The Economic and Revenue Forecast Council (ERFC) met today to adopt a new budget outlook. There was a lot of discussion, with members getting into questions about how much the remaining McCleary pieces will cost and whether they should be accounted for in the four-year outlook. (Here are the meeting materials.)

Ultimately, the ERFC adopted the outlook that is in the materials, which incorporates the governor's vetoes of provisions of the 2016 supplemental operating budget. The unrestricted ending fund balance for 2015-17 is $474 million (down from $576 million as passed by the Legislature). The unrestricted ending fund balance for 2017-19 is negative $314 million (down from $9 million as passed by the Legislature). (It should be noted, though, that the balance of the rainy day fund at the end of 2017-19 is expected to be $1.143 billion.) (I wrote about the governor's vetoes and how they would affect the four-year balanced budget here and here.)

The outlook includes the remaining costs associated with fully implementing the K-3 class size reduction, as already planned by the Legislature, in 2017-19. But should the last part of McCleary (state funding of compensation) be included (even though the Legislature has not yet agreed on what it will do and how much it will spend)?

The meeting materials include a legal memorandum on whether remaining McCleary costs must be included in the outlook. It notes that the four-year balanced budget law specifically excludes "in the 2013-15 and 2015-17 fiscal biennia the costs related to the enhanced funding under the new definition of basic education . . . ." Further, the memo gives a few reasons for this exclusion:

The record does not reflect specific member intent regarding the McCleary exclusion from the ensuing biennium balance requirement. However, the budget and legal context of the exclusion suggests two possible rationales for the exception. First, when the exclusion was enacted in 2012, the legislature had enacted specified statutory enhancements to K-12 formulas (ESHB 2261 and SHB 2776) to be implemented by 2018, but it had not enacted any phase-in schedule for the statutory enhancements, so there was no reasonable basis for determining ensuing biennium costs. Second, the legislature did not know (and still does not know) what if any future expenditure obligations the court might impose in the course of its McCleary oversight. To date, the McCleary court has determined that the state must enact legislation to achieve full state funding of salaries for the state's program of basic education, but it has not ruled that any particular spending levels or policies are required. 

The memo argues that the enactment of E2SSB 6195 ("which commits the Legislature to eliminate school district dependency on local levies to fund the program of basic education") does not legally need to be included in the outlook for 2017-19. Further, it notes that the McCleary exception in the outlook law "continues to apply."

I had thought that the McCleary exception meant that McCleary costs that are due to take place in 2017-19 would have to be included in the outlook. Happily, today David Schumacher of the Office of Financial Management asked the attorneys why the McCleary exemption doesn't end after 2015-17, as the law seems to say. Steve Jones, fiscal counsel for the Senate Ways and Means Committee, said that the law is a bit vague — is it referring to the outlook for those specified biennia, or to the outlook adopted during the specified biennia? Jones said, "the general understanding as to what the legislative intent was that it includes 17-19 because in 15-17 you are preparing the outlook for that biennium" (see 11:15-12:53).

The final item of the meeting materials is a compilation of the fiscal impacts of four proposals from 2015 that would have addressed K-12 compensation (none of them made it past the public hearing stage). The biennial state costs of these proposals when fully implemented would have ranged from $3.5 billion to $4.8 billion.

State Treasurer James McIntire made a motion to add a policy level item to the outlook for 2017-19 saying that the Legislature is working under E2SSB 6195 to fund McCleary and the costs will range from $3.5 billion to $4.8 billion. He said that although the ERFC is not legally obligated to include McCleary costs, he thinks they should be included in the interest of transparency. Sen. Andy Hill questioned how you include a range of numbers in the outlook that are based on proposals not approved by the Legislature. McIntire's motion failed, as did one by Rep. Timm Ormsby to include basically the same information in a footnote. 

The motion to adopt the outlook as prepared by staff also failed (4-2, approval requires five votes), but in the case of insufficient votes, the staff recommendation goes into force. Treasurer McIntire asked for an alternative outlook that would include the range of McCleary costs.

All in all, a very interesting outlook meeting.