POLICY HIGHLIGHTER

Volume 14, Number 29
November 29, 2004

Locke setting next governor up for budget fallout

Now that Washington's state spending limit (I-601) and November revenue forecast have been adopted, the budget picture is coming into focus for 2005-07. The good news is that with inflation up only 3.7 percent for 2005-07, the forecasted revenue is projected to increase by 6.7 percent—an increase of more than $1.5 billion over expected revenue for the current biennium (2003-05). It is worth remembering that in 2003 Governor Gary Locke presented just one budget based on his Priorities of Government (POG) budget review. Unfortunately, unlike in 2003, Locke may now be presenting two budgets for the next governor to inherit. One will be balanced within expected revenue and the 601 spending limit; the other would be his tax and spend budget, which will result in a projected $1.8 billion "deficit" barring a massive tax increase. This budget would consist of a 14.3 percent increase in spending—$3.3 billion more than current 2003-05 expenditures.

This means that while forecasted revenue for 2005-07 is nearly twice the rate of inflation, Governor Locke hopes to increase spending at nearly four times the rate of inflation.

$1.8 billion "deficit"

Source: OFM updated November six-year outlook

$1.5 billion revenue increase (6.7 percent)

Source: November revenue forecast

$3.3 billion spending increase (14.3 percent)

Source: OFM updated November six-year outlook

$1.6 billion spending limit increase (6.9 percent)

Source: Expenditure Limit Committee

The prospect of two budgets, one POG and one based on "iceberg budgeting," sets the stage for the next governor to be accused of making drastic "cuts." Iceberg budgeting is what occurs when only the spending above the budget baseline is examined instead of starting all purchase decisions on a priority basis within forecasted revenue. It is important to remember, however, that a reduction in an increase is not a cut, especially in a budget supposedly built on a priority basis with a focus on those programs actually providing results. When utilizing a results-based budget, the focus isn't "what do we want to do and what revenue can we raise." The proper focus is on what revenue is available and what spending within that revenue produces the greatest results for the taxpayer's investment.

If state officials use the "what we want to spend" approach, there will always be a budget "deficit" as policy additions can always be penciled into forecasted expenditures; however, if a results-based budgeting system is used, there is never a deficit as state officials take the money available and build the budget from the bottom up within those funds. This core principle makes the concept of a yearly supplemental budget very troubling. When spending pressures arise in an off budget year, lawmakers using the results-based budgeting outlook re-evaluate all spending to determine what expenditures provide the greatest return. Simply adding on to already approved budgets with supplemental expenditures is iceberg budgeting 101. By resorting to this approach, Locke's budget will do more than slam the brakes on POG momentum; it will set it into reverse.

Prepared by Bob Williams (President) and Jason Mercier (Budget Research Analyst)

Contact: Jason Mercier | Budget Research Analyst | 360.956.3482

Evergreen Freedom Foundation P.O. Box 552, Olympia, WA 98507 Phone: (360) 956-3482, Fax: (360) 352-1874 Email: effwa@effwa.org