If ever there was a time for building up Washington’s rainy-day reserves, this is it.
Warning signs continue to flash on an economy that has endured unprecedented stress during the last three years. Inflation remains stubbornly high after months of interest rate hikes. Concern about a potential recession is growing stronger in the wake of the California bank failure and continuing layoffs.
Employers of all sizes and all industry sectors are nervous, and with good reason.
All of this should weigh on the minds of lawmakers in Olympia as they turn their attention to the state budget during the final weeks of the legislative session.
The latest state revenue forecast, released March 20, underscored the importance of fiscal responsibility at this moment. The forecast predicts a slight increase in revenue during the current two-year budget, and then drops in the predicted revenue in the next two budget cycles of $483 million and $541 million.
Lower real estate and sales tax collections account for most of the drop in expected revenue, according to the state Office of Financial Management.
The predicted drop in expected revenue doesn’t mean the state will take in less money. Total revenues are expected to continue growing, just not at the incredible rates we have seen the last few years. Forecasters are now expecting collections to grow 2.4% between the 2021-23 and 2023-25 budget cycle, down from the 20.7% growth between the 2019-21 and 2021-23 budget cycles.
In other words, the budget explosion we witnessed during the pandemic years is reverting to something more closely resembling normal.
Steve Lerch, executive director of the Economic and Revenue Forecast Council, said a cooling economy is driving the projected revenue drop. Real estate excise tax collections have come in under forecast and rising interest rates have curtailed construction and spending. The red-hot job market shows signs of slowing and inflation has decreased but remains high.
The challenge for lawmakers, then, is to adjust accordingly. That means they should be cautious about new programs and new spending, avoid using one-time funding to pay for ongoing programs, and be aggressive about building up reserves.
These are all things that families and business owners do when it appears a downturn is coming, but they are not things lawmakers have had much experience doing in recent years. Last year, lawmakers missed the opportunity to slow the pace of growth in the state budget by choosing to spend most of the extraordinary $15 billion surplus rather than using it to shore up reserves or provide significant tax relief for families or employers which many other states did.
Building up a solid rainy-day fund isn’t just a good idea because it sounds like financial advice your grandmother would give. It’s a good idea because when the next downturn hits the economy, having a solid reserve fund could be the difference between covering a revenue shortfall with savings versus raising taxes.
There is no doubt that lawmakers are tackling a variety of big and important issues this legislative session, from the housing crisis and energy to climate issues and workplace law. But nothing is more important than making smart choices with taxpayers’ money, especially when it appears a downturn is on the way.
Kris Johnson is president of the Association of Washington Business, the state’s chamber of commerce and manufacturers association.