Gov. Inslee's 2015-17 budget

By Jason Mercier
Gov. Inslee released his 2015-17 budget and tax plan. After reviewing his balance sheet it has becomeclear that I need to update the dictionary I have been using to decipher budget terms. Earlier this week the Governor said:

“We have a very solid, fiscally sound, secure and stable way of financing everything I've talked about today. I can tell you it's a real financing plan. It is not based on indebtedness.”

Solid, fiscally sound, secure and stable. Those are the right priorities for building a responsible balance sheet. Have those goals been achieved though?

Consider the major revenue assumptions of the Governor's proposal:

• $798 million in capital gains taxes
• $380 million from cap and trade
• $537.5 million from the state's constitutionally protected emergency reserve

So are these revenue assumptions solid, fiscally sound, secure and stable?

Let's look first at capital gains:

• According to the fiscal note for HB 2563 (2012): “Capital gains are extremely volatile from year to year. Revenue from this proposal will depend entirely on fluctuations in the financial markets and can be expected to vary greatly from the amounts presented here.”
• California's Legislative Budget Office (LAO) says: "Probably the single most direct way to limit the state's exposure to the kind of extreme revenue volatility experienced in the past decade would be to reduce its dependence on the source of income that produced the greatest portion of this revenue volatility—namely, capital gains and perhaps stock options."
• Standard & Poor's says: "State tax revenue trends have also become more volatile as progressive tax states have come to rely more heavily on capital gains from top earners."

Summary: Capital gains are "extremely volatile" and it is difficult to book the revenue for future spending.

Now let’s look at cap and trade revenues:

• California's Legislative Budget Office (LAO) says: “The amount of revenue that future allowance auctions will generate will depend on the price of allowances and the number of allowances purchased versus allocated for free. The price of allowances could range greatly depending on demand for allowances relative to the cost of directly reducing GHG emissions, the state of the economy, and other factors . . . California’s cap-and-trade program is expected to raise billions of dollars in auction revenues from 2012 through 2020. The actual amount of revenue that will be raised is difficult to predict, particularly because of the uncertainty about future allowance prices."

Summary: Cap and trade revenues are unpredictable.

In a state the budgets for a two-year period and is required to project being balanced over four-years, "extremely volatile" and "unpredictable" do not seem to be the best building blocks for a solid, fiscally sound, secure and stable budget.

Then there is the reliance on $537.5 million of one-time money from the constitutionally protected emergency reserve account. Although the Governor said today that it isn't rainy, "it's a downpour," the fact remains the economy is growing and will produce an additional $3 billion in new revenue for spending. Raiding the emergency reserve account with projected 8.6% revenue growth occurring probably isn't what the voters had in mind when they required budget writers to save for a rainy-day with approval of the constitutional amendments in 2007 and 2011.

By assuming the use of these one-time emergency reserve revenues in his balance sheet the Governor has also changed the vote math needed for his budget from a majority vote to a supermajority vote since using these funds absent an economic crisis (as defined by law) requires a 3/5 vote.

Then there is the definition of "financially feasible" when it comes to relying on tax increases to fund the secretly negotiated state employee compensation increases (including health care) that cost around $600 million.

Before today I thought I knew what solid, fiscally sound, secure, stable and financially feasible meant when it came to budgeting. It is clear though now that I need a refresher course on these terms to better understand the current budget debate unfolding in Olympia.