OLYMPIA – Washington state’s surging economy, supercharged by the construction and real estate boom, has created a $1.1 billion cushion for the often-pinched state treasury, forecasters said Thursday.
The state Revenue Forecast Council announced an unexpected $493 million bonanza – the third big quarterly increase in a row. That pushed the reserve fund over the $1 billion mark.
“We haven’t seen more than a billion dollars in the ending balance for a long, long time,” said the state’s chief economist, ChangMook Sohn.
Legislators and administration officials on the state panel cautioned that the windfall mustn’t set off a spending spree in Olympia. The economic expansion could cool a bit as the construction and the housing market softens, and the state could face a budget deficit in the next few years, they said.
The first call on the new money should be pension funding and preserving a healthy reserve account, said state Budget Director Victor Moore. The state skipped a $170 million pension contribution this year.
Sen. Mark Doumit, D-Cathlamet, said the public pension funds face a $4 billion unfunded liability, and that lawmakers must use some spending restraint.
“We’re going to have to go cautiously into this future,” he said.
Gov. Christine Gregoire said the state needs to salt away a sizable “rainy day” savings account in case of a natural disaster like Hurricane Katrina.
The council chairman, House Finance Chairman Jim McIntire, D-Seattle, said the Legislature also faces growing school and social and health service costs that could hit $100 million.
“We’re not wearing party hats and blowing noisemakers,” because the extra money can’t be spent on bold new initiatives, said Moore, who called for a double dose of prudence.
“The economy is cyclical; we need to be planning for the next downturn,” said Rep. Ed Orcutt, R-Carrolls.
The surplus includes a lot of money that won’t recur in future years, such as the real estate excise tax bonanza, said Sen. Joe Zarelli, R-Ridgefield.
The new forecast now projects that more than $26 billion in revenue in the next two fiscal years. That is up $492.9 million over the June forecast.
As Washington emerged from recession and the real estate boom began, the council has adjusted forecasts upward dramatically for the past three quarters in a row.
Previous increases were $450 million and $739 million, bringing the total increase to over $1.7 billion.
Lawmakers left town this spring with a skimpy $200 million ending fund balance after boosting a variety of “sin taxes” by about $450 million. Now the forecast shows a reserve of $1.12 billion.
That’s about 3.5 percent of the state budget.
Sohn said the sizzling housing market is responsible for nearly half of the latest windfall. But he cautioned that the pace will soon start slowing to a more normal rate.
He assumes that the state is now at the peak of the housing boom and will drop back a bit.
“We’re not talking about the busting of the housing bubble, but not having the same kind of acceleration,” he said, adding, “The peak is here now.”
But Sohn conceded that he’s been wrong repeatedly with his predictions of a cooling market. If the boom continues another half-year, it would generate $90 million more for state coffers, he said.
“The steam’s going to have to go out at some point,” said McIntire, an economist.
Soaring oil prices haven’t noticeably affected consumer spending and gasoline pump prices haven’t been heavily affected by the Katrina hurricane, he said.
Washington’s gasoline prices rose an average of 21 cents a gallon after Katrina hit, with only three other states less affected, Sohn said. His numbers came from the Oil Price Information Service.
Even with expensive oil prices – now hovering at $64 a barrel and nearly $3 a gallon for gasoline – people still are buying houses and using home equity for a variety of purchases, he said.
Still, he said oil prices could affect the overall state and national economies over time. Even the experts’ predictions are unreliable and volatile, he cautioned.
The strike at Boeing could whack personal income figures by $100 million if it goes on for a month, but the latest forecast doesn’t make any Boeing-related adjustment, he said. Sohn still assumes that Boeing and the aerospace industry will expand by 6,000 workers both this year and next.
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