OLYMPIA — You won't hear this advertised around the Capitol, but the state actually has more money to spend the next two years than it did in its last budget. A recovering economy is producing over $1 billion more in tax collections.

Yet it's not nearly enough to keep up with skyrocketing medical costs and growing tabs for schools, universities and prisons.

The reality is that simply keeping the same level of state services — just treading water — plunges the state budget into a deep hole. And that's without even talking about proposed pay raises for teachers and state workers.

This inflationary pressure is what state budget writers call a "structural" problem. In other words, it's not going away.

For the foreseeable future, the state's cost of doing business is expected to grow faster than the state's tax base. Lawmakers this year are looking at a shortfall projected at more than $2 billion.

That means state budget writers face raising taxes or cutting services but probably both. Their job is harder because past legislatures have postponed some of the pain by using one-time budget fixes and delaying contributions to the pension system.

Options ranging from taxes on cigarettes, beer and wine to freezing university enrollment and ending state health-care coverage for 17,200 low-income adults have been discussed to close the budget gap. Gov. Christine Gregoire and Democrats in the House and Senate are expected to roll out their budget proposals within the next couple of weeks.

"I'm waiting for the hellfire and brimstone to fall on all of us," said Sen. Margarita Prentice, D-Renton, chairwoman of the Senate Ways and Means Committee.

Inflation factors

Why is inflation such a big deal for the state when it has been relatively mild for consumers?

For one thing, driving down costs through increased productivity doesn't work as well in government as it does in the marketplace, where everyday goods from televisions to DVD players seem to drop in price every few months, argues Robert Zahradnik, a senior policy analyst with the liberal Center on Budget and Policy Priorities in Washington, D.C.

For example, in public schools, "most people want class sizes to be smaller, which means that a teacher is teaching less kids, not more. If a teacher was being 'efficient' they'd be teaching 100 kids. But everyone knows that really doesn't work," Zahradnik said.

Also, individuals can make decisions about whether to eat out, go to the movies, subscribe to cable television or buy a fancy car, said Victor Moore, Gregoire's budget director. But the state in many respects is stuck, he said.

"The big difference between running your household budget and trying to deliver [state] services is somebody doesn't drop a new kid on your doorstep each month," he said. "You can make a lot of decisions about how to spend your money, and to have kids or not have kids, but the state has to deal with what gets presented to them."

When more children show up in schools, and more criminals end up in prison, the state picks up the cost. "As the population ages and the boomers move on into later age we have to take care of them," Moore said. "We don't have a choice. They aren't the Snickers that we do without."

Others say the state could save money if it chose. Rep. Mike Armstrong, R-Wenatchee, deputy GOP leader in the House, says, for example, the state could cut costs by limiting the scope of health-care coverage it offers the poor.

Some Republicans have also argued for requiring state workers to pick up more of their health-insurance costs and reducing the number of low-income people eligible for free health care.

Moore acknowledges cuts can be made and notes the state has already reduced the number of people on the state Basic Health Plan from 144,000 down to 100,000 in recent years. But there's a price to pay, he contends.

"The dilemma with the medical care is it's very expensive to cover these people, but if you don't cover them, they just present themselves in the hospital system in the emergency rooms, [where] they're more expensive," he said.

Pressure from public-employee unions and well-organized advocacy groups can make cuts not only painful but politically perilous. Last year state House budget chief Helen Sommers, D-Seattle, almost lost her seat to a Democratic opponent backed by a union that felt Sommers didn't fully support pay raises for its members.

"Pac-Man" of the budget

Nowhere is the state's inflation problem better illustrated than in health care, which has been described as the "Pac-Man eating the state budget."

For example, a single dose of Avinza, a prescription pain-relief medication, jumped $72 in the past year to $208 a dose. The cost of an electric hospital bed went up $101, to $1,407. And the cost of a wheelchair increased by $98, to $2,366.

Add cost and caseload increases to expected cuts in federal Medicaid spending, and the state suddenly finds it needs about $695 million in additional funds over the next two years to maintain existing health-care services for the poor.

If the double-digit increases in the medical-assistance budget continue unabated, "at some point, every dime spent will be spent on health care," said Richard Davis, president of the business-backed Washington Research Council.

Higher education is another area where costs have consistently outpaced inflation.

At the University of Washington's library, for example, the cost of an electronic subscription to the American Association for Cancer Research journal went from $2,335 to $10,300 in one year. The subscription to The New England Journal of Medicine leaped from $500 to $5,600.

Add cost increases to growing numbers of poor people, prisoners and students who want to attend college, and the cost of maintaining programs quickly mounts.

To maintain existing levels of service, the state needs to come up with an additional $90 million to pay for prisons over the next two years, $164 million to run colleges and universities, $383 million for public-employee pensions and $444 million for public schools. That doesn't include pay raises or benefits increases.

Moore, Gregoire's budget director, says it's often hard for people to understand why it costs more to do the same thing. He attributes part of that to the fact many state services aren't highly visible to the public.

"Most of us don't know people who are in prison," he said. "Nursing homes and child-protective services, these aren't things that most people come in contact with."

Pay-raise pledge

Finding enough money to pay for existing levels of service is only part of the problem, however. There's also relentless pressure to increase spending.

Proposed pay raises are a big item this year: $85 million for home-care workers and other outside vendors, $115 million for nonunion state workers, $130 million for public school teachers, and more than $180 million in pay raises and health benefits for unionized state workers.

Gregoire and Democratic leaders in the House and Senate have pledged support for pay raises for teachers and unionized state workers.

Republicans say given the size of the budget problem, raises shouldn't be sacrosanct. "In a year like this it should be part of the discussion," said Senate Minority Leader Bill Finkbeiner, R-Kirkland. "Education would be a much higher priority for me."

House Majority Leader Lynn Kessler, D-Hoquiam, says that when people question the need for pay raises, she thinks of guards who work at a prison in her district.

"I think about the individual who drives from Port Angeles every day to Clallam Bay, makes $36,000 a year, is 62 years old and ... hasn't had a raise in four years," she said.

Public-school advocates argue the state needs to put more money into education to meet the growing expectations placed on students and comply with the citizen-passed initiative reducing class sizes.

Colleges and universities want millions of dollars more to meet growing demand in the state, as well as to attract and keep top faculty members.

And public-health groups have pushed for a program that would guarantee health care to every child in the state.

Republicans and Democrats alike say the state can't keep spending more money than it takes in from taxes. Yet the parties are far apart in terms of how to deal with the problem.

Republicans argue the cure is to rein-in spending. "We just can't continue to carry forward what we're doing constantly," says Sen. Joe Zarelli, R-Ridgefield, ranking Republican on the Senate Ways and Means Committee.

Democrats say the state can't simply cut its way back to financial health. After all, people want the services, said Senate Majority Leader Lisa Brown, D-Spokane. Perhaps the true question is, "how much [money] do we need, to do what we want to do?" she said.

Andrew Garber: 360-236-8268

or agarber@seattletimes.com