New state windfall of $57 million may benefit health care, schools

OLYMPIA — Washington's "strong but slowing" economy will produce another windfall of $57 million, driving the state's reserves to nearly $1.9 billion, state revenue officials said Thursday.

Gov. Christine Gregoire will use the new projection from the state Economic and Revenue Forecast Council to write a new, two-year state operating budget next month. She said she wants to use some of the surplus for education and health-care improvements.

"The revenue forecast reinforces that our economy is strong," she said. "We have to remain diligent and make smart investments based on what works and maintain an appropriate reserve."

Chang Mook Sohn, the state's chief economist and the council director, said the new forecast amounts to "very minor fine-tuning" from the September estimate of revenue expected between now and summer 2009.

Since March 2005, Sohn's forecasts have risen by more than $2 billion over expected levels, including $1.4 billion in the last two quarterly updates, primarily because of an unusual and unsustainable surge in housing.

The extra money erased budget-office projections of a deficit in the next two years and started building up a sizable reserve.

The $1.88 billion reserve includes about $740 million that lawmakers set aside for pensions, education and health care for use in the upcoming budget.

The current budget is about $27 billion.

Gregoire's budget chief, Victor Moore, wasn't turning backflips over the new numbers. Much of the money will be needed to pay for current-level services, labor contracts and new policy goals, such as health care and extending kindergarten to full day in more districts, he said.

The governor also wants to leave a healthy reserve unspent, lest the state get on a "roller-coaster" cycle of spend-cut-spend, he said. He declined to give a target number.

Moore said many interest groups are looking for big budget increases, and they need to lower those expectations.

Sen. Joe Zarelli, R-Ridgefield, the Senate Republicans' lead on the budget-writing panel, urged the Democratic-controlled Legislature and governor to create a constitutional "rainy-day" fund and set aside some of the windfall.

The council chairman, House Finance Chairman Jim McIntire, D-Seattle, said the new money is nice after having to deal with huge budget gaps in recent years.

But he and other panel members joined in the call for budget restraint.

Sohn's views were mostly optimistic, though he said the expected cooling of Washington's once-torrid housing and construction sector is under way as he had long predicted. Earlier forecasts built in the prediction of slower growth.

"Clearly in terms of income and employment, the Washington economy is doing a lot better than the U.S. economy," he said. "We are enjoying a very strong economy."

Washington job growth has topped 3.6 percent in the past 12 months, compared with the 1.4 percent national rate.

Four high-wage sectors are leading the way, he said, referring to gains in software, construction, aerospace and professional and business services.

The new forecast adds $49 million more for the two-year budget period that ends in June, plus an additional $8 million in the upcoming biennium.