FY 2006 fiscal year runs from July 1, 2005 until June 30, 2006.
FTE Staff - Full time equivalent (FTE) staff is a way to measure the size of
the state’s workforce. One FTE is equivalent to 2,088 hours worked per year,
which represents one full-time employee. Total FTE staff does not necessarily
represent the total number of state employees because some staff work part-time
and are thus classified as a percentage of one FTE.
Governmental Operations - A functional area of state spending which
comprises a large number of central service agencies, such as the departments of
General Administration, Personnel, Financial Management, Revenue, etc., as
well as the legislative and judicial branches of government.
Higher Education - A functional area of state spending that includes the
cost of secondary education and workforce training provided through the state’s
34 community and technical colleges, four regional universities, and two
research universities.
Human Services - A functional area of state spending which comprises
human services agencies such as the Department of Social and Health Services,
the Department of Corrections, and the Department of Health.
Page 30
28
Natural Resources - A functional area of state spending that includes the
state’s natural resource agencies such as the departments of Ecology, Fish and
Wildlife, Natural Resources, and the State Parks and Recreation Commission.
Object - A state accounting classification used to categorize expenditures.
Objects of expenditure in the state operating and capital budgets include:
Salaries and Wages; Employ Benefits; Personal Service Contracts; Goods and
Services; Travel; Capital Outlays; Grants, Benefits, and Client Services; Debt
Service; and various transfer objects.
Operating Budget - The budget which pays for most of the day-to-day
operations of state government and constitutes the majority of all state spending
is referred to as the operating budget. Revenue to support this budget comes
from a variety of taxes and fees that are deposited into more than 200 separate
funds and accounts, the largest of which is the state general fund.
Other Education - A functional area of state spending that includes the
cost of providing specialized education services at the Schools for the Deaf and
the Blind, arts and cultural services provided through the Arts Commission and
the two state Historical Societies, and cost of the state Work Force Training, and
Education Coordinating Board.
Public Schools - A functional area of state spending that includes the cost
of educating the state’s children from grades kindergarten through high school.
It also includes the funding for other activities of the public school system. The
Superintendent of Public Instruction allocates these funds to 296 school districts,
nine educational service districts and other contractors who provide education
services.
State General Fund - Often referred to as General Fund-State (GF-S), this
fund serves as the principal state fund supporting the operation of state
government. All major state tax revenues (sales, business and occupation,
property tax, and others) are deposited into this fund.
Transportation Budget - The budget which pays for both the day-to-day
operation of state transportation agencies and the construction and preservation
of state highways and roads, is called the transportation budget. Most of the
revenue that supports the transportation budget comes from the state gas tax.

WA State 2001-3 Budget - Wa Policy Brief

Ideas for Balancing the State Budget Without Raising Taxes


by Eric Montague, Policy Analyst
January 2002


Washington state is facing a serious budget deficit during the 2001-2003 biennium. Until early last year, state economists projected a surplus for the current budget. Since that time the national economy faltered and the state's business outlook weakened. In Washington, the burden of taxes and our state's costly regulatory environment are contributing to the slowdown. As a result, revenue is coming into the state treasury at a lower rate of increase than was predicted.

The current problem stems from the more optimistic revenue projections the legislature used last year in passing the two-year budget. Spending was set to increase substantially, but revenues were expected to keep pace. The revenue projections, however, turned out to be wrong. Beginning in March 2001 money coming into the treasury began to fall short of what the legislature anticipated. Budget experts now predict a shortfall of between $1.25 billion and nearly $2 billion in the current biennium. The state has budgeted for $22.8 billion in General Fund spending for the 2001-03 biennium, while the amount actually being collected in taxes and fees is today estimated at about $21.2 billion.

While projected spending is falling short of planned levels, in real terms state government spending continues to go up. The state spent $20.6 billion through the General Fund in the 1999-01 biennium. In the current biennium it will collect, and spend, at least $700 million more, for an increase of 3.4%. The state does not face a deficit in the sense of having fewer public dollars to spend than it had in past years. Instead, spending is simply increasing at a slower pace than budget writers estimated. The "deficit" the legislature faces this session is the difference between the level of increase the state planned on and the level of increase it is actually collecting in taxes.

The present rise in state spending reflects a long-term trend. Since 1990 General Fund spending has increased more than 78%, rising from $12.8 billion to $22.8 billion per biennium. Over the same period the number of people employed by the state has risen more than 25%, from about 81,000 workers in 1990 to more than 102,000 today.

While projected spending is falling short of enacted levels, in real terms state government spending continues to go up.

Both rates of increase are considerably greater than the growth in the state's population. Some of the widespread frustration people feel over the rising cost of government is reflected in voter support for recent popular initiatives to cut or limit the growth of the tax burden. In the last ten years, each time such a proposal has come before voters it has passed.

To address the deficit the governor and the legislature must chose one or a combination of three widely differing options: 1) increase taxes on residents and businesses to cover the deficit; 2) cut fixed costs and reduce the number of services and state employees; or 3) improve the efficiency of existing programs to maintain services while slowing the rising cost of providing those services.

The first option, imposing a broad based tax increase, is not a practical choice for policymakers. Our state is already the fifth highest taxed in the nation. Washington businesses shoulder 51% percent of the tax burden, fourth highest in the nation and higher than any other western state. In addition, residents now pay more in taxes than they do for food, clothing and transportation combined. The state unemployment rate stands at more than 7%, the second highest in the country. Increasing the tax bite in a time of economic slowdown is not a practical economic or political decision.

The second option, cutting programs and laying off employees, may be necessary but can be used sparingly with innovative leadership from the executive and legislature. In his proposed budget, Governor Locke proposes cutting 435 FTEs, or .004%, of the current state workforce. While this level would have minimal impact on reducing fixed costs, the proposal shows an encouraging willingness to address the underlying sources of the budget shortfall.

The third option, improving the efficiency of existing programs, offers the most effective long-term solution. It would allow the state to maintain service levels while holding the line on cost to taxpayers. The changes needed to improve the way state government operates require tough choices. Enacting change is never easy. Entrenched interests and powerful constituencies that directly benefit from public spending will naturally resist altering the status quo. Recognizing this condition is the first step to success.

Looking ahead, it is evident the falloff in expected revenue growth is not a short- term problem. Without significant restraint in the rate of spending increase, the legislature will face an even deeper fiscal dilemma in the 2003-2005 biennium. The future solvency of Washington's government hinges on decisions the legislature and governor make this year.

Washington's situation is not new or unique. Other states are facing similar tough choices, as increases in tax collections fall short of projections in state capitols across the country. Unlike other states however Washington has policies in place that build-in costs and make it difficult to adjust to lower-than-expected revenues. The following study presents a number of specific reforms that address the structural problems that have caused the current budget shortfall. With sensible reforms state policymakers can balance the current budget, avoid deficits in future years and ease the recurrent sense of crisis in government finance.

Proposal I: Adopt a Flexible Freeze in State Hiring

Over the past twenty years state spending has increased dramatically. Much of the responsibility for the increased spending can be attributed to the growth in government employment. Since 1980 state government employment has increased by nearly 20,000 positions, to more than 100,000 positions, with 9,000 FTEs added just within the last 5 years. State employees earn an average salary of $42,779 plus a generous benefits package that includes full medical coverage, ample vacation, sick leave and a 401(k) retirement plan, driving average total compensation over $53,000 per employee.



State spending on personnel totaled $5.4 billion last year. Over the last 10 years average total compensation for state workers has increased more than $13,000. During the same time the state added nearly 14,000 workers, increasing total state payroll from $3.5 billion to $5.4 billion. Today, Washington taxpayers and businesses spend $1.9 billion per year more than they did ten years ago to support a government payroll that is larger than any business in the state and provides an average compensation package more than $15,000 above that of the average private sector wage.

The governor's proposal to trim 435 full-time positions from the state workforce, which is about .004% of the current level, is inadequate to bring state salary and benefits spending under control. To help address the immediate need for budget restraint a simple flexible hiring freeze would limit total state employment to current levels, allowing the governor and agency managers breathing space to prioritize hiring in areas that need assistance. Increases in one agency would require decreases in another. This method of reigning in rising costs is often used in the private sector as a first step to regaining fiscal control.

Proposal II: Authorize the State Auditor to Conduct Performance
Audits

In other states independent performance audits have improved service and reduced cost by identifying and eliminating waste and inefficiency. The Joint Legislative Audit and Review Committee (JLARC) conducts performance audits at the direction of the Legislature. The quality of JLARC research is excellent, however the committee only audits specific agencies or programs as directed, which significantly restricts its effectiveness. Audit assignments can also face conflicts of interest because committee staff must audit programs that legislators initially approved and wish to continue to fund.

During the 2001 Session the legislature appropriated $300,000 for a pilot program to allow the state auditor to conduct three initial audits of state agencies. Governor Locke approved the funding, but vetoed the provision authorizing the actual program, even though it passed both the House and Senate by wide margins.

Three audits of individual agencies are clearly not enough. The independently- elected state auditor has the capability to conduct performance audits with a broad view of state government performance and agency or program interaction. The state auditor should be allowed to conduct a comprehensive statewide performance audit, identifying overlapping agencies and regulations, and helping to restore Washington residents' trust in government.

Conducting performance audits saves money for state taxpayers. In Colorado, performance audits completed in June 2000 identified over $12 million in easily adopted savings, and $41 million in additional near-term efficiency improvements during their initial audit. In Florida, an audit of the budget system helped the legislature and the governor enact changes that will significantly improve future efficiency. Texas is a pioneer in statewide performance audits. Over an eight year period that state has identified total savings of $8.1 billion.


Proposal III: End the Monopoly on Government Work by Competitively Bidding for State Services

Private companies should be allowed to compete equally with state employee groups to provide services to Washington residents. State law bans private competition for government services that are, or could be in the future, provided by government workers. Repealing the ban would allow agency managers to select the most efficient and effective method for delivering services to Washington residents.

Competitive bidding is a powerful planning tool that gives managers greater flexibility in working with scarce public resources. Competitive bidding does not mean privatization. In other states public employees compete for, and often win, competitions to perform government work. Competition, not privatization, achieves higher efficiency by allowing managers to choose the best-cost option while delivering improved services to the public. Even when government workers are selected as the ideal way to provide a given public service, the very existence of competition from the private sector tends to drive down the cost of the government's in-house operations.

Examples from other state and local governments show typical savings of ten to twenty-five percent. In 1998 an independent audit estimated the Department of Transportation could improve service levels and save at least ten percent, or more than $25 million, by competitively bidding highway maintenance. Other services would experience similar benefits by introducing competition. For the purposes of this analysis we assume a conservative ten percent in savings during the 2001-03 biennium from competitive bidding, unless otherwise noted. Specific opportunities for competitive bidding include:

A. Highway Maintenance

The state highway maintenance program covers nearly 18,000 lane-miles of state highways, ten major mountain passes, 45 rest areas and many other transportation related systems. Maintenance operations include roadway repair and operation, roadside and landscape maintenance, snow and ice control, rest area operations and many others.

In a department of this magnitude, one would reasonably expect there to be areas where the state could do its job more efficiently, uphold quality standards and gain major savings. Experience from other states, like Massachusetts and Virginia, demonstrate that competition for highway maintenance can be easily implemented, with minimal impact on state workers and significant improvement in cost savings and work quality. In Washington, competition between knowledgeable and experienced state workers and the innovative and vibrant private sector would benefit taxpayers and commuters alike.

Current Budget: $261 million, 1310 FTEs
Potential 10% Savings: $26.1 million

B. State Capitol Building and Grounds Maintenance

Government offices and grounds, like similar private facilities, require professional upkeep on a regular basis. At the Washington State Capitol, the Department of General Administration operates five million square feet of building space and 160 acres of landscaped grounds.

Long ago private companies found that they could save money and shift their energies to more important projects if they contracted out routine maintenance to companies that specialize in this type of work. Wisely, the state has already contracted out some responsibilities, but many opportunities for reform remain. By competitively bidding for services such as landscaping, parking management and building cleaning and repair, the state could significantly reduce the cost of maintaining an attractive, vibrant capitol campus.

Current Budget: $41 million, 230 FTEs
Potential 10% Savings: $4.1 million

C. Operation of the State Motor Pool

Washington state, like most states, owns fleets of cars, buses and vans. Basic maintenance of these vehicles, such as oil changes, tune-ups and other repairs, as well as managing equipment rentals, require a full assortment of public-sector staff. Yet there are high-quality companies that provide full motor pool services, including maintenance, ownership and operation, to governments and private companies throughout the country.


San Mateo, California, Coral Springs, Florida and Indianapolis have all opened their fleet services up for competitive bidding and all have saved money. In Indianapolis, a government employee group won the motor pool bid and increased productivity by 22 percent while saving taxpayers $4.6 million.

Current Budget: $27.9 million, 99 FTEs
Potential 10% Savings: $2.7 million

D. Liquor Sales and Distribution

The Liquor Control Board operates 157 state liquor stores and is responsible for selling all distilled spirits marketed in the state of Washington. Privatizing the sale and distribution of liquor would free up substantial revenue generated by liquor and beer taxes that could be better spent on alcohol education, enforcement of existing laws or to reduce the deficit.

By privatizing the sale and distribution of liquor, the state would no longer shoulder the cost of purchasing, storing, distributing and selling liquor to Washington residents. The taxes imposed on liquor sales would continue to be collected by the state, but they would no longer be used to support a large distribution and sales network, allowing that money to be used for increased enforcement or to balance the budget.

Current Budget: $108 million, 673 FTEs
Potential 100% Savings from Full Privatization: $108 million

E. Passenger Ferry Service

Washington State Ferries provide 27 million passenger trips each year. Many of those trips are on passenger-only ferries, where fare-box revenue only covers 60% of the cost of operation. Competition against the state's ferry service is currently illegal within ten miles of any existing route, an area that covers all Puget Sound ports. Revising the law to allow private companies to compete for passengers could improve service to thousands of commuters and reduce the burden on taxpayers of the heavily subsidized government ferry service.

Current Budget: $327 million, 1684 FTEs for operation of the entire ferry system
Potential 5% Savings for Private Competition for Passenger Ferries: $16 million


F. Park Operations and Maintenance

The State Parks and Recreation Commission operates and maintains 125 camping and day-use parks, land and water trails, winter recreation areas, historic sites, interpretive centers and environmental learning centers. Inviting private companies or non-profit organizations to compete for contracts to maintain and operate these facilities would improve efficiency for an agency that is increasingly constrained by budget pressures and threatens to close state parks.

In Canada many provinces have successfully contracted out park operations with the private sector. By tapping private companies and non-profit organizations they have saved money and maintained a high level of service to Canadian citizens.

Current Budget: $76 million, 548 FTEs
Potential 10% Savings: $7.6 million

G. Prison Construction and Management

Case studies from across the nation show that private competition in prison management can help increase quality and public safety while cutting cost. By allowing private contractors to compete with existing state workers for prison management and construction other states have reduced costs by 10 to 25 percent.

Private companies already manage a Whatcom County work release facility, a Spokane County juvenile detention center and a federal prison in the state. Instead of reacting to budget constraints by releasing prisoners back onto the streets, many of whom will quickly seek out new victims, competitive contracting should be used to reduce cost and increase quality of service at our state's correctional facilities.

Current Budget: $1 billion, 7,629 FTEs
Potential 10% Savings: $100 million

H. K-12 Busing and Student Transportation

Many private companies already provide transportation for thousands of Washington students. Competitively bidding the remaining government worker monopolies could free state funds and reduce the government workforce while maintaining a high level of safety and well being for the children of our state.

Current Budget: $387 million, 3,630 FTEs
Potential 10% Savings: $38 million

I. Department of Printing

The public printer binds, prints and delivers documents to all branches of state government. Printing firms in the private sector are capable of providing quality and cost-competitive printing services to the legislature, judiciary and executive, meeting all service requirements and employing the latest technology currently provided by the Department of Printing, a taxpayer subsidized monopoly.

Current Budget: $83 million, 155 FTEs
Potential 10% Savings: $8.3 million

J. State Convention and Trade Center

Supporting Washington state products and industries is an important element of ensuring a vibrant and innovative economy. By subsidizing the State Convention Center taxes must be increased on residents and citizens. The $30 million the state spends every two years to keep the Convention and Trade Center running is money that would otherwise be productively spent in the state economy, promoting actual trade and commerce between Washington businesses and the rest of the world.

Many states have privately run convention centers, and in fact, our state has a thriving privately-run convention and trade show industry. By continuing to fund a trade center with taxpayer dollars the state takes away much needed business from local merchants that could otherwise do the job. Washington state should sell the Convention and Trade Center, returning a private sector function to private hands.

Current Budget: $30.9 million
Potential 100% Savings from full privatization: $30.9 million


Proposal IV: Eliminate Prevailing Wage Requirements in School and
Highway Construction

A. Highway Construction and Prevailing Wage

Current law needlessly drives up government contracting costs. The prevailing wage statute, called the "little Davis-Bacon" law because it is modeled on federal law, interferes with the normal bidding process for highway construction contracts by imposing requirements that eliminate wage competition and artificially inflate costs. The state law, first enacted in 1945, provides that the hourly wage rate paid to laborers on any public works contract shall be "no less than the prevailing wage in the locality where the work is being performed."

The prevailing wage is defined as the wage paid to the majority of workers in the applicable trade, which in practice is not interpreted as the true market wage but as the going union rate. Unfortunately, the effect of this interpretation is to reverse the meaning of words. Normally, in our free economy the prevailing price of labor, or of any commodity, is set by open market forces, not by a government-administered process. By interfering in the market the government only drives up its own costs.

Federally-funded highway construction will continue to be governed by the national Davis-Bacon law, but repeal of the state law would permit major savings on transportation projects built with state funds. Repeal would be especially helpful in rural areas of the state that have a lower wage base than the high-priced Puget Sound corridor, allowing the state to provide more service with limited funding.

B. School Construction

Just as mandated prevailing wage laws increase the cost of highways, they also drive up the cost of school construction. Over the next two years $408 million in state funds will be used to match local spending on school construction. National studies show that prevailing wage regulations add up to 20% to the cost of building a new school. Elected leaders must ask themselves, "Why are we building only five schools for the price of six?" Allowing market forces to set wage rates would bring the state's labor costs down to a realistic level, one that reflects the actual cost of putting up a comparable building in the private sector.

New schools are sorely needed, as are trained teachers, computers and other educational equipment. Ten states have already repealed their prevailing wage laws. Washington should join them. We can make more efficient use of tax dollars to advance important educational goals if we eliminate the inflated cost of prevailing wage statutes.


Proposal V: Review the Need for Various Boards and Commissions

Washington state government supports more than 440 appointed boards and commissions. Most of these groups advise agencies and policymakers on constituent interests or industry practices. Many are not necessary for the quality delivery of government services to Washington residents and are a drain on scarce resources during difficult economic times. A thorough review is needed to determine whether to continue or eliminate many of these taxpayer-funded entities.

In some cases, the services provided by the board or commission can easily be turned over to private organizations and professional partnerships. A fee on a particular industry or classification of business funds many commissions. In these cases, there is no need for the industry group to be facilitated by the government. Instead, it should be organized and coordinated as a private entity funded and operated by the businesses concerned.

In many cases state commissions are not necessary for the safety and well being of Washington citizens, or were created decades ago and are no longer necessary. Often commissions are created only to satisfy certain political constituencies. Eliminating these programs and commissions may anger some influential interest groups, but will not jeopardize vital services to Washington residents.

Governor Locke has rightly proposed eliminating thirty programs and commissions. As part of the budget process, the legislature should carefully consider the role of all 440 boards and commissions and determine if the private sector could provide a similar service if state funding is ended. As an initial, cursory review, some of the programs that should be considered for elimination include:
Board / Commission Name Cost to Taxpayers
· Acupuncture Consulting Group $280,000 / year
· Advisory Council on Historic Preservation $6,000 / year
· Bicycling Advisory Group
$6,093,000 / year
· Blue Ribbon Panel on Ergonomics $34,000 / year
· Board of Boiler Rules $21,500 / year
· Board of Denture Technology $332,532 / year
· Board of Massage
$715,180 / year
· Naturopathy Committee $233,075 / year
· State Advisory Committee $14,450 / year
· Washington State Conservation Commission $20,295,000 / year

Many boards whose work overlap could be combined. For example, the Child Care Partnership Committee could become part of the Child Care Coordinating Committee, which coordinates child-care and early childhood services between the legislature and all state agencies. The Chiropractic Advisory Committee could be folded into the Chiropractic Quality Assurance Commission.

To ensure the rights of all Washington residents are protected the governor could consolidate the various minority relation boards into the existing Civil Rights Commission. Combining the commissions would end the need to pay for a separate commission for each racial or ethnic group. Similarly, the regional Developmental Disability Advisory Boards could be consolidated into the Developmental Disabilities Council, which already receives more than $2 million.


Proposal VI: Implement State Agency Self-Evaluation

One of the keys to maintaining a well-run government is to transfer proven management principles from private enterprise to the public sector. During a budget crisis each level of government must be capable of conducting an effective performance evaluation, providing agency managers and elected leaders with the tools to evaluate program effectiveness and determine how best to cut cost while maintaining service. In this spirit the Washington State Department of Transportation (WSDOT) has instituted a new, quarterly self-evaluation that can help policymakers identify areas where program performance or service delivery must be improved.

While the WSDOT model does not include cost modeling and return on investment measurements similar to that of a private enterprise, the initiative is a useful start in returning accountability to Washington state government. It is important that the evaluation not be a cheerleading or self-promotion opportunity for agency managers, but that the evaluation criteria present realistic measures of success and objective evaluations of performance.

Two keys to establishing an effective self-evaluation are setting attainable and measurable goals, and identifying and measuring yourself against your competition. When combined with the ability to contract-out government services, self-evaluation can be a valuable tool for agency managers and state legislators. By readily identifying areas for improvement, competition can then be selectively instituted to improve services and reduce cost.


Proposal VII: Open State Workers' Compensation Insurance to the
Private Sector

Washington state is one of only five states in the nation that does not allow businesses the choice of private workers' compensation insurance. Other states allow private companies to provide workers' compensation insurance. By ending Washington's monopoly on this service the state could significantly reduce its administrative costs. Why not give companies a choice to buy workers' compensation insurance like individuals buy car insurance?

In Oregon more than 200 insurance companies offer worker compensation plans tailored to the specific needs of businesses and employees. To protect the interests of injured workers an appointed Ombudsman for Injured Workers helps employees, employers and insurance companies to quickly and effectively resolve disputes. In Idaho more than 270 private insurance companies compete in offering high-quality service to meet employer's workers' compensation needs. By tapping the vigorous insurance market the burden on state taxpayers is reduced and the quality of insurance coverage is improved.


Proposal VIII: Sell the UW Metropolitan Tract

In 1860 the Legislative Assembly of Washington Territory established a 10-acre campus for the University of Washington overlooking Elliott Bay. In 1895 the University relocated to its present location along the shore of Lake Washington. As Seattle grew, the downtown area overlooking Elliott Bay became more developed and the 10-acre parcel of land became known as the UW Metropolitan Tract. Today the state still owns the property and holds leases, through property management firm UNICO Properties, Inc., with occupants of the Rainier Tower and Olympic Four Seasons Hotel.

While UNICO has fulfilled its contract requirements in good faith, the agreement signed with the University in the mid 1970's does not provide reasonable return for Washington taxpayers. A recent study by the Joint Legislative Audit Review Committee (JLARC) found that, "The operating return to UW on the Metro Tract office properties is about 49% of the operating return earned by the SIB (State Investment Board) on its Union Square commercial buildings."

UNICO's agreement allows them to use up to 50% of operating revenue to cover expenses. This formula was established in the 1970's in exchange for UNICO financing of capital improvements taken on by the University. UNICO also received a contract extension through 2014.

Based on the latest estimate the Metropolitan Tract property is worth $285 million. With higher education funding threatened by the looming budget deficit, it does not make sense to hold an investment that will generate below market returns for years to come.

Selling the Tract would generate significant revenue that could be used to address the current budget deficit, and over the long term would capture property and sales tax revenue that is now being lost.

The Metropolitan Tract represents a common situation, in which a government entity attempts to compete in a private sector enterprise, but cannot generate return on investment typical of a private company. Unfortunately, when this occurs it is not private investors that lose money, but the taxpayers of Washington state. Washington taxpayers cannot sell their stock. As residents, we are forced to carry a higher tax burden because of the state's poor business decisions. Instead of subjecting residents to the risks of rental price fluctuations and falling downtown occupancy rates, the University of Washington should get out of the real estate business and return the Metropolitan Tract to the private sector.


OTHER PROPOSALS

Government Services Contribution Fund

Policymakers across the state often call for tax increases to fund higher government spending. Undoubtedly, as the debate over the current budget deficit gets more heated, media pundits and citizen activists will ask the legislature to raise taxes, rather than cut government spending. Typically, people that support tax increases feel that other people are not paying their "fair share," or that society can "afford" to pay more to support government programs.

Once a tax increase is imposed, compliance is not voluntary. However, for those who feel their taxes are not high enough, they should be able to make additional contributions to government. To assist in collecting money from people who wish to contribute more Washington should create a Government Services Contribution Fund. The fund would be administered by the Department of Revenue. Payments would be added to the General Fund and allocated by the legislature during the normal budget process.

Streamlining the process for Washington residents to contribute more money to state government would help address the impending deficit without cutting programs. It would also add to the public debate over spending priorities. Instituting a formal process would allow individuals to first provide their own support for the programs they feel are the most important before advocating that higher taxes be imposed on their neighbors.

Budget Process Reform

Because the Washington legislature only meets for a limited time each year, and state budgets are enacted on a two-year cycle, it is often difficult to predict, and then react to, dramatic changes in tax revenue. The current budget deficit is largely a part of this disjointed process.

Large corporations have similar problems. Budgets and fiscal planning conducted at the beginning of the year often change dramatically during the course of the following 12 months. To address this problem, many corporations use concepts like program prioritization and zero-base budgeting to help them weather economic difficulties.

By first prioritizing all proposed initiatives, then assessing how many of the high priority programs can be funded using existing revenue, Washington state could adjust to changes quickly and without extended debate. In Texas, the Education Agency found zero-base budgeting to be particularly effective when overall spending must be reduced.

A prioritization system could be established by the legislature. Some of the questions to determine priority levels include:

· Is this a core government service?
· Could this service be provided by the private sector?
· Does this service or program affect the security of Washington residents?
· Does this program or service fit within the mission statement of the agency that will be administering it?

Reforming the budget process using proven tools from the private sector will help create a public finance system that is durable, fair and flexible - one that provides the vital services of government at the lowest cost to taxpayers.

CONCLUSION

Washington legislators arriving for the new session are faced with many tough choices. Without significant reforms, future legislatures will face similar problems. It will take leadership and innovation from the policymakers of our state to solve our fiscal problems and restore trust in state government. While the reforms proposed in this paper will not alone solve the budget deficit, they can help address the immediate problem and secure the advantages of lasting, successful reform in state government.

A conservative estimate of the savings generated by the fundamental reforms proposed in this paper offers the prospect of immediate change and long-term budget stability. Taken together, these reforms would reduce the cost of state government operations by nearly $1 billion. Tinkering around the edges by relying on sin taxes and unstable lottery funds will simply lead us back into the same situation, or worse, during the next biennium. With common sense reforms, services to state residents can be maintained at a high level, while the cost to taxpayers is reduced.