State’s expected budget surplus up $305 million

OLYMPIA – After years of struggling with strained budgets, Washington lawmakers now face an entirely different kind of problem: more tax money than they expected.

The state’s chief revenue forecaster, economist Chang Mook Sohn, said Thursday that in the 2005-‘07 budget cycle, state government will likely collect $305 million more than he predicted just two months ago. Construction and the real estate market have been humming, job growth has picked up sharply in Seattle, and oil prices have dropped from summer highs.

“Our economy seems to be doing quite well,” said Rep. Jim McIntire, D-Seattle.

Sohn warned, however, that the housing market – the backbone of much of the growth – shows increasing signs of cooling off.

“We are expecting to see some slowdown,” he said, although when and how much remain unclear. In Olympia and the rest of Thurston County, he said, the average home price is near $300,000, a 29 percent increase over the previous year.

“We know that’s unsustainable,” he said, although he noted that he had issued similar warnings since 2003.

Thursday was the fourth time in a year that Sohn has revised his predictions sharply upward. If his prediction is correct – and he said $100 million of the expected $305 million is already in the bank – the state will have more than $1.4 billion sitting in its reserve fund. That’s about 5 percent of the state’s general-fund budget.

The key now, several lawmakers said, is to avoid the temptation – and the public pressure – to expand programs.

“I recognize there’s a lot of pent-up demand out there” for money, said Gov. Christine Gregoire’s budget director Victor Moore, but he said it’s not the time for big spending. The governor, he said, is focused on challenges that a slackening economy would pose for the next budget cycle, in 2007-2009.

McIntire suggested putting some of the money into the state’s pension funds. The state’s contributions to those accounts shrank in recent years, as budget writers tried to stave off major cuts during the recession. Now is the time to build those accounts back up, McIntire said. This may also be a good time to spend some money on one-time emergency-preparedness measures, he said.

“We are going to be maintaining a pretty high level of fiscal restraint,” said Sen. Mark Doumit, D-Cathlamet. “I don’t feel like anybody is feeling like we’re awash with new revenue.”

Moore also said that there are looming costs that the state must pay, such as educating growing numbers of schoolchildren. The Seattle consumer price index – to which teacher raises throughout the state are pegged – has increased, meaning that the state will face about $50 million more in payroll costs than expected, he said. And the cost of heating schools and state buildings is rising with the price of natural gas.

“We’ve got to be planning for the downturn that we know is coming,” said Rep. Ed Orcutt, R-Carrolls. “The best time to plan for an economic downturn is when you’re in an economic upturn.”

Locally things look good as well, Avista Corp.’s chief economist Randy Barcus said.

“Spokane overall is doing very well,” he said, even if some local governments – like the city of Spokane – are having problems raising enough in taxes. “That’s just the way the pie is getting divvied up, but the pie is growing. The economy is very healthy here.”

The city is hurt somewhat by the fact that the parts of the economy growing the fastest – the auto industry, construction – are elsewhere in the county. The city’s also hurt by the fact that sales tax on building materials is paid at the point of sale, not where the project is located. For example: The sales tax on the concrete for Spokane’s convention center expansion, he said, is paid in Spokane Valley.

Barcus is also more optimistic than Sohn about the strength of the housing and building sectors.

“I’ve been stupefied at how resilient construction has been,” he said, discounting suggestions of a slump. Spokane’s $150,000 median home price, remains a bargain compared to prices in states like California.

“We’ve got nothing to worry about, trust me,” he said.