Moderator: Welcome to Capitol Chat. I'm your moderator, The Olympian Political Editor Brad Shannon.

Moderator: Victor Moore, the former coordinator for the House Appropriations Committee, took over in January as Gov. Christine Gregoire's new budget director. He oversees the Democratic governor's Office of Financial Management. He is joined by Ed Penhale, communications director for OFM.

Moderator: Welcome to Capitol Chat, Victor. Please tell us a little about yourself and your background in government and budget work.

Moore: I worked in state government in Olympia for almost 25 years. I started out at The Evergreen State College as an assistant which included unjamming copy machines. Since then I found a job in the budget office out there and stuck with that through the rest of my career. I've spent the past 15 years approximately with the House Appropriations Committee.

Mell, Chehalis: With the state facing a $2.2 billion deficit and the Legislature looking for cuts that avoid tax increases, why aren't state agencies being forced to make cuts? Is this administration about tax-and-spend or will it buckle down and make government perform?

Moore: We cut $4 billion. This deficit or this gap is coming on the heels of four years of budget reductions, so that agencies have been asked to respond to the budget reductions.

Moderator: Was the administration going to go further in that regard this year?

Moore: Yes. Budget reductions are part of the budget solution once again.

Moderator: Any specifics you can share with us?

Moore: What we're looking at, without any additional revenue, means no (new) enrollments for higher education, reductions in the basic health plan, reduced mental health services, elimination of general assistance programs for folks who are unemployable, really looking hard at the folks we keep in prison and looking at sentencing reform. It also means looking at the class size reduction initiatives and whether we can keep reducing class sizes.

Penhale: You know, when you've got more than 8 percent of the budget in social services, you can't help but hit those areas.

Jason, Olympia: I have noticed several bills this session which would include some astronomical costs if they were made into law. With the huge projected budget shortfall, how does the state plan to implement these bills once they are law? Can these things be done while providing health care to low income families, maintaining roads, and paying police officers and firefighters?

Moore: In looking at the needs of the costs driven by the budget, just to deal with the cost of K-12 enrollment increases, the cost of providing medical care for the low-income folks in the state, all those things add up to about $25.7 billion. The forecast is $24.7 billion for the next biennium, so it's over a billion dollars more than the money coming in. We're also looking at the collective bargaining agreements. We're looking at providing some new enrollments for the higher education system. We're looking at backfilling some of the shortfalls from the federal government in mental health.

Brian, Olympia: Are you planning to cut Basic Health Care in the state budget?

Moore: Medical costs, there are two big drivers there. The increase in the cost of the pension system is up $6 billion. The cost of low-income medical care is up $500 million. And that's a federal program, the size of the program is dictated by the federal govt.

Penhale: They pay half, we pay half.

Moore: I think without at least ... what we're looking at in terms of, without any taxes, at least 17,000 people would be dropped from the rolls of the Basic Health Plan. That's out of 100,000.

Moderator: That's as bad as it would get?

Moore: Yes.

Moderator: We understand there is at least $1 billion more money to spend in this two-year budget cycle year than was available in the past one. Republican legislative leaders said last night in a meeting with reporters they think they could just carry forward program spending at current levels -- even accounting for added children in K-12 schools and added prison inmates -- and still make budget with that extra $1 billion and millions more in carryover funding. Why not just get along with the same amount of spending as last budget cycle?

Penhale: That's what we're trying to do.

Moore: I think the math doesn't quite work. Just to do what we're doing now, which again, is $25.7 billion, is a shortfall of $1 billion. I don't think the math works.

David, Olympia: What will your office do to cut back on high pay raises to high-ranking bureaucrats and give better wages and raises to the working class of the state government?

Moore: The collective bargaining agreements we're negotiating with the unions -- the legislature can approve them or disapprove them, they can't adjust them. So in terms of those represented by the unions, they have a proposal before the legislature to get their raise.

Moderator: Republican leaders in the Legislature say about 40 percent of state employees get 5 percent "step" pay increases each year as they gain experience in their jobs. Can the government really afford to give all state employees additional cost of living pay raises this year — and to keep paying 88 percent of health care costs, when private industry is doing less?

Moore: It's true that classified employees, if they're not at the top of their range, receive an annual increase based on their experience, but it should be noted that the state budget doesn't fund those merit increases, the state agencies are asked to find that money in existing funds.

Penhale: I didn't know that.

Moore: It's true.

Bruce, Olympia: What incentive is in place for State Agencies to beat their budget? They are known to use all of their budgets each year so they are not cut the following year. This often leads to unnecessary spending.

Moore: Actually there was a program initiated by the Legislature in the late '90s, put in place by the Legislature when it was under Republican control that allowed the agency to keep a percentage of their savings for future investments in efficiencies or equipment purchases or things having to do with public services, and the rest of the money went into the education construction accounts.

Gary, Tumwater: Why does the government consistently refer to its budget as "our money," ignoring the contribution of taxpayers?

Moore: We know whose money it is. It's the people's money.

Moderator: In past years, lawmakers deferred payments into state pension funds, they traded a share of future tobacco-settlement dollars for cash upfront through a bonding process, and they picked up some $400 million in windfalls from the federal government. Do you and your colleagues have any more budget tricks up your sleeves?

Moore: In lieu of program cuts and or possible higher taxes, the proposal is to delay payments into the pension system, and that's a significant amount. In addition, we continue to look into fund balances in other funds, to scrape them off and put them into the general fund.

Penhale: And we do this every year, but it is getting harder to do it.

Moderator: Gov. Gregoire keeps saying she wants to see what a budget without new taxes looks like. Is that really the goal -- a no-new-taxes budget -- or it is just a step along the way to deciding what kind of tax increases to seek and how much?

Moore: Well, I think what the governor's asked me to do is to show her a no-new-taxes budget. What she is going to have to do then is decide if that represents her values and is good for the state of Washington. And if it is, that's what she'll propose. If it's not, we'll do some work on it.

Moderator: Do you expect a tax proposal yet?

Moore: We're still working with her on that.

Penhale: We do know that she will oppose a general tax that will hurt the economy, a boost in the sales tax, for instance.

Moore: I know that we have been hurt this year by the end of the estate tax, which cost us $430 million this year.

Moderator: Are there other taxes besides an across-the-board sales tax that are completely off the table? And which ones are most likely to get consideration?

Moore: Business and occupation tax also is off the table.

Penhale: There are a number of taxes out there I suppose you could adjust, but the overriding thing is, we don't adjust any taxes that might have some kind of adverse effect on the economy.

Moderator: In preparing a budget for Gov. Gregoire's review, are you making changes to the priorities, the system put in place by Gov. Locke?

Moore: She's a fan of the priorities process, and we've talked to her about what the priorities are and the outcome of the priorities of government process, and she uses that to inform her budget process, the same as Locke did.

Moderator: You've seen plenty of budget showdowns and hard choices in the Legislature. How do this year's budget challenges compare with past ones and what do you think legislators will do differently this time around?

Moore: I think what makes this budget different than just about any budget I've been involved in is it comes on the heels of four years of tough decisions by the governor and legislators, and it comes with a huge structural problem, and there are huge parts of the problem that are growing much faster than revenues, especially medical costs, which are growing 10 percent a year.

Moore: In terms of different, I think all the gimmicks or one-time savings are almost exhausted and while the public demands a certain level of service, I don't think the government revenue streams can support it.

Moderator: You said before that you think the public doesn't quite understand the situation that the state's in. What do you think at this point is the most important thing for the public to know that you're trying to accomplish with this budget? Is there something the public should keep in mind when it's judging your work on this budget?

Penhale: When people think of the state budget, they think of the bureaucracy, they think of the agencies, but more than 80 percent of the state budget goes out there in terms of services, including education, social services, public safety. And most of it is money that goes to pay people -- especially in health -- to pay people to provide services.

Penhale: If you're talking just about the general fund, the amount of the budget that goes to running agencies, like the one I work for is just 1.6 percent of the budget, and I think people don't realize how much services do go out there. For example, we are serving more than 900,000 statewide, a sixth of the population, with health services.

Moderator: Are you doing anything to educate the public?

Moore: I think that's always been part of the challenge to budget writers. It's a huge and complicated system of services, and a lot of them aren't visible to the public. There's a large portion of the population of the state that doesn't use the state to provide medical care. The prisons aren't sitting by the side of the road, so they don't see that.

Penhale: There's a million kids in school, there's 260,000 in state universities, there's 16,000 inmates in state prisons.

Moderator: Do you anticipate that the number of state employees could be cut?

Moore: I think the debate ought to be about the programs and the services, and if you decide a service is important, then you'll need someone there to deliver the services. I think that's what the debate should be about. They're not all sitting in the department of Waste, Fraud and Abuse over in Olympia.

Moderator: Do you already know where you would cut, given priorities of governement?

Moore: Priorities of government kind of informs that process. It tells you what's the relative importance of one program over another. It's not absolute, it probably shouldn't be used that way.

Penhale: What happens when you apply priorities of government to a no-new-taxes budget is you lose enrollment in higher education, reduction of classes in schools, health coverage.

Moderator: Who are the people who would be dropped from Basic Health?

Penhale: They earn between $13,000 to $19,000 per year. They're adults, that doesn't include children.

Moderator: We want to thank you for joining us.

Moderator: Please join Capitol Chat at noon next Wednesday when our guest will be new state Attorney General Rob McKenna.