Earlier this week Governor Gregoire asked agency budget directors to prepare for budget cuts of up to 10 percent ($1.7 billion). Today the state’s Economic and Revenue Forecast Council released the revenue total’s for August underscoring the prudence of the Governor’s actions. Based on the numbers, the September 15 revenue forecast could put the state budget in the red. From the Council’s press release:

“Revenue collections through August 10, 2011 came in $9.4 million (0.8%) below the June forecast. Cumulatively, collections are $30.8 million (1.3%) below the forecast. Due to the recent deterioration in national and state economic conditions, the shortfall is likely to increase in the remainder of the year.

At the time of the June revenue forecast, the state and national economies were experiencing a slowdown after moderately strong growth in the spring. The forecast assumed the slowdown would continue through June, with improvement beginning in July and then accelerating.

Revenues so far have come in close to the forecast, but in recent weeks it has become clear that the increase in economic activity which was expected to be underway by now has not occurred. In addition, estimates of national growth for the remainder of the year have been revised down sharply. The small current shortfall is therefore likely to grow relative to the June forecast in the upcoming months.

Our guarded optimism about the second half prospects of the national economy has given way to a sinking feeling of pessimism. The national economic outlook has weakened significantly since our last forecast. The European economy is in no better shape as its sovereign debt problems have now spread beyond Greece to Italy and Spain. To add to the mess, although Congress was able to lift the federal debt ceiling in time to avoid a default on U.S. Bonds, it was not timely enough to prevent a debt rating downgrade by Standard & Poor’s (S&P). Bond, equity and commodity markets are now all pointing to a sharp economic slowdown ahead. Consumer confidence is in the tank. The risk of the national economy slipping back into recession has increased significantly.

The state, along with the nation, is now facing additional shocks and uncertainties from the deteriorating European sovereign debt crisis, Congressional wrangling over the debt ceiling, and the S&P downgrade of U.S. debt. The resulting decline in consumer confidence is likely to slow growth in Washington in the second half of this year and has increased the risk of another recession in the state’s economy.”

It is becoming increasingly likely the Governor may be forced to call a special session or order blunt across-the-board cuts before the legislature is scheduled to convene in January 2012.

Going forward it is probably time to provide the Governor discretionary budget cutting authority versus the current across-the-board option. Here is a summary of the various budget cutting authority for Governors across the country.

One potential reform could be something along the lines of allowing the Governor to make discretionary reductions that don’t exceed a set % (maybe between 5-10%) of an agency’s appropriations. Cuts in excess of the set % would require approval of a standing legislative emergency budget committee (made up of four corners). No reductions could be made in independently elects budgets without their approval or the standing legislative committee.

All reductions made would have to be immediately reported to legislative fiscal committees and posted on OFM/fiscal.wa.gov. This type of enhanced budget cutting authority for the Governor should provide enough discretion while addressing any accountability or transparency concerns while providing budget reduction tools other than current one size fits all across-the-board cuts option.

One potential benefit of providing this type of discretionary budget cutting authority for the Governor is enhanced taxpayer protection. While the Legislature could decide to raise taxes in a special session, the Governor can’t raise taxes on her own. This means the default response for budget deficits that arise when the Legislature is adjourned would be surgical spending reductions versus the uncertainty of facing tax increases in a special session.


[Reprinted from the Washington Policy Center blog; photo credit: flickr]