Washington budget gets billions worse

OLYMPIA – Saying that “everything we feared could go wrong, did,” Washington’s economic forecaster Thursday said state revenues will likely drop another $2.3 billion by mid-2011, bringing the overall budget shortfall to about $8 billion.

“It has become clear to me that we were not pessimistic enough,” said Arun Raha, executive director of the state’s revenue forecast council. In November, the council predicted a shortfall of about $5.7 billion. The gap is the difference between expected revenues and the cost of maintaining current programs.

Lawmakers said the news wasn’t unexpected. They’d already come up with hundreds of millions of dollars in state cuts as well as federal funding, with another $2 billion or more expected from the stimulus just signed by President Barack Obama.

Still, budget writers face a daunting problem as they try to preserve services. The governor’s office says despite the cuts, the shortfall for 2009-11 remains about $6.8 billion – equal to about 20 percent of the budget, the largest in state history. That’s more than the state spends on higher education, prisons and children’s health care combined. Between now and July, the state also faces a $721 million shortfall.

Thursday’s news makes it more likely that lawmakers, desperate to avoid severe cuts to social services and higher education, will seek voters’ approval for a tax hike.

“We still believe that we’re going to proceed with cuts first, but there’s a certain point at which you cannot go any further,” said Senate Majority Leader Lisa Brown, D-Spokane.

She said lawmakers don’t have specific plans yet on the size, type or timing of a potential tax increase. They want to first see what the cuts would look like.

State employees, teachers and advocates for the poor have all been calling for tax hikes to offset budget cuts. On Thursday, about two dozen economists and policy experts told Brown and other lawmakers that deep cuts would hurt the economy more than higher taxes.

Brown said she’s convinced that voters would back a tax plan presented not in terms of “faceless government” but from the perspective of people – an unemployed worker, a single mom wanting health care for her kids – who rely on state services. “I think people can relate to that,” she said.

Sen. Mark Schoesler, R-Ritzville, said Democrats are clearly headed for a tax hike.

“They will drag out the most vulnerable as an excuse to raise taxes. It certainly won’t be bureaucrats,” he said. He and other Republican lawmakers are arguing for more cuts instead.

“I just don’t think we should be throwing in the towel and asking the taxpayers for a bailout,” said Rep. Ed Orcutt, R-Carrolls.

Despite the grief, Sen. Joe Zarelli said, the state is still expected to take in more money in 2011 than in 2010. He said that simply freezing state spending for two years, starting this summer, would erase all but about $1 billion of the budget problem.

But that’s not realistic, said Victor Moore, Gov. Chris Gregoire’s budget writer. The state cannot order its suppliers not to increase their prices or decide that no more people will be allowed into schools or prisons. It cannot turn away people who qualify for health care under federal Medicaid rules.

“That’s the world we live in,” Moore said.

Raha said Washington’s economy, which had been outperforming most of the nation, “hit the wall” in the fourth quarter of last year. Holiday retail sales were hurt by bad weather. Some of the state’s biggest employers – Boeing, Microsoft, Starbucks – announced layoffs. Auto and housing sales have dropped sharply, as have the state’s exports.

“The state economy is caught up in a downward spiral that has devastated the national economy,” Raha said.

The good news: Raha still believes that Washington will emerge from what is already a 14-month recession earlier than the rest of the country. But he cautioned that he doesn’t expect a return to robust growth “until the middle of 2010.”

The state, which depends heavily on sales tax for its budget, is now at a record low for consumer confidence, Raha said. Uncertain about their jobs, people are putting off major purchases. January car sales were down 40 percent compared to a year ago. New housing permits are now declining faster than in the rest of the nation, he said, and sales of existing homes are doing no better.

The reason for the lingering recession, he said, is a “three-legged stool of misery.” People with homes are struggling to pay their mortgages and are facing foreclosure. That leaves banks with “toxic assets” on their balance sheets and hurts investors. That means lost jobs, which hurts consumer spending and means that people lose their homes. Each of these problems feeds the others.

Until consumer confidence returns and spending resumes, Raha said, the recession will continue.