November 21, 2010 in City

State economist still bullish, but forecast has officials scrambling

By The Spokesman-Review
 

OLYMPIA – Little changes can have big costs. That may be the main lesson from last week’s announcement that Washington state’s budget appears to be another $1.2 billion out of balance, prompting calls for more cuts, a special legislative session and union givebacks.

It’s not that the economy is still falling, or even that it is flatlining, chief economist Arun Raha said. Rather, it has some bright spots, some dim spots and in general is growing slowly – but a bit slower than expected two months ago.

The difference between a slow-growth forecast in September and a slightly slower-growth forecast last week is about $385 million less in state revenue through the middle of next year, and $810 million less between mid-2011 and mid-2013.

Forecasting the economy coming out of a once-in-a-lifetime recession is difficult, Raha said, because none of the models works and all you know is what’s in the past. “It’s like driving a car forward while only looking in the rearview mirror.”

Kriss Sjoblom, economist and research director for the Washington Research Council, agreed. “There’s no history for this.”

Here are some of the things Raha and the other forecasters saw in that mirror that prompted them to shift into a lower gear:

• Construction remains slow. A drop in housing construction during the recession was followed by a drop in commercial building. Construction jobs were down about 8 percent in October compared with a year earlier.

Washington state’s budget is particularly sensitive to construction changes, Sjoblom said. Like many states, it collects sales tax for the materials used in construction; unlike most states, it also collects sales tax on construction labor. That creates a double boost during a boom, but a double whammy during a bust.

“Construction is in a deep hole, and it’s 10 percent of (state) revenues,” Raha said Thursday night on TVW’s “Inside Olympia.”

• Real estate excise tax, collected on property sales, is flat. The REET, as it is often called, spiked in 2007, then slid to its lowest point in more than a decade as the recession took hold. It jumped last spring thanks to federal aid to homebuyers, but dropped in September and is now holding steady.

• Voters passed Initiative 1107, canceling temporary taxes on soda, candy, bottled water and some processed foods as of Dec. 2. That sliced about $63 million off revenue through mid-2011 and $218 million for the next biennium.

• Average personal income is rising in Washington state, but spending is not rising as fast. This is common coming out of a recession, as people tend to save more until they are confident that improvements will last.

“There is a difference between the economy and (state) revenues,” Raha said. “Just because incomes are rising doesn’t mean revenues will rise.”

There are some positive signs in the mirror, too. Employment is up in the software industry, wholesale and retail trade, and the professional and business services sectors. Boeing has a backlog of more than 3,400 airplane orders. Exports are stable. Auto sales are up after the drop that followed the end of the “cash for clunkers” program.

So Raha and the forecasters “pulled more downside risk into the forecast,” projecting a slightly slower rise in revenue, which, when stretched out over 30 months, amounted to about $1.2 billion less for a state that collects about $15 billion a year.

By law, the state’s projected expenses must equal its projected revenues, so expenses need to be lowered. While the lower projection is a relatively small percentage of the overall expenses, the state has already faced a series of drops in its revenue projections for this budget cycle and the next.

In early 2008, forecasters projected the state would have $34 billion to spend in the 2009-’11 budget cycle. That dropped nearly $4 billion before the Legislature set the current budget in 2009, but the economy continued to slide and now the projected revenue is down about $6 billion from that February 2008 forecast. After a $770 million drop in September, Gov. Chris Gregoire ordered most state agencies outside of basic education to cut 6.3 percent from their budgets. The additional drop of $385 million in Thursday’s forecast would require those across-the-board cuts to be nearly 11 percent.

Gregoire called that “unfeasible.” But under state law, she can’t pick and choose which programs to spare, which to trim and which to eliminate. Only the Legislature can do that.

Shortly after the forecast was released Thursday morning, she asked leaders of both parties in both chambers to submit proposals by Nov. 29 on ways to cut the budget, which could lead to a special session in December. On Friday she called on state employees unions, which are still negotiating most contracts for the upcoming biennium, to reopen their current contracts for what could be immediate cuts in pay and benefits.

State officials seemed shocked by the size of the projected revenue drop Thursday, and Office of Financial Management Director Marty Brown voted not to accept the projection through next June, saying it’s too large. He was outvoted by the rest of the Economic and Revenue Forecast Council, 5-1.

Raha said he was surprised by their surprise and isn’t pessimistic about the state’s long-term prospects: “I’m still bullish about the economy. It’s just coming back at a slower rate than we projected.”

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