$718 million deficit looms for state budget

OLYMPIA – Washington’s brief respite from budget woes will end abruptly next year, with state budget officials now projecting a $718 million deficit.

“I wasn’t prepared for a number that big,” Senate Budget Chairwoman Margarita Prentice, D-Renton, said with a sigh Tuesday.

“We’ve been through some very tough years, and we face it again,” said House Appropriations Chairwoman Helen Sommers, D-Seattle. “We face some unbelievably high costs in the medical area and we continue to face initiatives that could cut our revenue.”

The Republicans’ senior budget writer, Sen. Joe Zarelli of Ridgefield, said the big gap shows that Olympia has a spending problem.

The new projection is part of the six-year outlook just published by the governor’s budget office.

Although legislators knew when they left town last month that a deficit was likely to shape up for the 2007-09 budget cycle, the new report is the first solid projection. Previous guesses were from $500 million to $1 billion.

The forecast, based on current revenue projections for the next biennium, takes into account money for increased school enrollment, prisons and other state caseloads. It factors in inflation, including 12 percent for medical assistance increases over the biennium.

The projection also assumes lawmakers will pay the voter-mandated pay raises for teachers and a 2 percent annual cost-of-living raise for state employees and higher education faculty and staff.

It also presumes the Legislature will empty out the $947 million in reserves from this biennium, including $825 million that lawmakers placed in savings for schools, pensions and health care.

The $718 million gap also assumes that legislators will leave $300 million on the table for future emergency needs. In truth, the Legislature could easily pick a much smaller ending fund balance, particularly if the economy is still growing.

The report also projects a $2.5 billion gap in the 2009-11 budget cycle.

State budget chief Victor Moore said the $718 million number can change greatly over the next year. He mentioned quarterly revenue forecasts that can swing by hundreds of millions, big changes in caseload forecasts and initiatives that subtract from the state treasury.

He and legislative budget staffers said it’s actually not a bad starting point.

“Compared with the $2.7 billion gap we faced four years ago and the $2.2 billion last time, you could even say we’re making progress,” Moore said.

In recent years, governors and lawmakers have grappled with big budget gaps as the state weathered an unusually long recession, but the demand for expensive state services grew.

This year is the exception. After the state economy started cooking again, largely propelled by a red-hot construction and real estate boom, a $1.6 billion surplus was forecast.

Gov. Chris Gregoire and the majority Democrats passed a $1.35 billion supplemental budget that included $520 million in new spending, about $50 million in business tax cuts and a big savings account.

At the time, minority Republicans warned against spending much of the reserves, noting that a big deficit was just around the corner.

Sommers and Prentice defended those budget decisions Tuesday and said they were generally pleased with the restraint showed by the Legislature.

“I think we behaved very prudently,” Prentice said. “People for the most part didn’t go nuts.”

Sommers conceded that lawmakers made it somewhat tougher on themselves by raising the cost of government but said they also deserve credit for shielding more than $900 million.

Both chairwomen said they expect the projected deficit to shrink somewhat because of economic growth.

“The housing market is still hot, and I look at Boeing adding people and all of Microsoft’s activities and all kinds of economic development around the state,” Prentice said.

The Legislature will try to balance the budget by restraining the spending growth, not through tax increases, she said.

“We’d be very loath to raise taxes,” Prentice said.

Moore agreed.

“The governor doesn’t want to raise taxes and doesn’t think we have to,” he said.

Zarelli said Democrats should have listened to warnings of the impending deficit and not spent so much this winter.

“It just goes to show you that spending has to be checked,” he said. “I don’t see how anybody in their right mind would raise taxes during an expanding economy.”

His House counterpart, Gary Alexander, R-Olympia, called the deficit “a disappointment, but not a surprise. It’s part of the fallout we expected from the largest spending increase in state history, approved last month by majority Democrats and the governor.”

Sommers, with more than 30 years of legislative service, said she’s running for another term, even with the looming budget problem.

“No use worrying about it now,” she said.