How the State Lost $572 Million in a Single Day
After reviewing the June 2011 June State Revenue Report, Reporter David Goldstein (Goldy) wrote in the Stranger:
Goldy would have been less puzzled had he read my critique of the State Revenue Forecast, posted 2 months ago on my website: Realwashingtonstatebudget.info entitled:
“Why the 2011 – 2013 Budget Shortfall will Exceed $8 Billion” http://realwashingtonstatebudget.info/index.php?option=com_content&view=article&id=47&Itemid=58
In this critique and a follow-up article, I predicted this sharp decline in revenue and gave 10 reasons why State Revenue would be much less than the $32 billion – and will likely wind up between $28 to $29 billion for the next biennium. Losing $572 million in a single day is only a symptom of much bigger problems – an impending financial meltdown that will soon come to pass. Let me recap a couple of problems with the House of Cards that is our State Revenue Forecast:
The Tax Amnesty Program will actually cost more money in the next biennium than it has taken in during the current biennium
A month ago, there was much excitement about an “extra” $225 million in State Revenue that came in due to the Tax Amnesty program. It was treated as a solution to our budget problems when it actually made our budget problems worse. I pointed out over a month ago that this extra revenue was really just robbing Peter to pay Paul – which does not do much good when Peter and Paul are the same person. The June 10thRevenue Report which includes collections from May 10th to June 10th for activity during April, added another $40 million in Amnesty Collections. Despite this extra $265 million, actual revenue was $70 million below forecast in the current biennium. But the amnesty program now results in $270 million LESS in the next biennium – almost half of the $570 million loss Goldy was worried about. The Amnesty program merely shifted $265 million we would have gotten in the next biennium to the current biennium – hiding the budget shortfall in the current biennium and making the budget shortfall much worse in the next biennium – as it reduces future collections by more than $270 million.
Pay Back Time for One time fund transfers
There were several other “accounting tricks” used to balance the last budget – many of which I described in my April article. I pointed out that nearly all of these “one time” fund transfers would eventually need to be paid back. One in particular – that was and still is unconstitutional – was failing to make the June $400 million Basic Education payment to public schools. The claim was this $400 million payment was simply being “delayed by a couple of days.” In a remarkable shell game, the extra $265 million from the Amnesty program will be used on June 30th to pay half of the June payment. But this shifted the entire $400 million as a reduction in revenue for the next biennium (which starts on July 1st). Outside of this shell game, the actual revenue for May came in about $100 million less than predicted. Moving this lower revenue level forward –combined with the $400 million shell game – is why $570 million disappeared in a single day. More accurately, the $570 was never there in the first place – it was imaginary money.
Below is the new State Balance Sheet as of June 16, 2011:
The above Balance Sheet shows that Revenue Council is now predicting that State Revenue will grow to $31.7 billion in the next biennium – compared to $28.2 billion which is the final amount for the current biennium which ends on July 1st. Thus, despite all economic indicators pointing to almost no growth, the Revenue Council continues to predict a 12.4% growth in revenue for the 2011-2013 biennium. Of course, if there is no growth, then revenue will remain at 28.2 billion for the next biennium – 3.5 billion LESS than is now predicted by the ERFC.
There are several disturbing facts in the above Balance Sheet:
First, while we entered the last biennium with $189 million in the bank, we will enter the next biennium with a MINUS $84 million. This is unconstitutional as it means the budget for the last biennium was never balanced – even after failing to make the June Payment to schools!
Second, the June 2011 Update reduced revenue by $387 million. But after a series of accounting tricks, predicted revenue only fell by $300 million – from $31.9 billion to $31.6 billion. As spending for the next biennium is predicted to be $31.7 billion, there is already a $118 million shortfall between spending and predicted revenue – even if revenue grows by 12.4%!
This shortfall is made up by transferring the entire Rainy Day Fund of $281.4 million to the General Fund – leaving a “reserve” of only $163 million – $572 million less than the $735 million reserve we had just one day earlier when the Governor signed the State budget! .
But even this $163 million reserve assumes that State Revenue will grow by 12.4% in the next two years:
The State Revenue forecast is an important benchmark, because that is what our entire State Budget for the next two years is based on. Sadly, while major multinational corporations are sitting on more than $2 trillion in cash, the bad news is that this cash was stolen from the American people – many of whom are losing their jobs, losing their homes, losing their health care and losing their life savings. Since the economy grows from the bottom up, and since Washington State Revenue is heavily dependent on Sales Tax Collections, it is not likely that State Revenue will grow by 12.4% in the next two years. If there is no growth, another $3 billion will have to be cut from public schools and other essential State programs in the next 12 months.
The above graph shows that the State Revenue Council predicted $34 billion in revenue for the 2009 to 2011 biennium. But in the end, actual revenue was only $28 billion. Below is how the Revenue Forecast was reduced over a period of 2 years:
Last year, the Revenue Forecast Council again predicted that State Revenue for the next biennium will be nearly $34 billion. This forecast has already been reduced by nearly $2 billion and the 2011 -2013 biennium has not yet even started.
The reason for all this red ink is that the Revenue Council has for years been predicting a rapid V shaped recovery being “just around the corner” – much like Hebert Hoover predicted a rapid recovery almost daily from the Crash in 1929 until he was finally booted out of office in 1932.
Five Reasons State Revenue will not exceed $29 Billion
I have documented since 2008 that there can not possibly be a recovery until the underlying structural problems with our economy are addressed. In fact, there are several factors not mentioned in the 2011 June 16th Revenue Update which are likely to lead to an actual DECLINE in State Revenue in coming months. The first of these is the loss of billions in federal stimulus funds at the end of June. This will have a chilling effect on jobs as millions of stimulus jobs will end. A second blow will be the $5 billion in cuts to State programs here in Washington State – also scheduled to take effect on July 1st. Thousands of teachers and health care workers will lose their jobs and join the ranks of the unemployed. A third problem is that the Federal Reserve is likely to end giving away billions to banks, also called quantitative easing. A fourth problem is that home prices continue to plunge due to the record number of foreclosed properties (also called shadow inventory) that have yet to enter the market. This has caused a net worth loss for middle class families in Washington State of more than $100 billion! A final problem is the looming federal government shutdown in August – which should it occur, would be the final nail in our economic coffin.
Given these five problems and the chilling effect each will have on jobs, a “double dip” recession is nearly certain by this Fall. Because there is a 2 month lag between when economic activity occurs, we should know how this will affect State Revenue by the end of December. But it is not going to be pretty.
An important question is how long our State legislature can continue to ignore our economic problems?
At a surface level, the answer would appear to be about 2 months. This is based on the “reserve” being about $160 million, and the budget shortfall rising at about $80 million per month.
But there are problems with this estimate. First, there is no real reserve. The entire reserve was used up in the last biennium and we are entering the next one on July 1st 2011 with a MINUS $84 million in the State bank. (This is a joke because the reserve does not exist and our State Bank does not exist). In other words, our State is already broke. There is no gas left in the tank. The $163 million reserve is money that is supposed to come in during the next two years. But it will not actually come up. So the $163 million cushion does not exist and is not going to exist. What the State Treasurer appears to be doing to pay the State’s bills is borrowing from the pension accounts of State Workers – as unlike the Federal Government, the State is not actually allowed to just print money. This raises the question of how long our legislature can go just ignoring the problem that our State is “already broke”?
The second problem is that the legislature has promised to pay back the remaining $200 million in the June Basic Education payment that it borrowed to “balance the books” during the current biennium. Where will the State come up with $200 million during the first week of July when the State will be $84 million in the red on July 1st??? This will also be from the State pension fund which will have to be paid back at some point.
The third problem is that the revenue side of the State budget equation is heavily “back loaded.” This means that the gap between projected revenue and actual revenue which is growing at a rate of $80 million per month now will grow by a much higher rate in the future – maybe by more than $160 million per month within the next 12 months. In other words, our whole State Budget is nothing but a house of cards – and there is a hurricane heading our way.
The Real Problem is Rising and Persistent Unemployment
But so much for the superficial problems. The real underlying problem is rising unemployment. Unemployed workers can not buy goods or pay taxes. So there is a direct connection between rising unemployment and declining State revenue.
The State unemployment report, released on June 15th indicated a loss of 1,000 jobs. But our State’s workforce is growing by over 60,000 workers each year – meaning that we need 5,000 new jobs per month just to tread water.
The national unemployment report for May 2011 is just as bad. The nation only gained 50,000 jobs – but due to population growth, it takes 200,000 new jobs each month just to break even. This means there were 150,000 more unemployed workers in our nation in May than there were in April. The official unemployment rate is 9.1%. But the real unemployment rate is about 25% and among young adults it is closer to 50%. For more on this problem, see the report I wrote called “Counting the Invisible Unemployed.” http://coalitiontocreatejobsnow.org/index.php?option=com_content&view=article&id=51&Itemid=61
Here in Washington State, I predicted in November 2009 that employment would fall below 2.8 million and remain at or below 2.8 million until something was done about the structural problems in our economy. The Revenue Council claimed in November 2009 that by June of 2011 we would return to 2.9 million jobs – and has repeatedly claimed every three months ever since that there would be a rapid V Shaped Recovery in employment. Sadly, the Revenue Council over-stated job growth by more than 100,000 jobs:
Note that employment has remained at or below 2.8 million ever since November 2009. However, I am now predicting a sharp decline in employment – of 10,000 jobs per month – while the Revenue Council continues to predict a sharp rise in employment of 10,000 jobs per month.
The reason I am now predicting a decline of 10,000 jobs per month is that the State and federal government have done exactly the opposite of what they should have done. Both have fired thousands of workers at a time that they should be hiring thousands of workers. Our State and federal governments are doing exactly what Hubert Hoover did in 1930 to 1932 – trying to stimulate the economy by firing thousands of people. Hoover’s actions led directly to the Great Depression and it is likely there will be a similar outcome again this time. Those who do not learn from history are doomed to repeat it.
We already have more than one million unemployed workers in our State and an actual unemployment rate of more than 25% (see my report Counting the Invisible Unemployed in Washington State). By our economic crisis is about to get much worse.
This decline in jobs will lead to a further decline in sales and a further decline in State revenue – which will set off a disastrous downward spiral that will continue until either the people or the leaders of our State wake up and demand structural changes in our economy – by putting everyone back to work.
Regards, David Spring M.Ed.