Anatomy of a budget gimmick
circumventing the state spending limit

Introduction

On December 17, 2013, Governor Inslee announced his first full budget proposal, releasing his recommended 2014 supplemental budget. His 2013-15 budget proposal, announced early last year, was not a full bill but instead presented a general outline of his spending and tax goals. The legislature is now considering the governor’s 2014 supplemental budget. The State Expenditure Limit Committee announced in November that the 2013-15 budget was already projected to surpass the spending limit. It was expected the governor would propose ways to get the rate of state spending growth within the required limit. After careful review, however, it now appears the governor is attempting to circumvent the state spending limit.

State spending limit

According to the state Expenditure Limit Committee, state spending is projected to be only $75 million below the spending limit for FY 2014, but $15 million over the limit for FY 2015. Breaking the spending limit would subject the State Treasurer to civil penalties as required by RCW 43.135.025.

The state spending limit was adopted by voters in 1993 with the passage of Initiative 601. It has been amended numerous times by lawmakers. The most dramatic change lawmakers have made (besides suspending the popular 2/3 vote requirement for tax increases several times) was in 2005, when the fiscal growth factor was changed from a three-year rolling average of population growth plus inflation to a ten-year average of state personal income growth.

This change allowed state spending to grow much faster than voters intended and facilitated the large spending increase that occurred during the 2005-07 biennium.

Governor’s proposed 2014 supplemental budget

With the state’s 2013-15 budget already projected to exceed the spending limit, how does the governor propose an increase in state spending?

The governor uses some creative accounting, which appears to serve no purpose but to get around the state spending limit. Here are the steps the governor wants to take with his 2014 supplemental budget proposal:

• Transfer $41,833,000 from the State Toxics Control Account to the Education Legacy Trust Account (Section 805).

• Transfer $67,364,000 from the Local Toxics Control Account to the Education Legacy Trust Account (Section 805).

• “Appropriate,” not transfer (a transfer would result in a decrease of the spending limit) $23,500,000 from the General Fund to Education Legacy Trust Account (Section 708). The Senate Ways and Means Committee notes this would be a “double appropriation.”

• Use the $132,697,000 of “new” funds in the Education Legacy Trust Account to replace General Fund spending with spending from the Education Legacy Trust Account by:



a) Reduce General Fund spending for OSPI general apportionment by $70,800,000 while increasing spending
    from Education Legacy Trust Account by $96,809,000 (Section 502).


b) Reduce General Fund spending for OSPI per pupil transportation by $51,398,000 while increasing spending
    from Education Legacy Trust Account by $52,672,000 (Section 503).


c) Reduce General Fund spending for OSPI special education by $14,654,000 while increasing spending from
    Education Legacy Trust Account by $11,333,000 (Section 505).
 

Money in the state and local toxics control accounts would then be “backfilled with state bonds.”

In summary, the governor wants to raid dedicated accounts to build the capacity for the Education Legacy Trust Account to replace spending already occurring in the General Fund. Despite these gimmicks, the moves still should trigger provisions of the spending limit (RCW 43.135.034(4)) which would result in a corresponding drop of the limit, thus putting the governor’s proposed supplemental budget over the spending limit.

When asked about these proposed accounting maneuvers, the Office of Financial Management (OFM) acknowledged that the moves are an attempt to work around the spending limit, but OFM officials say they do not believe the actions would trigger the requirement that the spending limit be reduced. OFM officials say the spending changes would be for “new programs” in a future fiscal year and would not impact the state spending limit. OFM officials say they do not recall this particular budget move being used in a prior budget.

In testimony before the House Appropriations Committee on January 14th, OFM officials said that a conversation will be needed if changes to the spending limit should occur in a “post McCleary world,” referring to the state Supreme Court ruling concerning K-12 education spending.

Conclusion

It is clear that the budget maneuvers proposed by the governor in his 2014 supplemental budget serve no purpose but to circumvent the state spending limit. Rather than spending time and energy on ways to work around the law, it would be better for policymakers to make the case for why changes should be made, while complying with the voters’ intent. Changes that might be considered after an open public debate include ending the yearly rebase requirement of the spending limit, thus allowing unused spending capacity to be “banked” for future years, adding more state accounts to its provisions to help make it as gimmick free as possible, and returning to the original growth factor approved by voters, to prevent spending from growing too quickly again in the future.