Reaction to March 2011 Revenue Forecast

March 17, 2011

Remarks AS PREPARED:

Good afternoon and thank you all for coming.

Before I begin, I want to say that my heart is with the people of Japan as they suffer from the devastation of an earthquake and tsunami. We have a long and deep friendship with our neighbors on the Pacific and I ask all Washingtonians to join me in keeping those affected by this terrible tragedy in your thoughts and prayers.

I have remained in touch with our Department of Health, which routinely monitors air samples around the state for radiation. We have stepped up our monitoring and have seen no above-normal readings. I urge residents to follow the advice of our health experts � do not take potassium iodide. It is not needed and can cause side effects.

Finally, I�ve been in contact with Energy Northwest, which operates the Columbia Generating Station, a nuclear facility. They have assured me that the plant has undergone the required structural integrity and leak rate tests to ensure it will withstand a powerful earthquake or other disaster.

It was built three miles inland from the Columbia River to avoid any potential flood. Over the next month the station will join every nuclear facility in the U.S. in a safety review to ensure it can respond to power outages, floods, fires and other significant events.


We are climbing out of the worst recession in 80 years. Like the last few forecasts, today�s offers no relief to our budget problem. But it does add urgency to our solutions.

I want to thank the Legislature for the hard work they�ve done to encourage our recovery and support job-creation.

On Monday, I signed legislation � again passed with bipartisan support � that will better serve our injured workers and save $218 million in workers compensation costs over the next four years.

Last month, with bipartisan support, we reduced unemployment insurance tax rates for 90 percent of businesses in our state, including 65,000 small businesses. That�s savings our businesses can use to start hiring.

We also approved extended benefits for 69,000 out of work Washingtonians, which helps fuel the economy especially for local small businesses.

And in the December special session the Legislature approved my proposal for an amnesty period on penalties to allow businesses that are behind on their taxes to catch up.

We had expected it to bring in $24 million � now we expect $51 million dollars. And our strategy of stepping up auditing and collections from out-of-state companies has brought in $19 million.

That is $70 million we would not otherwise have had and it helps businesses operate above-board.

The economy is also showing good signs. In January, we saw the largest job gains since 2007. February job growth was more modest � but still going in the right direction.

Last year was a record year for the Ports of Seattle, Grays Harbor, Longview and Olympia.

Boeing�s win of the refueling tanker contract means 11,000 more jobs for our state.
And our bond rating is excellent � double-A plus. That is the result of prudent fiscal management.

But even with these positive signs, we face significant challenges. State budgets lag two years behind general recoveries.

In the budget that ends June 30, the recent forecast predicted $78.1 million in savings due to changes in caseload. The revenue forecast lowered our expectations from the previous forecast by $80 million.

All told, we now face a shortfall in the supplemental budget of $201 million.

That is an immediate priority.

In the coming 2011-13 biennium, we faced an existing shortfall of $4.6 billion. With a positive forecast of $209 million in caseloads and the $698 million decrease in revenue, that shortfall has grown to over $5.1 billion.

When the recession began in December of 2007, we believed it would be like other recessions we have experienced � short-term, followed by rapid recovery.

That is not the case. Although the recession officially ended in June of 2009, it has had deeper and more profound impacts than any recession in our experience.

This is a time of fundamental change in terms of what we can expect to collect in revenue into the future.

Our own state�s economist projects that by 2013 the per-capita general fund state revenue will be at the level it was in 1997.

This means we can�t rely on short-term fixes. We must put our state on a stable, long-term trajectory.

The decisions are difficult, but they are the ones we must make.

The size of the shortfall means we cannot trim our way out � real cuts must be made. Those impacts will be felt.

Those who have been asking to remain exempt from our budget challenges cannot be. All must sacrifice as part of the solution.

We cannot wait for better numbers. In 2009, we hoped things would turn. In 2010, we hoped things would turn. Now in 2011 we hoped they would turn. They haven�t.

Recovery is taking place, but it is fragile. Oil prices, the tragedy in Japan, federal budget cuts and financial instability and unrest in other parts of the world have caused uncertainty.

Our challenge today is to create a budget that is both responsible and lives within our means. We need a long-term plan that protects our fiscal integrity.

Have no doubt � writing a budget that relies on no new taxes, low revenue and high demand for services is a tough challenge. But it must get done. This must be a year of decision, not deferral.

We can�t kick the can down the road.

Short-term solutions may cause less pain now, but we need a budget that is both sustainable and long-term.

History shows us that.

Let me address the idea of a 25th month.
In 1971, the Legislature created a 25th month in the two-year budget. It gave budget writers an extra month�s worth of tax collections to fix their shortfall � but it gave the next budget just 23 months of unspent revenue.

It took 16 years � eight full biennial budgets � to buy back that quick-fix loan.

Increasing state debt concerns me.

In 1989, the state�s debt payments for bonds totaled about 3.7 percent of our General Fund spending. In the current budget, debt payment has nearly doubled, to 6 percent of General Fund spending � $1.8 billion.

As our debt burden grows, we have less ability to address revenue shortfalls. Adding to the debt to pay short-term costs will not place us on a stable financial path.

And I�ve already shared my concerns regarding securitization.

In 2002, the Legislature borrowed money through securitization of tobacco settlement payments, giving the budget a one-time, $450 million boost.

But quick cash is expensive. It will ultimately cost us about $1 billion in principal and interest. And we now have about $100 million less per biennium in tobacco settlement funds that we could be using for today�s needs.

These fixes may look good now, but they won�t a few years from now. We�ve got to stand for our kids� economic future as well as our own. That requires sacrifice on our part.

Two last reminders � in November the voters told us decisively that they did not accept new taxes.

And, we must have a balanced budget.

My proposed budget is still a good framework. The ideas I put forward need legislative action.

I�ve proposed ending automatic COLAS for Plan 1 retirees, approved in 1995. Plan 1 members would still get their retirement benefit, but ending these automatic COLAs would save us $2 billion over four years and cut our unfunded liability by 60 percent immediately.

That will help maintain our double-A plus bond rating.

Our public employees have stepped up to the sacrifice. They have seen their pay frozen with no cost-of-living increases since 2008. They are paying more for health care. Many have been furloughed for up to two weeks.

But in proof that collective bargaining works, they agreed to give back and be a part of the solution in the coming budget, including 3 percent pay reductions and a 25 percent greater share of their health care costs.

And recently, ferry workers agreed to $10 million in annual savings in their contracts.

We have included more than $400 million in savings in our budget based on union agreements.

Rejecting those contracts would mean carrying on the current agreement through next year, meaning no savings. For health care, the current agreement would continue for 18 months with no savings.

Rejecting the contracts would leave the Legislature to reach a better deal, which is a hard promise to keep.


Our state employees are leading the way. Across Washington cities, for example, 76 percent have not reduced salaries and don�t plan to. 60 percent have not used furloughs. Federal employees just saw a wage freeze, but nothing more is on the table today.

In the legislative agenda I laid out, there are future savings � more than $1 billion that can be made through efficiency, eliminations and consolidation.

These are effective, long-term approaches:

� Consolidate 21 state agencies to 9, saving $30 million in natural resources, back office functions and civil rights.

� Enact a user-pays policy, including State Parks, saves $162 million per biennium.

� Eliminate 75 programs, services and agencies � saving over $1 billion.

� We�ve reduced our work force. Last year 18,000 former state and education employees received unemployment benefits.

Tackling this shortfall means moving those proposals � and more � out of committee and into action.

The budget process begins in earnest. We have to step up to this challenge. Hard choices now mean a predictable future ahead.

The Legislature has shown an unprecedented degree of collaboration in working to solve our problems. My administration is ready to work with both parties and both chambers to move Washington forward.

Thank you.