On Friday, the Office of Financial Management (OFM) sent budget instructions for 2027–29 to agencies. In the instructions, OFM director K.D. Chapman-See writes, “To be direct, there will be significant budget shortfalls next biennium in both operating and transportation budgets. I want to be clear that we do not yet know precisely how significant the shortfalls will be.”

The fact that there will be an operating budget shortfall in 2027–29 is no surprise given the 2025–27 biennial budget and the 2026 supplemental, which only papered over known budget problems. That OFM is expecting a transportation budget shortfall is a little newsier. On one hand, it is not a surprise in the sense that the transportation budget has known, long-term funding challenges. On the other hand, the 2026 supplemental transportation budget had balanced through 2029–31 (an improvement on the 2025–27 biennial budget, which had balanced through 2027–29).

According to Director Chapman-See,

This year’s revenue forecasts will likely not provide sufficient support for the maintenance of current programs, let alone any expansions, despite recent tax code changes. Revenue from the Millionaire’s Tax (Chapter 238 Laws of 2026) will not be collected until FY29, and 42% of the projected revenue from this new tax will go directly back to supporting small businesses, Washington families, and consumers. This law is also the subject of a court challenge and may also face potential ballot measures, the outcomes of which could impact the state’s receipt of revenue. In view of these factors, agencies should not assume funds from the Millionaire’s Tax are available for their requests in the 2027–29 biennium.

It is appropriate to manage expectations regarding use of income tax revenues. Even if the income tax remains law, it cannot solve the budget problem on its own, as I have shown.

However, the claim that 42% of income tax revenues “will go directly back to supporting small businesses, Washington families, and consumers” is a stretch. Based on the income tax bill, the state will retain about 70% of revenues (after providing the tax relief and working families tax credit expansion). In March, Gov. Ferguson had made similar claims about the amount of money going back to families and businesses. His accounting had included money for the fair start for kids account, for free school meals, and for cities and counties. Although the income tax bill does direct 5% of revenues to the fair start for kids account, there’s no requirement that the money supplement existing funding for child care programs. Free school meals and funding for cities and counties are not required by the income tax bill; any appropriations will be up to the Legislature. Perhaps OFM is signaling that Gov. Ferguson’s 2027–29 budget proposal will use income tax revenues for these purposes.

Director Chapman-See writes, “Given our current reality, I am directing all agencies to submit operating and transportation budget requests that focus only on addressing mandatory increases while not expanding existing programs and services.” Further, “Agencies should plan to pause the phase-in of most new programs” and “provide reduction options for efficiencies, program reforms, and other savings in non-essential services and programs.”

Importantly, she adds:

The Governor has requested agencies, in addition to carefully reviewing base budget expenditures, specifically consider: Programs created or expanded after January 1, 2019; Areas where Washington provides particularly high levels of service relative to other states, or is one of only a handful of states that provides a specific service or program; Innovative proposals that reimagine service delivery in cost-effective ways.

This is a good approach to take. In early 2025, we collected all the new policy changes adopted from 2021 through 2024 to show that there were many ways the Legislature could have solved the budget problem. As we wrote,

To minimize disruptions to Washingtonians, the Legislature should forgo new spending as much as possible this year and consider rolling back programs that were started in the past few years. However, in cases where priorities have changed, legislators should consider cutting programs that have been on the books for a long time.

From 2021 through 2026, the Legislature has added $15.5 billion in net new policy spending.

Additionally, on Saturday, Gov. Ferguson posted on X, “I’m meeting with our agencies and communicating my goals: Preserve core services, protect our state’s most vulnerable, don’t raise taxes, and address the structural challenges in our budget to achieve long-term financial stability and protect our AAA bond rating.”

The credit rating agencies have warned the state to stop relying on one-time solutions and to restore reserves.

Finally, in the budget instructions, Director Chapman-See writes that the upcoming budget “will likely be the most challenging budget any of us has yet faced in these roles.” That really says a lot, after the 2025 and 2026 legislative sessions. It’s starting to feel like the line from the move Office Space: “. . . every single day of my life has been worse than the day before it. So that means that every single day that you see me, that’s on the worst day of my life.”

Newcomers to the Legislature need to know that this is not normal.

According to the budget instructions, “Key contributing factors to our budget challenges include costs for providing essential services that are far outpacing revenue due to inflation, cuts to federal funding, population growth, ongoing economic uncertainty, and court decisions with substantial or long-term funding impacts.” But these factors are present to some degree in every budget cycle. The difference now is self-inflicted: Spending in 2023–25 far exceeded revenues; and since then, the Legislature has widened the gap (despite increasing taxes significantly).

If the state finally acts to bring spending back in line with expected revenues, future budgets will be able to absorb the perennial challenges of cost growth and general economic uncertainty. This is why the Research Council is so focused on budget sustainability. Sustainable budgets give policymakers room to maneuver.