Revenue Forecast: Next biennium’s ending fund balance is now projected to be under $200M

The latest Economic and Revenue Forecast is out — and the state’s estimated revenues are down by about $183 million from the March forecast for 2011-2013. But because the budget relies on some one-time money and many other factors, it means about $570 million difference in the 2011-2013 budget. And what does that mean? That the ending fund balance for the next two-year budget cycle, which was more than $700 million yesterday when Gov. Chris Gregoire signed the budget, is now at about $160 million.

Dr. Arun Raha, the state’s top economist, said the economy has hit yet another soft patch. “Before I start, I have to acknowledge my new-found respect for our northern neighbors. Unlike the Greeks, who are rioting over economic conditions,” he said, our Canadian neighbors are rioting over the Stanley Cup. “Who knew Canadians could riot, eh?”

Back to the forecast: At the economic review earlier this month, he warned that the sails of the economy were luffing. Now, he says, the wind has been fully taken out of the sails.

“The forecast I present today is based on the weaker near-term outlook for both the nation and the state than the preliminary economic forecast presented on June 3,” he said.

“Actual collections were $93 million higher than expected,” he said — the entirety of which is due to a larger-than-expected windfall from the tax amnesty program. Without that boost, collections were 3.8 percent below the March forecast.

“This is the worst recession since our Great Depression, and our data sets don’t go back that far,” he said. That means he’s been operating in “uncharted waters” for the duration of the recession.

Now, about that $183 million forecast adjustment for 2011-2013. “At this point, it appears that the successive downward revisions are slowing,” he said.

“Even with the growth projected through fiscal ’13, we will only get to where we were in fiscal ’97,” he said, in real dollars.

General Fund State revenue as a share of personal income are rising, but still below trend, he said. “The ratio is improving, but still below trend,” he said. “Nonetheless, the ratio is still lower than the ratio for fiscal years 1995 to 2008.”

Back to the economy: 41 months since the recession started, there are 7 million fewer jobs nationally. “The reason behind this jobless recovery is remarkable gains” in productivity, which means greater output with fewer employees. “We are now at that stage in the recovery where any increase in final demand will result in job growth,” he said. So, what’s holding the economy back is a “weakness in final demand.” In other words, consumers aren’t buying as much.

“The news regarding overseas demand is encouraging,” he said: Exports are growing faster than imports. (And you may remember Gov. Chris Gregoire saying yesterday that Washington has a trade-dependent economy, so our recovery depends on a strong export market.)

The main reason the 2 percent decrease in federal payroll taxes hasn’t materialized into a jump in the economy: Half of that money is going overseas to buy petroleum, he said.

He said the Fed is unlikely to raise interest rates, at least through the end of the year.

Now, for construction: Nonresidential construction is “comatose.” Contracts dropped by a third in 2009, a fifth in 2010, and are down another tenth this year. Like the forecast for 2011-2013, the decreases are slowing, he said, which is good news.

“Housing prices are in double-dip mode,” he said. “Prices are lower than a year ago.” Seattle home prices are now at their Oct. 2004 levels. He said this will likely continue, because more foreclosed homes will likely hit the market later this year. He showed a chart of “seriously delinquent” loans, which are stabilized but still elevated. “However, we believe this is a finite problem and there is light at the end of the tunnel.” For now, home prices will remain depressed until the inventory of those seriously delinquent mortgages can be cleared.

He said it’s now cheaper to buy an existing home and remodel it, rather than build a new home. He said that’s a good thing — there are already too many homes on the market, so adding to that by building a home wouldn’t help the situation.

“That the rental market is picking up can be seen in declining rental vacancy rates,” he said.

Now, for Boeing: The company’s order book has a seven-year backlog. That’s not including the military refueling tanker. He said aerospace has added thousands of jobs, and that is expected to continue.

And Microsoft: Software publishing employment is growing. And Raha said employment in that sector will continue to grow.

Back to exports: Washington is the most trade dependent state per capita, he said. And export growth is strong. That faltered a bit when Japan was hit with the earthquake and devastating tsunami. But: “As Japan rebuilds later in the year, we should see exports pick right up,” he said.

Jobs: As of May, the state still has 151,000 fewer jobs than when the recession hit. Raha thinks Washington will outpace the nation in employment recovery, and since job growth is concentrated in high-wage industries, he thinks Washington will beat the nation in wages as well.

While the forecast change for next biennium is down by $183 million, Raha said the 2009-2011 biennium is actually up a little — so the net change is $12 million. So, he said, “no rioting.”

Now for reporter questions. Marty Brown was asked what this all means for the budget. The ending fund balance for 2011-2013 is now $160 million, he said. It was budgeted — in the budget signed by Gov. Chris Gregoire yesterday – at more than $700 million.

What are the implications, Austin asked, that the ending fund balance has evaporated. “This is a comparison of General Fund revenues to General Fund maximum expenditures,” he said. In other words, the budget tells you the maximum you can spend, but the state rarely spends every penny.

Is another special session on the way? “I’m not going to predict another special session,” Brown said. The new biennium starts on July 1, and he said they’ll all be watching each month to see how things go.

“It’s hard as a legislator to predict Libya and Japan,” said Sen. Ed Murray. “We left what we felt was a very healthy fund balance. And it’s early. We won’t know the full picture until November. We’ll be back in six months and can act again.” He said the hope is at some point, the economy will stabilize.

But Rep. Ed Orcutt said he feels lawmakers should have left a bigger ending fund balance. “With so much unpredictability out there and so many downside risks, you need to cushion a little bit more, especially at the front end of the budget.” He says he’d prefer budgeting to the pessimistic forecast, not the baseline.

Tags: Arun Raha, Economic and Revenue Forecast