$1 billion budget gap may greet Legislature

By Ralph Thomas
Seattle Times Olympia bureau

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That hasn't stopped them from pushing forward on plans to increase government spending and extend several business tax breaks, which together would put the state hundreds of millions of dollars deeper into the hole.

The latest projections from the governor's budget office indicate state spending will outpace tax collections by more than $1 billion during the next two-year budget cycle — the budget legislators will be working on a year from now. The shortfall is projected to grow to more than $3 billion by 2009.

In an election year, though, legislators are not eager to dive into another nasty budget fight like last year's. Besides, Locke and many legislators say, there isn't much they can do now about a budget problem that is more than a year away.

Everyone is banking on an economic rebound to help ease the state's fiscal woes, though it would take a mighty big economic rally to keep the state in the black.

Big bills coming due Washington's treasury faces the following in 2005-07: • A $440 million extra payment into public-employee pension funds because of stock-market declines. • More than $300 million in costs for business tax breaks. • $230 million for raises to teachers and state employees, plus another $230 million to satisfy a state initiative to reduce school-class sizes.

Before stepping down next year, Locke's last task as governor will be to propose a balanced budget for 2005-2007. Locke said he isn't worried, even if the economy doesn't improve enough to dent the projected $1 billion gap between projected revenue and projected spending.

"It's a heck of a lot more manageable and doable than what most states are facing," he said.

He predicted that settling the budget will be a much easier task than last year, when the state's shortfall was a record $2.7 billion.

On the other hand, the state's financial reserves have been spent down, from more than $1 billion five years ago to what is projected to be less than $200 million by next year.

Some Republican legislators, contending that it's too soon to declare the budget crisis over, recently criticized the Democratic governor when he proposed additional spending in the state's current $23 billion budget.

"Now is not the time to throw a party and spend ourselves down to zero," said Senate Majority Leader Bill Finkbeiner, R-Kirkland.

Yet both sides are pushing for spending this year that likely will lead to bigger deficits.

For instance, Locke's proposed revisions to the current budget include $30 million in new spending to boost enrollment at colleges and universities.

Locke also included $25 million for a new contract to give the state's 26,000 home-health-care workers a 50-cent-an-hour raise and health benefits.

Many Democrats also support Locke's proposal to restore about $23 million worth of health-care cuts that he and legislators agreed to last year.

Meanwhile, Republicans and Democrats alike are eager to renew several high-tech business-tax breaks that will cost the state an estimated $74 million in the current budget.

The real concern is not how much these things will cost in the current budget, but how much the costs will balloon in the future.

The home-care-worker contract, for example, is projected to cost $82 million during the next two-year budget. And the cost of renewing the tax breaks is expected to top $225 million.

Republicans argue that the tax breaks should not be lumped together with spending items such as the home-care contract. They contend that the high-tech business incentives pay for themselves by stimulating the economy and boosting state tax collections.

But there are few data to support that. The state's budget forecast does not factor in any increased revenue resulting from the tax breaks.

"It's an unverifiable claim," replied David Rolf, head of the union that represents the home-care workers.

A lot of other factors are expected to contribute to the projected $1 billion shortfall in the state's 2005-2007 budget.

The biggest single culprit is the public-employee pension funds, which are still hurting from stock-market declines. During the next budget cycle, the state will have to put in an extra $440 million to begin to make up for huge losses on Wall Street.

The forecast also assumes more than $230 million worth of cost-of-living raises for teachers and state employees. While those are not mandatory, legislators are sure to face intense pressure from public-employee unions. The Legislature suspended voter-approved pay raises for teachers in the current budget, and state workers have gone without raises five of the past 10 years.

Aside from the rising costs, several factors are expected to cut into the amount of money available to budget writers. For instance, the Boeing 7E7 tax breaks the Legislature approved last year will kick in and are projected to cost the state more than $100 million in the next budget. And under the state's voter-approved class-size-reduction initiative, more than $230 million is supposed to be diverted to school districts.

Some critics outside Olympia say Locke and the Legislature shouldn't wait to start tackling the problem. But you won't find much consensus on how. Some say legislators should start looking for cuts now, or at least reject any new spending. Others favor letting the high-tech tax breaks die, or perhaps even considering new taxes.

None of that is likely this year.

"The reality is there's not a lot the Legislature can do right now," said Rep. Barry Sehlin of Oak Harbor, the ranking Republican on the House Appropriations Committee. "I think it's pretty clear that the Legislature will come into session next year facing a significant problem."

Ralph Thomas: 360-943-9882 or rthomas@seattletimes.com

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