Saving for a rainy day (while the roof is leaking)

Gov. Christine Gregoire recently proposed a permanent, constitutionally mandated rainy-day fund for Washington state. That's an idea whose time has come. Lawmakers from both parties have praised it, as have the heads of groups as disparate as the Association of Washington Business and the Washington State Labor Council.

There is reason for this breadth of support. Our state's political leaders, charged with maintaining the continuity of public services in good times and bad, understand the benefit of a substantial set-aside of funds in good times so that the money is available to help us through the bad. This provides budgetary flexibility and stability.

But, it is also clear that such a fund is not a cure for all that ails our state balance sheet. And if treated as a total cure, it would divert us from the most important budgetary problem we face: an undeniable — and worsening — structural deficit. That underlying deficit ensures that state government, due to inadequate revenues, falls further and further behind the pace of expansion of the state's economy and the growth in our community's need for quality health care, expanded educational opportunities and infrastructure improvements.

But first, the positives about the rainy-day fund. The latest research shows that a permanent set-aside fund would be a useful budgetary tool for softening the impacts of cyclical economic downturns. To understand why, think back to our last recession.

In early 2002, Washington state was suffering from the fiscal equivalent of an Excedrin headache. The economy, reeling after the dot-com collapse and layoffs at Boeing, went into near hibernation following the Sept. 11, 2001, terrorist attacks. The resulting implosion in revenues blew a $1.6 billion hole in the state's coffers. To make matters worse, officials had few fiscal tools at their disposal to cushion the blow. Reserves were only $384 million, less than 4 percent of general-fund expenditures and not nearly enough to close the gap.

Policymakers responded by cutting education and the social-services safety net. Performing battlefield budgetary surgery born of fiscal necessity, they sliced nearly $250 million from important human-services programs. They also resorted to one-time budget gimmicks like borrowing against national tobacco settlement payments. But short-term fixes are not always available.

There might have been a better way. Our analysis of other states shows that rainy-day funds do serve as an important budgetary resource for dampening the negative effects of natural downturns in the business cycle. Had our state set aside funds in the boom years of the 1990s into a well-designed and sufficiently sized rainy-day fund — 15 percent of annual general fund revenue rather than the 10 percent currently under consideration would be best — much of this painful triage might have been avoided.

Gregoire understands that lesson. Buoyed by the happy accident of hundreds of millions in unanticipated revenue, she has proposed earmarking $262 million this year to launch a constitutionally mandated fund so we won't be caught so off our guard by the next recession.

Still, a persistent and even larger problem remains. Washington state faces a "structural deficit," a situation where revenue inflows are unable to keep pace with the natural growth in the cost of education, health care and other priorities. This natural growth assumes no new programs (or expansion of existing programs) and, among other things, student enrollment growth, health-care inflation and population increases. The problem was exacerbated in the 1990s by excessive state tax cuts that together amounted to fully 8 percent of revenue.

This structural insufficiency continues to grow. If levels of state services remain constant (only natural growth), forecasters predict deficits of $1.2 billion in the 2009-2011 biennium and $2.8 billion in the 2011-— biennium. And that presumes that the economy will remain healthy. The first deposits to the rainy-day fund would occur even though — despite all the happy talk about the current surplus — projected revenue for the current biennium is around $800 million less than the price tag for current priorities.

In that context, a rainy-day fund is just a Band-Aid (though a necessary one) on Washington's budgetary wound. Few of our state's leaders are willing to acknowledge this structural deficit, but it is really the elephant in the room.

Thus, even a carefully crafted rainy-day fund will be of full benefit only if paired with a responsible near-term effort to cure our state tax system's structural inadequacies. Otherwise, it could well have the perverse effect of driving lawmakers to ignore pressing present-day fiscal shortfalls while setting aside scarce resources in anticipation of future crises that might never arise, and while also creating false public perceptions that the state is taking in far more revenue than it needs.

Hugh Spitzer a Seattle attorney, was vice chairman of the Washington State Tax Structure Study Committee in 2002. Remy Trupin is the executive director of the Washington State Budget & Policy Center, www.budgetandpolicy.org