In a December policy brief, we proposed some general principles for legislators to follow as they dispose of a historically large surplus (which has grown since then). The first principle is to restore reserves. We suggested that not only should the Legislature return the funds needlessly swept from the budget stabilization account (BSA, or the rainy day fund) last year but also make an even larger BSA deposit in response to economic uncertainty.

As Kriss wrote yesterday, there is now reason to be even more cautious. Unfortunately, the budgets approved by the Senate Ways & Means Committee and the House Appropriations Committee are light on reserves.

The best place to keep reserves is the BSA, which is protected by the constitution. Other ways to save money include keeping a relatively high unrestricted ending balance in funds subject to the outlook (NGFO), transferring funds out of the NGFO to a dedicated account and not spending it, and balancing the budget within forecast revenues.

BSA. Both budgets would make the constitutionally-required transfers of 1% of general state revenues to the BSA, but neither would make any additional deposits. In 2023-25, the House budget outlook estimates the BSA balance would be $1.247 billion and the Senate budget outlook estimates it would be $1.248 billion.

However, when the Legislature swept the BSA last year, its balance was about $1.8 billion. If that amount were returned, the BSA balance would be about $3.1 billion in 2023–25. To Gov. Inslee’s credit, his supplemental budget proposal would have made an additional BSA deposit of $600 million.

Unrestricted NGFO Ending Balance. The unrestricted ending balance becomes the beginning balance in the following year. Thus, a higher ending balance gives the Legislature a better footing for the next budget.

The House budget would leave an exceptionally low unrestricted NGFO ending balance of $14 million in the current biennium. The unrestricted ending balance would be $221 million in 2023–25. The Senate budget would leave an unrestricted NGFO ending balance of $311 million in 2021–23 and $351 million in 2023–25. By comparison, Gov. Inslee’s budget proposal would have left an unrestricted ending balance of $998 million in 2023–25.

Other Accounts. The Senate proposal would move some funds into dedicated accounts off the NGFO balance sheet.

Last year, the Legislature transferred $1 billion from the BSA to the Washington rescue plan transition account (WRPTA). As we discussed here, this is essentially a shadow reserve account not subject to the BSA’s constitutional restrictions.

Neither the House nor the Senate budget would make appropriations from the WRPTA. The Senate budget would transfer $1.5 billion from the general fund to the WRPTA in 2021–23, and the outlook assumes that another $500 million would be transferred in 2023–25.

Additionally, the Senate budget would create the strategic enterprise resource planning technology account. Money in the account could be used “for information technology projects projected to cost more than $250 million from initiation of the project through its implementation date.” As proposed by the chair, the budget would have appropriated $500.0 million from the NGFO to the new account in 2021–23. As amended by Ways & Means, only $100.0 million would be appropriated to the account in 2021–23 (but the other $400 million is assumed to be appropriated in 2023–25). There are no appropriations made from the new account this biennium; instead, the Senate is banking money now for use later.

Assumed Revenue. Under the four-year balanced budget requirement, the budget must balance within available fiscal resources, which are defined as the greater of the official revenue forecast or 4.5% revenue growth in each year. For 2023–25, revenues are currently expected to grow by less than 4.5% a year. That means that the Legislature may assume an additional $896 million in revenues for 2023–25. (That’s on top of the revenue forecast, which gave legislators $10.129 billion more to work with than they expected after last session.)

With the enacted 2021–23 biennial budget, the Legislature chose not to assume the 4.5% growth. They balanced the budget within forecasted revenues. As Sen. Rolfes explained, this choice was “a way to not get trapped into overspending.”

Sen. Rolfes’s original budget proposal this year would similarly have assumed forecasted revenues instead of 4.5% growth. In this way, she held back $896 million that could have been spent under the outlook rules.

However, as passed by Ways & Means, the Senate budget now assumes 4.5% growth. The House budget does the same. This means that neither budget would balance within forecasted revenues. This is particularly troubling given our historically large surplus and Kriss’s warning about the need for caution.