UPDATE (10:35 a.m. PT) — In a move not seen since the Great Recession, Washington Gov. Jay Inslee on Wednesday canceled pay raises for some state employees and ordered furloughs for many more through at least this fall. The move came the same day a new state revenue forecast projected an $8.8 billion drop in tax collections over the next three years.
“COVID-19 has hit our state hard and our economy has taken a severe hit as a result,” Inslee said in a statement announcing the spending reductions. “These are very difficult decisions but they are necessary to address the financial shortfall that we are facing.”
An hour after the governor’s announcement, the new revenue forecast was released. While it was worse than an unofficial forecast in May, it wasn’t as bad as some had anticipated it might be.
Overall, the forecast anticipated a $4.5 billion drop in revenues for the current two-year budget cycle ending in 2021 and an additional $4.3 billion reduction for the next biennium.
“The impact of lost economic activity from the COVID crisis will extend for many years,” warned the official forecast.
The dire numbers reflect the impacts of the COVID-19 triggered recession, which officially began in February. Since then, more than a million people have lost their jobs in Washington, and tax collections, with the notable exception of cannabis taxes, have plummeted.
For example, the state’s real estate excise tax has fallen to 2014 levels and sales tax collections are projected to tumble by more than $2.5 billion through the middle of 2021. Curiously, cannabis sales have skyrocketed during the pandemic resulting in record cannabis tax collections over the past couple of months.
But the forecast comes with a big dose of caution.
“There’s a lot of uncertainty about how consumers and how businesses will react to COVID-19 going forward,” said Steve Lerch, the state’s revenue forecaster.
He noted that consumer confidence and hiring perked up nationally in May as the economy started to reopen. But Lerch also cautioned that until there’s a COVID-19 vaccine or therapy, it’s unlikely the economy will recover fully.
Another wildcard is whether Congress will pass a bailout package for states and local governments this summer.
In some respects, the worst may not yet be over. The forecast assumes a loss of nearly 13,000 aerospace jobs from March through September, driven in large part by Boeing layoffs. Another bleak spot is exports, which are down 35% year-over-year in Washington.
If the forecast contained a bright spot, it’s that state revenues show a steady increase beginning in fiscal year 2022, after a projected 7% decline in the fiscal year 2021.
The new fiscal outlook prompted majority Democrats in the Legislature to call for a combination of cuts and revenues to balance the budget.
“I’m saying everything is on the table right now,” said state Sen. Christine Rolfes, the Democratic chair of the Senate Ways and Means Committee. “The goal is do no harm, but we cannot recover the economy until we have the virus under control and that requires spending money.”
Meanwhile, minority Republicans renewed their call for an immediate special session to begin reducing spending now. On July 1, roughly $1 billion in new spending is set to kick in.
“We should stop that new spending,” said state Sen. John Braun, the ranking Republican on the Ways and Means Committee. “Some of that new spending is good stuff, we all agree it’s good stuff, but when you’re in this kind of a situation the last thing you need to do is spend more.”
Braun also noted that even with the recession losses, the state is still expected to take in more revenue during the next two-year budget cycle than in the current one. That’s likely due in large part to Democrats passing a robust tax package in 2019.
But Democrats insist that an austerity-only budget would be devastating. Inslee’s budget director, David Schumacher, noted that state agencies recently modeled 15% cuts which he described as “very stark.”
“To do an all-cuts budget would be a very drastic take,” Schumacher said.
Inslee has signaled that he’ll likely call lawmakers back to Olympia later this year to address both the budget crisis and police reform, in light of recent protests over police killings.
In the short-term, by rolling back some pay raises and ordering furloughs, Inslee hopes to save roughly $55 million over the next year. If state colleges and universities, the court system and other statewide elected officials follow his lead and implement similar reductions as he’s urging, the savings could swell to $146 million.
The state’s current budget is about $53 billion and the state has roughly $3 billion in restricted and unrestricted reserves.
Under Inslee’s directive announced Wednesday, 5,600 general government employees -- mostly agency directors, senior managers and other middle managers -- will lose their anticipated three percent pay raises on July 1. But approximately 55,000 state workers, most represented by unions, will still see that pay bump. Rolling back the pay increases for union workers would require reopening negotiated contracts.
Instead, starting June 28, about 40,000 state workers -- or about 80 percent of general government employees -- will be required to take one furlough day per week through July 25. After that, workers will have to take a furlough day per month at least through the fall. “This was a difficult decision,” said Schumacher. “We know the furloughs will put additional pressure on all employees.”
According to the state's Employment Security Department, furloughed workers will qualify for partial unemployment insurance payments based on having their hours reduced.
But Braun, the Republican budget writer, said the reductions in spending didn’t go far enough.
“A step in the right direction, absolutely,” Braun said. “But it’s kind of a halfway step or a quarter-way step,” Braun said.
Previously, Inslee ordered a freeze on hiring, contracting and equipment purchases and, in April, vetoed $235 million in new spending approved in the 2020 legislative session.
Correction: An earlier version of this story incorrectly stated the potential total amount of savings from canceling pay raises and implementing state employee furloughs. That number is $146 million. OPB regrets the error.