The economic outlook from today’s state revenue forecast was virtually unchanged from the expectations in February providing taxpayers with good and bad news about the health of the state’s budget.

The “good” news is state economic activity only reduced expected revenues for 2011-13 by $16 million. The bad news is lawmakers left a minuscule budget ending fund balance and there remains a 40% possibility that forecasted revenue will come in $1.3 billion lower than expected before the biennium ends. These facts viewed together, however, mean lawmakers appear to have escaped the need for a special session or across-the-board cuts by the Governor through at least the September revenue forecast.

Although there is $266 million in the state’s constitutionally protected budget stabilization account, those funds can’t be accessed without a vote of the Legislature, meaning a special session would need to be called to rely on them. This means the only flexibility available to weather an increase in caseloads or decrease in the revenue forecast without legislative action or across-the-board cuts is the tiny unrestricted ending fund balance.

Here are some of the details from today’s revenue forecast:

  • Revenues are expected to grow 7.9% between the 2009-11 and 2011-13 biennium and 7.2% between the 2011-13 and 2013-15 biennium.
  • The national and state economies appear headed for an extended period of slow economic and job growth, high unemployment and weak confidence.
  • The level of uncertainty in the baseline remains extremely high, and downside risks outweigh upside risks.

Downside Risks:

  • The level of uncertainty in the baseline is high. Downside risks are still very elevated.
  • The European sovereign-debt crisis takes a turn for the worse, with Greece exiting the Eurozone in a disorderly fashion and the Spanish banking bailout expanding to a bailout for the entire country.
  • Congress fails to address the “fiscal cliff.”
  • A hard landing in China.
  • Turmoil in oil-producing countries or on oil transit routes.
  • Unexpected events – natural disasters, political upheaval, etc.

Upside Risks:

  • The housing sector improves faster than anticipated.
  • Underlying pent-up demand continues to drive the recovery.
  • Hiring picks up, and triggers a virtuous cycle.
  • European governments are able to build a firewall around their banks, so the sovereign debt crisis does not turn into a banking crisis.
  • Political gridlock in the nation’s capital eases.

Forecast of GF-S Revenues (probabilities in parenthesis): 2011-13

  • Baseline (50%): $30.440 billion; $156 million higher than the previous forecast.
  • Optimistic (10%): $31.674 billion; $1,234 million more than the baseline forecast.
  • Pessimistic (40%): $29.159 billion; $1,281 million less than the baseline forecast.

While the world watches Europe, lawmakers should enjoy their summer break and hope the small budget ending fund balance they left doesn’t force them back to Olympia for yet another special session this fall.


[Reprinted with permission from the Washington Policy Center blog; featured photo credit: MrWoodnz]