Why the 2011 – 2013 Budget Shortfall will Exceed $8 Billion
For more than two years, I have been writing reports critical of the State Revenue Council’s Quarterly Forecasts. This is the 10th in an ongoing series of such reports. On March 17th, the State Revenue Council reduced their estimate of revenue for the next biennium by $700 million to $31.9 billion. Strangely, they also predict the “caseload” for State services will fall in the next two years by $200 million. Thus, the budget shortfall for the next biennium will only increase by $500 million from $4.6 billion to $5.1 billion. They also raised the remaining budget shortfall for the current year by a mere $80 million – bringing the new total to about $310 million. Sadly, the State Revenue Council has a well documented history of overestimating revenue by billions of dollars. The March 17th Forecast was no exception.
To give you some idea of how badly the Revenue Council has overstated past revenue projections, their original estimate for the current biennium started out at $34.2 billion. It is currently at $28.0 billion – with three more months left to go. That is a drop of $6.2 billion or an overestimation of revenue of 18% in the past year and a half.
As the chart shows, the Forecast Council overestimated revenue EVERY QUARTER during the past 2 years. The only “exception” was when the legislature raised taxes in 2010. Even this windfall was later overturned by the voters.
If revenue remains flat over the next biennium at $28 billion, then the budget shortfall for the next biennium will continue to rise about another $4 billion and eventually hit $9 billion. The budget shortfall for the current year will also continue to rise by about $100 million per month and will exceed $600 million by the time the next revenue forecast comes out on June 16, 2011.
In this report, we will take a closer look at the underlying data, as well as the assumptions used by the Revenue Council, to determine what the actual budget shortfall will be for the rest of the current year – as well as what the budget shortfall will be for the coming biennium. We will also expose numerous tricks being used to hide the budget shortfall – accounting gimmicks which will only make the budget problem worse during the next two years. We will then conclude with a proposal to resolve this budget shortfall without cuts to education or social programs.
The accounting gimmicks we will look at include:
# 1: Failure to fully account for accelerated tax payments to the State.
# 2: Failure to fully account for the monthly shortfalls in State revenue.
# 3: Treating the Reserve Fund and Rainy Day Fund as if they were Revenue.
# 4: Treating transfers of one-time dedicated federal funds as if they were ongoing revenue – thereby over-stating revenue by hundreds of millions of dollars.
# 5: Treating transfers from State dedicated State accounts as if they were ongoing revenue – when in fact these transfers actually increase long term debt by more than one billion dollars (Examples include robbing hundreds of millions from the School Construction account and from the State Pension account).
# 6: Robbing Basic Education funding by failing to pay schools the June payment.
# 7: Assuming a rapid rise in State Revenue during the next two years
# 8: Failing to account for the negative economic impact of billions of dollars in cuts to State programs – which will force the firing of tens of thousands of public sector workers.
# 9: Failing to account for billions of dollars in lost income due to unemployment.
#10: Failure to account for billions of dollars in lost home equity due to declining home values caused by record foreclosures.
Review of current year Monthly Revenue Shortfalls
On February 10th, the Revenue Council announced that January revenue was $105 million below forecast (an annual shortfall increase of 1.2 Billion or a biennial shortfall increase of $2.4 billion). On March 11th, the Council announced that February revenue was only $40 million below forecast. One might think that was good news – a sign that things are getting better – or at least not remaining so bad. But you would be wrong.
Trick # 1: Failure to account for accelerated payments to the State
Many tax reporters who use to be on a quarterly collection schedule and now paying taxes monthly. The latest monthly report on March 11, 2011 was for February collections of January Sales. Because revenue is coming in earlier, the May report is certain to be far below forecast. Here are comments from the ERFC March 11, 2011 Revenue Update for February Collections:
The reason they were expecting an increase was that one third of the money that was supposed to come in during April came in during February instead. This should have added an extra $25 million. Yet February revenue was still down $40 million and the annual revenue growth fell to 2%. Keep in mind the forecast for annual growth is 8% so 2% is pretty bad.
Trick # 2: Failure to account for monthly shortfalls in State revenue.
The total shortfall for February after adjusting for the extra $25 million that disappeared was $65 million. So you can say that for the year so far we are down $105 M + $65 M = $170 million in the past 2 months. Not a good sign. Revenue declines from September to November 2010 were about $100 million per month – bringing biennial revenue down to $28 billion.
Revenue is currently running short of forecast by about $85 million per month. If this trend continues through June, the current year shortfall will increase by another $300 million – bringing the total end of June shortfall to about $500 million. Also, if this rate continues for the next biennium, it annualizes as 12 x $85 million = one more billion tacked on to the next year and raises the biennial shortfall $2 billion from $4.6 billion to $6.6 billion – which is what I said it would be more than a year ago. This is clearly much more than the $5.1 billion currently predicted by the Revenue Council. Actual revenue has remained flat at about $28 billion for more than 2 years. If there is no recovery, revenue may again fall to $28 billion raising the budget shortfall to $9 billion.
Of course, we got to $6.6 so quickly – before the biennium has even started – that I am now certain the budget shortfall will climb to at least $7 billion and maybe $8 billion by the time the biennium is over. My certainty is due to the fact that State revenue predicted gains have been heavily back loaded – meaning that the Revenue Council is calling for very huge increases in revenue in coming months. When those increases fail to appear, the budget shortfall is going to start rising even faster than it is rising now. For the remaining portion of the current biennium, a shortfall of $500 million essentially means our State is going broke and may not be able to make the June payment to school districts. More on this later.
Trick # 3: Treating the Reserve Fund and Rainy Day Fund as if they were Revenue.
Technically, there is supposedly to be a couple hundred million in the State Reserve Fund and another couple hundred million in the State Rainy Day Fund. But in fact, there is no money left in either account. Both accounts have already fallen to ZERO. The Reserve Fund balance is like the balance in your check book at the end of each month. It is never a good idea to let it go down to zero because then you might start bouncing checks. But the $500 million shortfall we will face by the end of June is exceeds the State Reserve fund by a wide margin.
This raises the question of what we will do for money between June 1 and July 1?
The State is not allowed to go broke. Although it seems they are going to go broke anyway. Maybe we can get permission from the Feds to start printing money – like those IOU’s that California has been passing out. I remember fondly back in the good old days when there was some kind of policy about keeping one month’s revenue, or at least $800 million in the State Reserve Fund. That policy appears to have fallen by the wayside at some point.
When this will really hit is when May revenue is reported on June 10th and when the Revenue Quarterly Update is issued on June 16th. We are going to be missing 3 whole months of revenue – which instead came in during February, March and April for the prior months sales tax.
Three Years of Red Ink
The State Revenue Council keeps predicting a rapid V Shaped rebound in State Revenue. As the following Table confirms, this has led to a wave of RED INK which has only made the Economic Crisis even worse. Here is the ERFC Track Record for the current biennium:
$7 billion in over-estimates of State Revenue over the past 12 quarterly reports is an average of $800 million per report. Even limiting it to $1.2 billion over the past 3 quarterly reports is $400 million per report. Therefore we can expect the June Report to tack on an additional $400 to $800 million in red ink for the current year.
And here is there Track Record for the next biennium:
Excluding revenue increases by the legislature (ie non-economic changes in revenue), the total over-estimation of State Revenue was $6.9 billion in the last biennium and $1.7 billion in the next biennium for a total over-estimation of $8.6 billion in just the past 3 years!
Recap of Revenue Shortfalls and Budget Cuts during the past 6 Months
The November 2010 budget had a shortfall of $900 million. The shortfall was made up with $500 million in across the board cuts made by the Governor in October. The Governor’s cuts brought the budget down from $30,465 to $29,965. This left $400 million for the legislature to address in December. December 2010 legislation (HB 3225) included $70 M in revenue (from fund transfers and tax amnesty) , also $488 million in cuts (includes $208 M in edujobs transferred to General Fund and $39 million in K4 class size funding cut) = $558 million. Then in February, the legislature agreed to another $242 million in cuts including all of the December 17, 2010 cuts proposed by the Governor (ESHB 1086). But as near as I can tell, these cuts do not yet include the $253 million in cuts from delaying a portion of the June school payment to the next biennium. The enacted budget was $30,465 million minus $728 million in cuts lowered the Budget down to $29,743 million.
Trick # 4: Treating transfers of one-time dedicated federal funds as if they were ongoing revenue – thereby over-stating revenue by hundreds of millions of dollars.
There are a couple of federal funds programs that are certain to not be extended. These are $200 million in federal “edu-jobs” funding that the State took back from school in December. The second is a 6 month extension of a federal medical aid program. These represent hundreds of millions of federal dollars which have been used to cover State budget shortfalls. Had these funds not been available, the drop during the March Revenue Council report would have been much greater. Obviously, these federal funds will be gone in June – requiring hundreds of millions in additional cuts for the next biennium.
Trick # 5: Treating transfers from dedicated State accounts as if they were ongoing revenue – when in fact these transfers increase long term debt by more than $1 billion.
There is a section of the State Balance Sheet called “Legislative Transfers.” The total of these transfers for the current biennium has been more than $1.2 billion. The legislature appears to treat these fund transfers as if it was free money to be used whenever the shortfall gets too big. But the funds being used are dedicated funds that were supposed to be used for other mandatory expenses.
For example, hundreds of millions of dollars has been robbed from school construction and repair accounts. This does not mean that schools do not need to be built or repaired. Instead, it means that the school construction and repair backlog – already around $10 billion – is simply getting bigger. This is unconstitutional as school construction and repair is a required duty of the legislature in our Constitution. The legislature has an obligation not only to pay for the operation of schools but also for their construction and repair.
Similarly, the legislature has robbed hundreds of millions of dollars from State pension funds. This money will also eventually need to be paid back. Finally, debt payments have skyrocketed – nearly doubling over the past 10 years from 3% of the State budget to 6%, to the point where we are paying more than one billion per year just on debt payments.
Trick # 6: Robbing Basic Education by failing to pay schools the June payment.
In the past 2 years, the legislature has repeatedly robbed our public schools. First, they stripped $2 billion in I-728 and I-732 funding. Then they gutted school construction funding. Then in December 2010, they robbed schools of $200 million in federal edu-job funding.
But the greatest insult of all is being saved for June. By June, it will become obvious that the State is flat broke. The June payment to school districts is 6% of the annual apportionment
After all the previous cuts, Public Schools are just under $14 billion for the biennium or under $7 billion per year. Dividing $13.746 billion by 24 months is $573 million per month. This is very close to what the State Revenue shortfall will be in June. So while the Governor’s proposal in December 2010 was to rob just a portion of the June 2011 payment ($253 million), it is more likely that the entire June payment will be “delayed” to the next biennium.
Here is what Ross said about this problem in February just two days after the January $105 million revenue shortfall was announced – an announcement that made it obvious we are heading for a financial meltdown: “House Ways and Means Chairman Ross Hunter tells The Olympian newspaper that a one-day delay in payments to public schools from the last day of June to the first day of July may be inevitable.” “It’s pretty much a foregone conclusion – unless something more attractive comes up,” House Ways and Means Chairman Ross Hunter, D-Medina, said Friday, referring to the payment delay to cover whatever negotiators can’t otherwise agree to in bridging a $566 million shortfall.
So let’s be clear. Ross was not talking about delaying a single day’s payment to schools. He was talking about delaying the entire month of June’s payments to schools – because that is the only way to balance the coming $550 million current year shortfall. Also as a practical matter, it is because according to my calculations, the State is going to be flat broke in June and would not be able to make the payment to the schools even if they wanted to.
This not only creates a problem for the writers of the next budget (who will see an extra half billion tacked on to the $6.6 billion problem they will already be facing), but it also creates a problem for our schools – who have to pay their bills even when the State is not paying them.
For example, the Snoqualmie Valley School District gets about $30 million per year from the State. Eliminating 6% of $30 million will be an additional $2 million cut to current year funding. Given the multitude of financial problems coming in the next biennium, it is extremely unlikely that this funding will restored. If anything, next year is going to be much worse.
In addition, delaying $500 million in funding for Basic Education to 295 school districts would lead to the firing of 5,000 teachers and is almost certainly unconstitutional:
Why the Delayed Payment will NOT be made up in the next biennium
It has been claimed that the payment is merely being delayed by one day. This is a false claim because the budget shortfall for the next biennium will be much worse than the budget shortfall for the current biennium. It will be much worse for three reasons. First, there will be $2 to $3 billion less in federal stimulus funding. Second, there will be much less ability to raid other State funds – as everything that can be stolen has been stolen. Third, and most important, thousands of public sector workers will lose their jobs this summer due to the All Cuts budget. This in turn will lead to the loss of thousands of private sector jobs which are dependent on the public sector jobs – which in turn will greatly reduce State revenue during the next biennium.
Instead of paying back schools for the $500 million which will be taken from them in June, what is more likely to happen is that there will be another billion per year in cuts to school funding in the 2011-2013 biennium – dropping funding from the current $7 billion per year to $6 billion per year. This will be about a 14% cut on top of the current school funding cuts – and cause another 5,000 to 10,000 teachers to lose their jobs in the next two years and cause a rise in class sizes from 25 to 30 students per class.
Trick # 7: Assuming a rapid rise in State Revenue during the next two years
The Revenue Council is now calling for 6.7% growth in FY 2011 and 6.7% growth in FY 2012. This would be a two year growth rate of 13.4% over the next 2 years. The actual rate of growth is currently less than 2%. So a 6.7% rate of growth is utterly ridiculous.
Naturally, ERFC is very good at coming up with excuses for why revenue will not meet their forecasts. This time it was bad weather and rising gasoline prices. Personally, I think it is because no one has a job. Therefore no one has any money to spend. Ironically coming State budget cuts are likely to lead to even further drops in State revenue.
Trick # 8: Failing to account for the negative economic impact of billions of dollars in cuts to State programs – which will force the firing of thousands of public sector workers – soon to be followed by the firing of thousands of private sector workers whose jobs depend on the spending of public sector workers. There has been $1.3 billion in State budget cuts in just the past 3 months. This does not include the ending of federal stimulus funding in June – and the failure of the State to pay schools in June – a double whammy which will lead to thousands of teachers being fired.
Billions in cuts and firing thousands of public sector workers (Hoover Economics) will only make things worse.. The economic meltdown coming this summer will not only greatly increase foreclosures, but unemployed workers cannot shop at stores and can not pay taxes.
Therefore State revenues will continue to decline setting off a downward economic spiral much like what happened in 1930 to 1932.
Trick # 9: Failing to account for billions of dollars in lost income due to unemployment.
State revenue will not recover until the unemployment problem in our State is resolved. However, just as the Revenue Council has been wrong in predicting a rapid recovery to State revenue, they have also been wrong in repeatedly predicting a rapid rise in employment.
In November, 2009, employment was just above 2.8 million. The Revenue Forecast Council predicted employment would rise rapidly to 2.85 million by 2011. In response to their claim, I issued a report predicting that employment would remain at or below 2.8 million through 2010. We currently have about 2.78 million jobs. Many State budget cuts and job losses will go into effect this summer as 10,000 teachers, 10,000 college instructors and 20,000 health care workers are fired. These mass firings will be followed in the Fall be tens of thousands of downstream private sector employees losing their jobs. By the end of 2012, the number of employed workers will fall below 2.7 million. Total job losses will exceed 120,000.
The number of unemployed workers has doubled in the past three years. Many have been unemployed for years, have ran out of benefits and ran out of hope. Unemployed workers can not pay State taxes.
Even the statistical rise in jobs in January was actually a decline in jobs
The rise of 10,600 jobs in January 2011 was only a statistical manipulation due to seasonal adjustment. There was actually a loss of 47,100 jobs after Christmas. But since they were expecting a loss of 57,700 jobs after Christmas, the papers reported an increase of 10,600 jobs.
“In a very real sense, we lost jobs. But we lost fewer jobs than we normally would at this time of year.” – Dave Wallace, Chief Economist for Employment Security, February 2011.
But the real reason only 40,000 lost their jobs after Christmas was because fewer people had jobs before Christmas. There were only 12,000 private sector created in Washington State in all of 2010. According to the Washington State Employment Security Department, since there are nearly 800,000 unemployed workers in Washington State, there were 66 unemployed workers for every new job created. Clearly what will be urgently needed is a massive public workers program.
Trick #10: Failure to account for billions of dollars in lost home equity due to declining home values caused by record foreclosures.
Estimating the Economic Impact of home foreclosures in Washington State
Thousands of unemployed homeowners will lose their homes unless immediate steps are taken to protect them from foreclosure. Congressman Raúl Grijalva, co-chair of the Congressional Progressive Caucus, recently stated: “The fundamental problem–and we learned this with previous efforts to slow down the foreclosure rate–is the fact that it’s voluntary on the part of the lender. It’s not just a question of looking at the mortgage and making some modifications. The endgame should be keeping people in their homes.”
According to the most recent Case Schiller report, homes in the three county Metro area have fallen from $400,000 in 2007 to $300,000 in December 2010 – a decline of $100,000. According to the most recent Core Logic report, in December 2010, Washington State has 1.4 million home mortgages (deeds of trust) of which nearly 300,000 have negative equity. Total property value of all homes with mortgages is $440 billion. This equates to an average home value of $315,000 by the end of the 3rd Quarter of 2010. Just three years ago, home values were about $100,000 higher for a total State worth of $580 billion in 2007.
The decline so far has been about $140 billion using the Core Logic and Case Schiller estimates. In December, 2010, Zillow.com independently estimated that the total loss of Washington homeowners was about $123 billion since 2007.
The Negative Equity Problem
Negative equity means owing more on your home that it is actually worth. It is strongly related to an increased risk of default and foreclosure. The percentage of homeowners with negative equity in Washington State is now about 20% (300,000 homeowners or one in five homes). Homes with negative equity and foreclosures are also both strongly related to being unemployed.
Core Logic estimated that current equity is $150 billion, which equates to an average home equity of $107,000. Most disturbing is the fact that over 50% of all Washington State homeowners now have less than 20% equity remaining in their homes (or less than $63,000 equity).
This downward death spiral of rampant unemployment followed by foreclosures followed by plunging home equity followed by declining State revenue must be stopped!
The US Commerce Department reported that corporate profits hit a record $5 trillion in 2010. Corporations are now sitting on trillions of dollars in liquid assets – which they are investing mainly to buy up assets and create jobs overseas. The Fed recently reported that bank reserves had risen from $2 billion in August 2008 to nearly one trillion dollars in August 2010. The four largest banks (Bank of America, JP Morgan Chase, Wells Fargo, and Citigroup) received hundreds of billions in subsidies from the US tax payers. Meanwhile millions of Americans remain unemployed and through no fault of their own have lost their homes, their health insurance and their life savings – while banks now rack in record profits from record foreclosures.
Millions of Americans could remained in their homes, if bailed-out banks were required to work with homeowners in good faith to find solutions which allow homeowners to stay in their homes and if unemployed workers were given a chance to earn a pay check. The government should represent and protect not merely the greed of banks to maximize profits, but also the needs of people to stay in their homes and have real jobs. We should protect not merely banks from failure, but also homeowners and middle class working families.
Solution #2: Cut Out of Control Tax Breaks for Billionaires instead of cutting school funding
State Revenue compared to Tax Exemptions
Washington State Office of Financial Management, 10 Year Financial Trends, Schedule 5: Near General Fund. Annual Tax Breaks extrapolated from DOR Tax Exemption Reports. See also http://leap.leg.wa.gov/leap/Oversight/histongf.pdf and fisca.wa.gov
Tax breaks for billionaires and major corporations in our State have skyrocketed 250% during the past 10 years (from $22 billion per year in 2000 to $50 billion by 2010): Over 90% of these tax exemptions benefit the richest one percent, with much of this wealth being shipped out of State and even out of the country, creating jobs overseas instead of here in Washington State. In shifting the tax burden to our middle class, and causing the firing of thousands of public servants, these massive tax exemptions for billionaires do not create jobs. Instead, they cost jobs.
We now spend $7 on corporate tax breaks for every dollar we spend on teachers. If we cut back on corporate tax breaks for the rich by even 10%, we could be hiring teachers and doctors and health care workers instead of firing them.
Resolution to require wealthy corporations to pay their fair share of State taxes
Whereas the State Revenue shortfall for the current biennium may rise to over $500 million by June 2011 and
Whereas House Ways and Means Chairman Ross Hunter recently stated that a delay in payments to public schools of the June payment is a “foregone conclusion – unless something more attractive comes up” and
Whereas the June payment to schools is 6% of annual school funding or about $420 million and $420 million in reduced State funding equates to the firing of about 5,000 teachers; and
Whereas firing 5,000 teachers would harm the future of one million school children and
Whereas the budget shortfall for the next biennium is now over $5 billion and delaying funding for schools would increase the budget shortfall for the next biennium by $420 million; and
Whereas our State is already 49th in the nation in school funding as a percent of income and our children suffer from the third-most overcrowded classrooms in the United States; and
Whereas the “paramount duty” of the legislature according to our State Constitution is to provide adequate funding for our public schools; and
Whereas the legislature has already cut more than $2.3 billion in Education Funding in the past two years – while not a single penny has been cut in tax breaks for wealthy corporations; and
Whereas State tax exemptions for wealthy corporations making more than one billion dollars per year in profit cost our State hundreds of millions of dollars every year; and
Whereas continuing to give hundreds of millions of dollars in tax exemptions to wealthy corporations while failing to pay $420 million in “Basic Education” funding to schools is contrary to our State Constitution, therefore be it
Resolved that we, Democrats, request that our Representatives and other Washington State Legislative Representatives and Senators sponsor legislation to protect schools from destructive budget cuts by suspending corporate tax exemptions during the current and next biennium for any corporation whose annual profit exceeds one billion dollars.
Respectfully submitted by David Spring M. Ed., email@example.com
5th LD Representative to the King County Democratic Party Central Committee