Washington Treasurer James McIntire last week cautioned legislators in both houses and both parties against balancing the state budget with phantom savings and raids on reserves and capital funds. They may fool themselves. They may fool voters. They will not fool Wall Street.
A false move could trigger downgrades on bonds the state sells to finance construction projects. Two of the three major credit-rating agencies – Fitch and Moody’s – have a “negative outlook” on still-solid state credit. If those yellow lights go to the red that signal downgrades, the result will be higher interest rates and millions of dollars in extra costs for Washington taxpayers.
Hundredths of a percent count when, as in January, Washington offered $1.2 billion in bonds, mostly a refinancing. That sale will save the state $11 million in the 2013-15 biennium alone.
Despite already high debt, McIntire notes in his April 25 letter that Washington has remained a very good credit risk because operating budgets have been balanced without borrowing, pension funds are healthy and reserves are at least adequate. But the easy cuts have been made, backfilled in part by federal dollars.
Although the economic recovery has provided some relief, maintaining state programs would add $1.5 billion to spending for the next biennium, a burden to which the state Supreme Court added $1 billion with its January 2012 McCleary case ruling that the state has inadequately funded K-12 education. The Republican-controlled Senate has responded with a no-new-taxes budget that cuts social programs, the Democratic House with a proposal that extends taxes scheduled to expire June 30 and repeals selected tax exemptions.
McIntire faults both.
The Senate budget would close the 2013-15 biennium with a $19 million balance, enough to cover half a day of state operations. The House version is worse – negative $263 million – a deficit closed by taking all of a projected $575 million out of the rainy-day fund, which the Senate leaves intact.
However, the Senate grabs $160 million out of the timber trust fund, a move that may violate the state constitution.
Both inflate revenue expectations, and assume leaner management will wring savings from a government apparatus wrung hard from four years of squeezing.
The letter is as good a summation of the defects in the Senate and House budgets as one will find during this quiet period between regular and special sessions. And as a former legislator, McIntire understands the conflicting demands lawmakers must sort out when they return to the Capitol on May 11. With another bond sale pending, what he needs is a budget resolution he can take to the credit markets with a straight face.
McIntire offers no solutions, but in the past he has circulated a graph that shows the share of personal income captured by the state general fund declining from 7 percent in 1995 to less than 5 percent today.
That might explain why the Supreme Court had to intervene to protect education. The Legislature had to heed the court. Legislators should take McIntire’s letter to heart as well.