Last month, the state treasurer’s office reported that Washington’s general obligation debt continues to be rated Aaa by Moody’s and AA+ by S&P and Fitch. As usual, the three agencies approvingly cite Washington’s “strong fiscal governance practices,” including the four-year balanced budget requirement and budget stabilization account (BSA, or the rainy day fund).

However, S&P writes,

The state’s budget stabilization account, which begins the year essentially empty, is expected to receive a $543 million deposit to bring its balance to 1.8% of near general fund biennial expenditures in fiscal 2023, which we consider low. However, we consider the state’s commitment to rebuilding the reserve account to be a positive credit factor.

The $543 million balance is from the official June outlook, which was completed before the June revenue forecast. With the increased revenues in the June forecast, I estimate that the BSA balance will be about $565 million at the end of 2021–23.

S&P notes that it could lower Washington’s rating “if Washington fails to replenish its budget stabilization account in a timely manner, or we feel the state lacks a realistic plan to rebuild its reserve profile.” The state constitution requires annual transfers to the BSA of 1% of general state revenues (and biennial transfers of any extraordinary revenue growth). This year the Legislature unnecessarily transferred the balance of the BSA back to the general fund–state and to a shadow reserve account not subject to constitutional restrictions. That action set a bad precedent.

Strangely, S&P seems to have conflicting thoughts about the capital gains tax. On the one hand, “the tax introduces some additional cyclicality to Washington’s revenue mix.” On the other hand:

The state is currently party to a lawsuit seeking to void the capital gains tax, based on claims it is an unconstitutional income tax. We understand the litigation could potentially halt collection of the tax at some point in the future. If this scenario were to occur, we believe it could challenge both the state’s structural balance, given the inclusion of capital gains revenue in current forecasting, and the plan to rebuild its budget stabilization account. However, we believe the state’s history of strong fiscal management will likely insulate the state’s credit profile from this budgetary pressure, based on current forecasting, should it arise.

(Emphasis added.)

First, the state budget balances over four years even without the capital gains tax revenues. Second, any capital gains revenues would have no bearing on the rebuilding of the BSA. The capital gains revenues are dedicated to the education legacy trust account, which is not considered “general state revenues.” As such, capital gains revenues will not feed into the constitutionally-required transfers to the BSA—whether the tax stands or not.