The final piece in the state budget puzzle falls into place today when the state economist, Steve Lerch, releases his revenue forecast. Most observers expect a reduction from the quarterly estimate made in November.
Part of the loss stems from a state Supreme Court decision affecting estate tax collections. Lerch also sees the economy growing more slowly than anticipated. Blame Congress and the president. A weak economy remains vulnerable to viral contamination from D.C.
The revenue forecast frames one side of the fiscal negotiations that define the closing weeks of the legislative session. Less discussed is the caseload forecast, an estimate of the cost of maintaining current services – public school enrollment, social service caseloads and corrections.
Last week’s report had more bad news than good. Estimates of Medicaid costs climbed substantially, for a net increase of $301 million. Lawmakers had counted on more Medicaid participants enrolling in a lower-cost managed-care program. They didn’t, so anticipated saving didn’t materialize. In a better fiscal world, a dip of less than 1 percent would occasion little concern; in today’s Olympia, they count paper clips.
Budgeting rests on guesses about the future. How many eggs do we buy to serve the breakfast rush? Will the housing market handle another new complex? How many students will show up for school next September?
Statistical models replace hunches. Economists read spreadsheets, not tea leaves. Still, as forecasting has grown in sophistication, people and events refuse to follow the script.
With politics and the economy so closely linked, efforts to reduce uncertainty are confounded by partisan gamesmanship that thrives on chaos and crisis. Although we’ve seen more economic stability in the last year, uncertainty continues to derail expectations.
And that’s why we should view today’s forecast with caution. With any significant cut in revenue projections and with higher caseload costs, legislators face a $1.2 billion deficit or more in current operations – before addressing the court-ordered increase in education funding. Views vary, but the overall problem falls somewhere in a $1.8 billion to $2.2 billion range. That’s if things don’t go south again.
The Senate majority coalition says the problem doesn’t warrant a tax increase. Liberal House Democrats and the governor think otherwise. Already there’s speculation that negotiations will take the session into overtime.
The temptation to find more cash by drawing down reserves will be strong. It should also be resisted. Despite evidence of an improving economy – housing, auto sales and employment numbers are up – considerable risks lie ahead.
The sequester budget cuts don’t address the long-term problem of unsustainable entitlement spending. A responsible congressional budget remains out of reach. The Affordable Care Act also adds to the economic drag as employers weigh newly identified costs.
Consumer confidence, no doubt affected by political dysfunction, plummeted to its lowest level in a year, according to the March Thomson Reuters/University of Michigan index. Similarly, the national Business Roundtable reports that, although corporate executives see some economic improvement, they will hold off on hiring new workers.
“The relatively smaller improvement in the outlook for hiring . . . may reflect ongoing uncertainty and a wait-and-see attitude about the business climate in the United States,” said Business Roundtable chair Jim McNerney, head of Boeing. He could also cite global competitiveness and economic instability concerns.
With much risk beyond their control, lawmakers should be cautious in their spending and prudent in maintaining adequate budget reserves. They should also do what they can to stimulate economic activity here and avoid actions that depress investment.
The state needs to maintain and expand roads, bridges and highways. Transportation investment is necessary for economic growth and will put people to work immediately. Senate-passed education reforms to increase accountability and student performance complement the push for increased school funding and expand career opportunities for the next generation. Workers’ compensation reforms will improve outcomes for injured workers and reduce employment costs.
There’s also a time for constructive inaction. They should avoid creating new regulatory burdens and higher business costs. Don’t give employers new reasons to defer investment and job creation.
This revenue forecast frames the short-term budget debate. But lawmakers must look beyond it. The best way to improve the revenue outlook for the future is by adopting policies that foster long-term private-sector job creation.
Bainbridge Island resident Richard S. Davis is president of the Washington Research Council. Email him at rsdavis@simeonpartners.com.
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