Back to the future: Cash deficits in the 1980s

By: Emily Makings
8:47 am
August 11, 2020

As I wrote in April, the state can borrow to balance the budget, but the ability is limited and costly. I gave the example of the early 1980s, when state borrowing led the bond rating firms to reduce Washington’s credit rating. Now that the Office of Financial Management (OFM) is projecting a cash deficit in the general fund–state (GFS), I’ve been reading more about what happened back in the ‘80s.

The GFS went into cash deficit in October 1980. According to the Legislative Evaluation & Accountability Program (LEAP) Committee, to address the problem, the state used interfund loans beginning in October 1980. (Interest is due on these interfund loans.)

Robert McDaniel of United Press International (UPI) reported, “Loan requests from financially strapped state agencies are building to a point where the state Finance Committee will have to decide who gets bailed out first.” The State Finance Committee had authorized up to $63 million in interfund loans as of Aug. 14, 1981, but “[n]early all available interfund loan money was used for a few days at the end of July, when the general fund was $61 million short. Now general fund cash-flow problems are expected at the end of this month” (McDaniel, “Broke: State agencies seeking loans to soothe financial pinch,” Seattle Times, Aug. 14, 1981).

With the high demand for interfund loans,

interest payments are becoming an ominous factor, especially if the state has to borrow from private banks to stay in the black. . . .

However, the governor has termed the cash flow problem ‘very temporary,’ and he said it is something that could be dealt with by state officials.

(McDaniel, “Most state agencies will face cuts later this year,” Seattle Times, Aug. 17, 1981)

In August 1981, the state took out a $100 million loan with local banks. As the Seattle Times reported, it

came nowhere near covering the state payroll and other month-end obligations of the state general fund.

Because of the deficit, $60 million more was borrowed from other state funds to keep the general fund afloat. . . .

Interest on the loans taken out yesterday will be about $65,000 a day for each day the $160 million remains unpaid. . . .

Another problem is the lingering effect of the cash-flow shortage. Although the governor has said the loans would be needed for only a few days each month, more than $13 million of the July interfund loan was not repaid and had to be made part of the August loan.

(Staff report, “State’s money woes require added loans,” Seattle Times, Sept. 1, 1981)

According to LEAP, in September 1981, the state took out another $185 million in loans. In October 1981, the state took out a $400 million loan from Citibank.

In Dec. 1981, the State Finance Committee had authorized interfund loans of up to $91.5 million, on which the state would have to pay interest. The Legislature acted in 1981 to increase the state sales tax by one cent and add new accounts to the GFS “to help reduce the cash shortage.” LEAP noted that in 1982, the Legislature would “have to make a policy decision to either reduce expenditures or generate more revenue or incur the additional costs of borrowing funds to meet its cash flow requirements.”

Beginning in August 1981, then-Gov. Spellman implemented freezes on hiring, personal service contracts, overtime, purchasing, and travel at least four times (Aug. 17, 1981; April 20, 1982; Dec. 13, 1982; Mar. 24, 1983). In April 1982, the governor required agencies to reduce staff by 4 percent.

The governor also implemented across-the-board cuts five times: 10.1 percent on Sept. 17, 1981 (later in the year, the Legislature went into special session and “passed a new, reduced budget as well as bills to generate more revenues.”); 4.9 percent on April 1, 1982 (later in April, the Legislature acted to increase revenues and reduce spending); 4.1 percent on July 11, 1982; $20 million in allotment reductions on July 16, 1982 (as directed by the Legislature); and 2.2 percent on Dec. 20, 1982.

Today, RCW 43.88.110(7) requires across-the-board cuts to all agencies in the event of a cash deficit. In 1981, agencies head by elected officials were exempt from the requirement. That year the Legislature passed HB 561, which made changes to budget and accounting laws and made school funding subject to the across-the-board cuts. McDaniel of UPI reported,

In the long run, House Bill 561, which the governor signed earlier this year, could mean spending cuts for all state agencies, something that was not possible under the prior law.

When former Gov. Dixy Lee Ray asked all state agencies to cut spending by 3 per cent, state Schools Supt. Frank Brouillet said no.

Because the law did not apply to elected state officials, Brouillet made his decision stick, and the attempted spending reduction was ineffective because basic-education spending accounts for more than $2 billion every two years.

But the Legislature in House Bill 561 got around Brouillet by declaring state money for local schools outside the superintendent’s jurisdiction and subject to budget cuts equal to those ordered for other state agencies.

(McDaniel, “Most state agencies will face cuts later this year,” Seattle Times, Aug. 17, 1981)

Eventually the shortfalls and cash-flow problems were resolved, but the history shows that borrowing (whether from private banks or from other state funds) is costly and tends to compound.

If there’s a silver lining here, it’s that the situation in the early ‘80s forced the state to establish “a much better money-management and -forecasting system,” as Seattle Times columnist Richard W. Larsen wrote in 1985 (Larsen, “State budget problems – they were worse four years ago,” Seattle Times, Jan. 16, 1985). Indeed, on Jan. 17, 1984, Gov. Spellman established a Forecast Council: “The importance of economic and revenue forecasting has become very evident in recent years.” (Later in 1984, the Legislature acted to create the Economic and Revenue Forecast Council.)

Categories: Budget.