Short-term planning creates long-term budget problems

In the midst of unprecedented turbulence in financial markets, state economists sliced $529 million from the official state revenue forecast. About half the cut comes from the estimates for the current budget cycle, which ends June 30, 2009. The balance applies to projections for the 2009-2011 budget that lawmakers begin writing in January.

The new forecast magnifies the projected budget deficit for the coming budget cycle to $3.2 billion.

Even with this latest reduction, though, revenues will still be up by 8.1 percent in the next cycle, giving lawmakers $2.4 billion more to spend. That’s a bit less than normal growth, but hardly a disastrous implosion. The slowdown was predictable.

So how do we get to a $3.2 billion budget gap? It’s a combination of two factors: unsustainable spending commitments made by the Legislature and collapsing tax collections. Even without the economic downturn, the escalating expenditures guaranteed trouble under any plausible revenue scenario. The recession simply hastened and deepened the problem.

The cost of maintaining current state services in the next budget will exceed the money at hand. Increased costs include paid family leave, social service caseloads, school enrollments, pension expense, health care, inflation and employee compensation. These commitments can only be changed by explicit changes in state policy. The governor and Legislature will have to set priorities and make choices.

Better decision-making over the past few years would have eased the current fiscal stress.

In 2007, with a strong economy and a hefty budget surplus, lawmakers adopted a budget that spent $1.3 billion more than anticipated revenues. Earlier this year, in a weakening economy, they added $300 million in additional spending.

Even as the budget was being written in early 2007, critics pointed out that unsustainable spending commitments assured a shortfall in the foreseeable future. At the time, a coalition of business organizations wrote legislators urging restraint. The budget “spends too much and saves too little,” they said, noting that construction spending was already slowing. Many of the state’s major newspapers expressed similar concerns.

Lawmakers stayed the unsustainable course, dismissing repeated warnings from nonpartisan analysts that they faced substantial budget shortfalls beginning in 2009. Instead, they highlighted their new “investments.”

One Democratic senator said as the Senate adopted the budget in 2007, “It’s a time for hope and optimism.”

I’m all for that, but as a financial strategy it leaves something to be desired.

The revenue boom stemmed directly from rising housing prices, hot sales, and an unparalleled surge in commercial and residential construction. Predictably, the real estate bubble burst and construction is returning to normal levels, contributing to the sharp contraction in anticipated revenues announced last week.

The other major contributor to the recent revision is the decline in automobile sales. With high gas prices, pessimistic consumers and a limited supply of the fuel-efficient vehicles auto buyers currently favor, a robust recovery in that major source of sales tax revenue may be a long time coming.

In business and household budgets, investments tend to be one-time things. Paint the house. Buy new equipment. Replace old floor coverings. Beef up staff training. Avoid ongoing liabilities.

Over the last few years, though, state government has used windfalls to create enduring entitlements and called them investments. So when they write the new budget next year, they start with a baseline swelled by promises made in flush times.

Unsustainable spending has depleted reserves, inflated expectations, and left the state vulnerable to the withering effects of recession. As the election approaches, state spending has appropriately emerged as a central issue. All else must now be placed in a context that begins with a $3 billion hole.

Remember, that’s the gap between available revenues and the “keep on keeping on” cost of status quo state government. There’s no mystery to balancing a budget within existing revenues. The state’s done it before. Set priorities and stick to them. Put everything on the table. Think long-term. Increase productivity. Promote policies and programs that stimulate economic growth, job creation and investment.

We don’t have a budget crisis. We have a manageable problem. In January, lawmakers must summon the will to manage it. And we must hold them accountable.

Bainbridge Island resident Richard S. Davis writes on public policy, economics and politics. His e-mail address is richardsdavis@gmail.com.