The Economic and Revenue Forecast Council (ERFC) will adopt an official outlook based on the enacted operating budget tomorrow. In preparation, the ERFC met June 3 to address five methodological questions from the State Budget Outlook Work Group.

The ERFC agreed with the approach taken in the unofficial legislative outlook for the budget conference proposal on four of the questions. First, the ERFC considered how to treat the Legislature’s decision not to assume 4.5% revenue growth in the second biennium.

The conference report for the 2021–23 budget left an estimated unrestricted ending balance in funds subject to the outlook (NGFO) of $98 million in 2023–25. However, the Legislature essentially left $1.443 billion on the table. Under the balanced budget statute, the second biennium must balance assuming the greater of the current revenue forecast or 4.5% annual revenue growth. The current annual revenue forecast is 2.6% for FY 2024 and 3.4% for FY 2025; thus, by statute, the Legislature should have assumed revenue growth of 4.5% a year. If it had, the unrestricted ending balance would have been $1.541 billion instead of $98 million.

However, as Sen. Rolfes explained at the June 3 meeting, the Legislature felt “that there’s such a gap between 4.5%” and the actual forecast that “it seemed risky to go with the 4.5%.” Thus, according to Sen. Rolfes, this choice by the Legislature was “a way to not get trapped into overspending.”

Sen. Rolfes added, “The statute does lay out 4.5% as the default. So if we’re going to go with what the economists projected rather than what a former legislature agreed to, we probably are going to want to look at reviewing that statute when we get back together as a group.” (The 4.5% was included in the four-year balanced budget bill, SSB 6636, when it was adopted in 2012. At the time, as Sen. Kastama noted on the floor, 4.5% was “in line with what . . . economists are projecting for revenue in Washington state in the upcoming years.” It is also approximately the long-term average growth rate of NGFO revenues. Its inclusion in the outlook statute gives legislators a little more flexibility in building budgets that balance over four years.)

The ERFC opted to follow the legislative outlook’s approach, so the official outlook will not assume the 4.5% revenue growth. The ERFC also chose to concur with decisions made in the legislative outlook about how to treat a nursing home rebase and the combination of bed closures and community placement additions. Additionally, in Gov. Inslee’s veto message for the operating budget, he said he would ask the Office of Civil Legal Aid to put $317,500 from a vetoed tenant study in reserve status. The ERFC agreed to increase reversions in the outlook by that amount.

On one point, the ERFC decided to break with the legislative outlook. The federal government sends grants to states to cover disproportionate share hospital (DSH) payments to hospitals that serve high numbers of Medicaid patients. These federal grants are meant to be reduced over time, but the federal government has delayed the reduction many times. In December, Congress further delayed DSH reductions until federal fiscal year 2024. That date will fall in 2023–25, but the legislative outlook assumed that the reductions will continue to be delayed beyond 2023–25.

Thus, the Legislature booked savings in the second biennium from a program that will require congressional action to continue. This is not a baseless assumption, given the history. However, as Sen. Rolfes noted, “It is always welcome during the budgeting process when we find out that it has been delayed, and it would be really a drag if we assumed it was going to be delayed and it wasn’t and we had to find that money.”

The ERFC, therefore, decided not to assume continued delay (or the consequent continued state savings) in the official outlook. This will reduce the ending balance by about $133 million. If the legislative outlook had not assumed continued delay, the budget as passed by the Legislature would not have balanced over four years. But, if that had been the case, the Legislature could have just used the 4.5% revenue growth assumption and the budget would have balanced, as required by statute.

Tomorrow, the official outlook will show exactly where the budget stands, given all these assumptions, and factoring in vetoes and any late-breaking legislative actions that may not be reflected in the legislative outlook.