Wash. treasury to see further revenue decrease

Washington's freshly balanced state budget dipped back into the red Thursday, as a recession-fueled drop in projected tax collections punched a $195 million hole in state government's main checking account.

Gov. Chris Gregoire immediately ordered cabinet agencies to cut payroll expenses by 2 percent, and continue earlier bans on travel, contractors and equipment purchases.

Her administration predicted those moves could free up roughly $200 million to patch the shortfall over the next budget cycle, which begins July 1 and runs through June 2011. Department heads will have flexibility in meeting the new reduced payroll target, with attrition, furloughs and layoffs among the possible actions.

Top lawmakers, meanwhile, said a special session of the Legislature is likely in October, if only to approve new school-spending and criminal justice policies that were not resolved during this year's regular legislative session.

Majority Democrats hope to avoid major adjustments to the cash-strapped $35 billion state budget during any special session, but they're holding open that possibility until the next quarterly forecast of state revenue trends.

"We'll make that decision in September after we have further analysis as far as where the economy's going," said Sen. Rodney Tom, D-Medina, the top deputy on the Senate budget committee.

The state's Rainy Day Fund, intended for emergencies, still has a projected balance of about $248 million through the upcoming budget cycle - enough to fill the new deficit and still leave about $54 million in the bank.

But tapping the fund requires legislative approval, and state officials want to keep the money in place as a hedge against further drops in state revenue.

The deficit was unveiled in Thursday's report from the Economic and Revenue Forecast Council. Revenue for the current budget period, which ends this month, is projected to drop by about $185 million. The drop-off for the 2009-2011 budget is an additional $297 million.

The recession has already hammered state revenue, and lawmakers had to bridge a roughly $9 billion budget deficit earlier this year with a combination of spending cuts and one-time fixes, including a multibillion-dollar flood of federal stimulus money.

Council Director Arun Raha, the state's chief economist, said a batch of mixed economic signals indicates an end to the national recession in the third quarter of this year, with a long, slow recovery lasting into 2011.

"Things are beginning to move sideways, rather than due south," Raha said. "In today's economy, sideways is good, because that is the first step toward recovery."

Washington is expected to emerge from the downturn on pace with the nation, unlike past recessions, when Washington lagged the recovery.

Raha sees consumer spending beginning to perk up later this year, and is predicting a relatively strong holiday season for retailers. That would be good news for the state treasury, which is heavily dependent on sales taxes generated by consumer spending.

With personal savings levels at 20-year highs and the credit markets loosening, consumers who sat on the sidelines thorough the 2008 holidays are likely to regain some confidence and inject money into the economy, Raha said.

"Don't underestimate the power of Madison Avenue to take your money away from you," he said.

Unemployment in the state still is expected to peak in the second quarter of 2010, with a rate of about 10.6 percent - significantly higher than the most recently reported rate of 9.4 percent.

Exports will not help the state's initial recovery, because the rest of the world is likely to emerge from recession only after the U.S. returns to economic growth. Raha said the eventual lift in exports will likely come in 2011, giving Washington an "afterburner" effect as it continues to slog through economic recovery.

Minority Republican lawmakers were mixed on the thought of a special session. They also pointed out the budget problems looming a few years in the future, when billions in federal assistance and other one-time money will have dried up.

"We may be in better shape than California, but that isn't saying much," said Sen. Joe Zarelli, R-Ridgefield, the budget panel's ranking Republican.

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On the Net:

Forecast Council: http://www.erfc.wa.gov/