Additional $1.2B hole in state revenue projected — expect more budget cuts

OLYMPIA — Officials were stunned to learn Thursday that the state is expected to take in $1.2 billion less in tax revenue than previously thought between now and June 2013, the latest grim result of an economy creeping toward recovery.

The bleak forecast means the state will have to cut $385 million more from the budget for the current fiscal year, which runs through next June — on top of a $520 million across-the-board cut the governor ordered in September.

"Extremely difficult choices must be made, and given this sharp revenue decline, they must be made now," Gov. Chris Gregoire said in a statement.

In addition, the shortfall for the next two-year budget has grown by more than $800 million, to a whopping $5.7 billion — roughly 18 percent of the current state budget, which is about $32.3 billion when you include federal aid.

The forecast takes into account voter approval of Initiative 1107, which repealed taxes on soda, candy and bottled water, but the drop is largely the result of a generally dismal outlook for the economy and an expectation that tax collections will be lower than previously projected.

Even before the latest news, the governor's office had been scrambling to decide where to make unprecedented cuts in areas such as health care for the poor. The state has already ordered cuts to programs such as hospice care, dental care and prescriptions for adults on Medicaid.

"We've been meeting every day" with the governor, said Marty Brown, Gregoire's budget director. "We've had people leave the room in tears over some of the things we've had to decide on.

"We've had her (Gregoire) come to the conclusion that as ugly as this is, it's easier than it was in the past because we don't have any choices," he said. "It's not, 'Well, I can do this or that.' It's, 'Both are gone.' "

Thursday's news means deeper cuts, but no quick answers as to where to make them.

Brown said the magnitude of the shortfall, just in the current fiscal year, is now larger than the governor can deal with on her own.

For the most part, state law allows Gregoire to make only across-the-board cuts without Legislative approval. "We've moved beyond across-the-board cuts now," Brown said.

Brown mentioned several programs talked about previously as possible targets. They include the state's basic health program, an insurance program for the working poor; and Disability Lifeline (formerly known as General Assistance-Unemployable), a program that provides a temporary safety net for people unable to work because of mental or physical disabilities.

But the state also must consider what happens to people if those programs go away, Brown said. "We end basic health, we end medical for Disability Lifeline. Where do those people go? They go to the hospitals, and what happens to them? Who pays?"

Republicans called for a special session of the Legislature in December to deal with the budget crisis.

"While the governor has done what she can with recent across-the-board reductions, the Legislature is in a legal position to prioritize services and make targeted reductions and reforms that will have immediate and long-term effects," Rep. Ed Orcutt, R-Kalama, the ranking Republican on the House Finance Committee, said in a statement.

"The sooner we act, the less severe the reductions will be," Orcutt said.

It's not clear if Gregoire will call a special session. Her office said she wants to hear from legislative leaders first and see if there's any chance for quick agreement on a solution.

In her statement, Gregoire said that since tax collections had been closely tracking to the September forecast — which predicted better revenue numbers — the latest projection came as a "great surprise."

"I have been working with legislative leadership in both parties to collect ideas on how to address our current shortfall. This forecast has added even more urgency to those discussions, and I've asked them to provide their options to me by Nov. 29. Quite frankly we can't cut any deeper without ending significant programs."

Chief economist Arun Raha did not point to a sudden decline in any particular sector of the economy as the reason for the drop in the forecast.

Basically the economy is not growing as quickly as had been projected, and the outlook for the near future is lackluster as well.

That led Raha to project slower growth in tax collections.

The worsening budget situation is created by the gap between how much money the state expects to collect in taxes and how much it's projected to spend.

Other states are experiencing similar problems with their forecasts, Raha said in an interview. "This is a problem around the country," he said. "The economic recovery is just not picking up steam. It's too anemic."

State lawmakers have little choice but to cut programs to balance the budget.

Voters this month made it nearly impossible to turn to tax increases as a way to avoid cuts. In addition to approving I-1107, they also passed an initiative that requires a two-thirds vote in the state House and Senate, or voter approval, to increase taxes.

Given the political makeup in the Legislature, it's a near certainty lawmakers won't increase taxes.

Democrats control both houses, though their majority was narrowed by Republican gains in the election. It's hard to imagine the two sides agreeing on new revenue.

Nor is there any expectation that Congress will approve another bailout for the states. The federal government helped prop up state budgets with billions in aid during the past two years.

Raha made no promises for the future.

"Uncertainty will continue to prevail until a new normal, whatever that may be, eventually settles in," he said. "We are essentially in uncharted territory ... Forecasting is like driving a car forward, looking only in the rearview mirror. If it hasn't happened before, your model will not see it coming."

Perhaps even more unsettling was this warning during Raha's presentation: "The downside risks remain higher than the upside."

Andrew Garber: 360-236-8266 or agarber@seattletimes.com