State faces nothing but bad choices

OLYMPIA — Last year was bad. This year is worse. The future won't be much better.

That, in a nutshell, describes the state budget mess lawmakers face when the Legislature convenes its 60-day session Monday.

Revenue collections have dropped so fast — by $1.5 billion in the past year, with more declines forecast — that state Treasurer Jim McIntire warned that the government literally could run out of money in a few months.

The state's chief revenue forecaster, Arun Raha, predicts tax collections won't return to their pre-recession peak until fiscal 2012. And Seattle economist Dick Conway, gloomier still, says it might take 10 years for taxable retail sales in the Puget Sound region to recover, adjusted for inflation and population growth.

"This is not a lull," Conway said. "This is really extraordinary."

In other words, unlike past recessions, after which state tax collections bounced back quickly, no one expects that to happen this time.

The question now is, can the state afford to pay for everything it's doing?

That issue underlies an old debate: whether lawmakers should cut their way to a balanced budget or increase taxes to help maintain core services to the poor.

Programs at stake with the state's $2.6 billion shortfall include state-subsidized health insurance for thousands of low-income workers, aid to people who can't work because of disabilities, and financial aid for lower-income college students.

Both Democratic and Republican leaders say cuts are needed, but Senate Majority Leader Lisa Brown, D-Spokane, argues the state can go too far.

"Are we content to lose ground in these areas? Lose health-care coverage? Increase class sizes and see the quality of life decline? Or are we going to take a stand and say we are committed to making improvements in these things even despite the tough economy?" Brown said last week. "We are committed despite the tough economy to not losing ground and to moving forward."

Republicans argue for cuts and for restructuring the way the state does business, not higher taxes.

"This isn't a temporary problem. Our economy is resetting," said Sen. Joe Zarelli, R-Ridgefield, the ranking Republican on the Senate Ways and Means Committee. "We've got to reduce the scope and size of government considerably."

But the reality is that Democrats — who control the state House, Senate and governor's office — will be the ones to decide how to fix the problem.

Money to spend

The state landed in this jam because the Legislature used a rapid rise in tax revenue, fueled by booms in housing and consumer spending, to increase spending 31 percent during Gov. Chris Gregoire's first term.

Billions of dollars were spent to expand access to health care, boost salaries for teachers and state workers, fund Initiative 728 to reduce class sizes, pay for other programs such as all-day kindergarten, and increase access to the state's colleges and universities.

Victor Moore, the governor's budget director, notes the state was coming out of recession when Gregoire was elected in 2004 and there was pent-up demand for increased spending, including restoring past budget cuts.

However, the rapid growth in tax collections that allowed all this came from an economy about to collapse. In late 2008, it did. State tax collections — including those from the sales tax and business-and-occupation tax — plummeted. That drop, along with increased costs, left the Legislature with an unprecedented $9 billion shortfall last year. Lawmakers closed it with cuts and one-time fixes, including federal stimulus money and dips into reserve funds.

Tax collections, though, continued to decline. And expenses for state services such as health care for the poor continued to rise because more people look to the state for help during recessions.

The shortfall represents the amount of money it would take to pay for current state services compared with the amount of tax revenue the state is projected to collect.

Budget writers predict it will cost about $33 billion in state revenue to maintain existing services through June 2011, plus leave several hundred million dollars in reserve. However, the governor's budget office expects to have only around $30.4 billion in tax revenue and other funds on hand to pay the bills.

That's the $2.6 billion gap lawmakers have to close.

Washington is not alone. Many states are in similar trouble, if not worse.

Keeping mum for now

Lawmakers aren't saying much about what they plan to do.

Gregoire and Democratic leaders in the House and Senate, without providing details, have expressed support for tax increases to help prevent cuts to social programs that serve the poor.

There's also been buzz lately about getting several hundred million dollars in one-time aid from the federal government, and how that could reduce the need for tax increases. At least for now.

Democrats also say some cuts will be needed to help balance the budget, but they offer mostly blank looks when asked for examples. The reality is, few lawmakers will publicly advocate specific cuts in state services.

The budget is made up of policy choices put in place over the years by Democrats and Republicans, and cutting anything means a political fight.

Health-care advocates will fight to protect medical coverage for the poor. Educators will fight efforts to cut money to schools. Unions will fight to protect pay and benefits.

There is no silver lining here for Democrats.

Closing the budget gap now doesn't mean they'll get to come back next year and restore past cuts or start new initiatives.

Looking ahead, the governor's budget office projects a shortfall of up to $2.8 billion when the Legislature writes a new budget in 2011, even after the current budget is fixed.

And that's assuming the economy begins to recover.

"It's going to be a long time before they get back to where they were before we got into this recession," Conway said.

Andrew Garber: 360-236-8268 or agarber@seattetimes.com