September 19, 2008 in City

State facing bigger deficit

Recession unlikely, forecaster says
Richard Roesler Staff writer
 
RICHARD ROESLER photo

State Rep. Jim McIntire, D-Seattle, listens to a state economic forecast Thursday in Olympia.
(Full-size photo)

OLYMPIA – Washington state is unlikely to dip into recession, a top economic forecaster said Thursday. But its weaker-than-expected economy means state government faces an estimated $3 billion shortfall over the next two years.

That’s about 10 percent of the state’s discretionary spending.

“We are definitely slowing down,” said Steve Lerch, interim director of the state’s Economic and Revenue Forecast Council. “Not as fast as the U.S. economy has, but definitely slowing.”

On Thursday, the council revised its expectations for the next 33 months, saying the state’s treasury will probably have $529 million less than it expected just three months ago.

Gov. Chris Gregoire recently called on state agencies and colleges to save $90 million by implementing a hiring freeze, using less fuel and delaying equipment purchases.

Amid the worsening budget picture Thursday, she upped the ante, calling for $200 million in savings over the next 9 ½ months.

“It’s going to be tough,” said Gregoire’s budget director, Victor Moore.

Republicans, including Gregoire challenger Dino Rossi, have been criticizing the governor and Democratic lawmakers all year for state budget increases of more than 30 percent over four years.

“We’ve ignored what is a real problem,” said Sen. Joe Zarelli, R-Ridgefield. Lawmakers knew in March that the economy was likely softening, he said, yet they approved a budget in which new spending exceeded new revenues.

Zarelli says the shortfall is now likely to be about $3.2 billion.

Gregoire has defended the additional spending, much of it on health care, education and salaries, as investments in the state’s future.

The governor has also long disputed that the projected shortfall based on nonpartisan Senate staff budget numbers is a meaningful figure. She said she wanted to wait for more revenue forecasts to get a clearer picture.

On Thursday, just three months before Gregoire must propose her next two-year budget, Moore wouldn’t say what he thinks the shortfall will be. Pressed by reporters to confirm the $3 billion or offer an alternative, Moore refused.

“I think putting a number out there is not useful for me as a budget writer,” he said. “… I’ll know in November.”

That’s when the final revenue forecast of the year will come out. The forecast is slated for Nov. 19, about two weeks after Election Day.

Moore pointed out, however, that while about 30 states have watched their current budgets fall into the red, Washington has not.

Rossi continued to blast Gregoire.

“This deficit is a bear that has been sitting on the front porch of state government for more than a year,” he said in a statement Thursday. “Every three months the governor looks out the window and the bear is bigger, but then she tells us not to worry, everything is fine. Meanwhile, she keeps feeding it and making it bigger.”

In Idaho, tax revenues are expected to fall $174.3 million below earlier projections this year, prompting Gov. Butch Otter to order agency heads to begin considering how they would cut spending.

Gregoire, meanwhile, has said that tax increases to help bridge Washington’s budget gap would be a last resort. Asked about his budget planning Thursday, Moore seemed to agree.

“I’m looking at the spending side” to find savings, he said.

Lerch said the economic data suggests that although people’s income isn’t dropping, their spending is.

“Big, big declines in auto sales,” he said, citing one chart. “People are just not buying cars.”

Auto sales in July were down 20 percent compared to last July. The reasons are no mystery, Lerch said: Gas prices are high, home values are down, unemployment’s up and there’s turmoil in the national financial markets. None of that, he pointed out, is conducive big purchases by consumers.

Real estate tax collections also have plummeted, falling 40 percent compared to last summer.

“Not as many houses are selling, and the houses that are selling, on average, are selling for less,” Lerch said.

“Consumers have shown some caution in recent months,” observed state Rep. Jim McIntire, D-Seattle.

“It’s very normal, rational, prudent behavior on their part.”

The impact of the financial-market woes in recent days remains to be seen, McIntire said.

At the end of Thursday’s meeting, he presented Lerch – who was temporarily filling in for a departed staffer – with a going-away present. It was a crystal ball, with a lot of little bubbles in the glass.

“There’s still a lot of froth in the outlook,” McIntire said. “… We’re in a very volatile time.”

Richard Roesler can be reached at (360) 664-2598 or richr@spokesman.com.

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