Slowdown reduces state reserves

The slowdown in the state's economy will trim $50 million from expected reserves, dropping the state's surplus to $801 million by next summer, forecasters said Thursday.

Democrats called the forecast good news overall. But top state forecaster Steve Lerch said it appears the economic slowdown, led by a falloff in construction activity and retail sales, might not reverse course until the end of the year.

"Housing is starting to come back later this year. We see that coming back not at an incredibly fast pace. But we do start to see a turnaround coming toward the end of this year," Lerch told the Economic and Revenue Forecast Council's quarterly meeting.

"We are forecasting that Washington is not going to be in a recession. We are showing positive job growth throughout this forecast period, but it is pretty weak," Lerch added. "We are really looking at sort of a bigger turnaround out in the next (two-year period)."

The revenue announcement was important because it lets state budget writers know what limits they are working with for next year's spending plans. But it also set the tone for the summer campaign, when Republicans are expected to emphasize that deficits are looming, and Democrats could have to cut spending or raise taxes.

"The new forecast clearly suggests revenue growth is continuing to settle down toward a normal level. Unfortunately, a more traditional level of revenue growth isn't enough to uphold all the promises made over the past four years and the corresponding 33 percent increase in state spending," Republican Sen. Joseph Zarelli of Ridgefield said after the council's meeting.

Zarelli called for caution in state spending and even a "soft" freeze on hiring by state agencies. Zarelli said the state faces a potential $2.5 billion shortfall in the next budget cycle, and he thinks the housing industry won't start reviving until late in 2009.

Lerch's forecast showed revenue collections will be $50 million less than predicted in February for the budget cycle that ends in June 2009; the dropoff is $166.8 million for the cycle ending in June 2011. Adding in the effect of law changes adopted by the Legislature this year, the total drop in future expected revenue is nearly $224 million.

Lerch's report also predicted state revenue will grow at a rate of 0.8 percent in the 2009 budget year, less than half of what was predicted in February. But Lerch said the rate could be 4.8 percent in 2010 and 5.3 percent in 2011, the latter rising from the earlier forecast of 4.6 percent.

The federal economic stimulus package is putting more money into consumers' pockets, but it appears the amounts people are receiving in tax rebates are roughly equal to their soaring fuel costs.

"They are very similar numbers unfortunately," Lerch said.

"We continue to be in better shape economically than most other states," Gov. Chris Gregoire said in a statement. "The Bush administration needs to take swift action to turn around the nation's economy through initiatives that will put people to work and lower gas prices."

State budget director Victor Moore said he advised state agency leaders to limit spending on travel and other discretionary costs. But overall, Moore said the revenue report shows the state is on track with the February forecast.

"$50 million is not chicken feed, but really in terms of a $30 plus billion budget (this) is essentially a no-change (forecast)," Moore said. "We know there is going to be some pretty significant belt tightening that we have to do."

Moore said budget work has begun for the 2009-11 cycle, ranking the effectiveness of spending and priorities.

Two more revenue forecasts will be announced, in September and November, before Gregoire submits her budget. Moore would not predict the size of the expected deficit, adding it would only be wrong later.

But he said the state should have $750 million available in its hard-to-tap "rainy day" fund by the end of the 2011 budget year. He also said Zarelli's deficit assumptions include increased spending for teachers and state workers and increases in spending to reduce school class sizes.

Republican gubernatorial challenger Dino Rossi has warned that Democrats would have to raise taxes or cut programs to balance the next budget.

Brad Shannon is political editor for The Olympian. He can be reached at 360-753-1688 or bshannon@theolympian.com.