Though it took a special session to finish its work on the 2011-13 budget, the legislature took positive steps this year to put the state on a more sustainable budget path. Despite progress, however, an inadequate reserve fund coupled with ongoing economic uncertainty and projected future spending pressure leaves the state’s budget outlook on tenuous ground highlighting the need for additional structural reforms and spending restraint.

While the discussion focused on spending cuts during the 2011 Legislative Session, state spending is projected to increase both for “Total Budgeted” spending and the “Near General Fund State” (NGFS). Although this increase in spending for the NGFS follows a 2009-11 budget cycle that saw a significant decrease in spending, Total Budgeted spending has not decreased since the onset of the “great recession.” Total Budgeted spending includes the transportation, capital and operating budgets including federal funds and grants. Near General Fund State is the account that principally supports the operation of state government and is funded primarily by state sales, property, and business and occupation taxes.

Total Budgeted spending is set to increase $3.2 billion for 2011-13. This builds on increases of $2.4 billion for 2009-11, $8 billion for 2007-09 and $7 billion for 2005-07. Since 1999-01, Total Budgeted spending has increased 66 percent.

Near General Fund State spending is set to increase $1.7 billion for 2011-13. This follows a decrease of $2.3 billion for 2009-11 and increases of $2.4 billion for 2007-09 and $4.6 billion for 2005-07. Since 1999-01, NGFS spending has increased 43 percent.

After years of flat or declining revenue, state revenues are projected to grow again by $3.5 billion for 2011-13. This follows a decrease of $1.8 billion for 2009-11 and increases of $88 million for 2007-09 and $4.8 billion for 2005-07. Since 1999-01, state revenues have increased 41 percent.

State government employment is projected to decrease by 1,578 full-time equivalent (FTE) employees for 2011-13. This is down 4,989 from the peak of 111,984 FTEs in 2007-09. Since 1999-01, FTEs have increased 6 percent.

One of the major positive developments this year was at the time of its adoption, the 2011-13 budget was the first budget since 1997 that spent less than forecasted revenue.

It is important to note lawmakers accomplished this “Budgeting 101” feat of spending within the revenue forecast without raising general taxes. This primarily occurred as a result of voters framing the budget debate last November by rejecting Initiative 1098 (creation of a high earners income tax) and adopting Initiative 1107 (repeal of various tax increases) and Initiative 1053 (restoring the two-thirds vote requirement for tax increases). The budget does, however, rely on $517 million in fee increases. The vast majority of these fee increases are for higher education tuition ($369 million).

Unfortunately lawmakers did not leave a big enough reserve which became apparent the day after the budget was signed by the governor when most of the ending fund balance was wiped out by the June revenue forecast – leaving only $163 million in total reserves for 2011-13 or less than 0.5% of spending (prior to the June 2011 forecast there was $723 million in total reserves or 2.3% of spending). This scant remaining reserve increases the possibility of a special session being necessary later this year should the economic outlook worsen.

Though challenges remain, the legislature took important steps this year by limiting spending to within the state’s revenue forecast. The failure to leave an adequate reserve coupled with the ongoing economic uncertainty, however, means additional structural reforms and spending restraint will continue to be necessary as the state recovers from the impact of past overspending combined with the “great recession,” and embraces the path of sustainable budgeting.

For additional details on the 2011-13 budget and the structural reforms still needed, here is our new publication: “A Review of Washington State’s 2011-13 Budget and Recommendations for Structural Reform

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[Reprinted from the Washington Policy blog.]