State faces cash flow woes

Borrowing may be needed; lawmakers eye tax increases

BRAD SHANNON THE OLYMPIAN

OLYMPIA -- The state might have to borrow money to cover a cash flow problem that could reach $2 billion by November if lawmakers can't write a budget to fix the situation, State Treasurer Michael Murphy warned Wednesday.

The warning was delivered to Gov. Gary Locke in a letter Tuesday.

"At the close of business last Friday, the General Fund was $812 million in the red, and today's forecast from the Forecast Council offers little hope the trend will reverse in the near future," Murphy wrote.

As a result, the state could be forced to borrow money from commercial lenders to cover its cash flow needs for the first time since the 1981 recession, Murphy said.

The state borrowed $400 million in 1981.

"Accrued revenues and deferred expenditures will not help solve it," Murphy, a Democrat, went on to say. "On the contrary, these strategies typically mask a deteriorating cash flow picture until it is very difficult to manage."

In an interview, Murphy said there is a difference between the state budget, which calls for revenue and expenditures to balance out over 24 months, and cash flow, which provides the stream of money needed to pay salaries, bond debt, pension contributions and other state expenses.

Spokesmen for Locke, also a Democrat, downplayed the letter, saying the situation has been known for months and is being managed.

Another budget hit

The state budget got more bad financial news Wednesday -- about $119 million to $155 million in new expenses for the 2001-03 budget cycle because of increases in school enrollment and higher demand for medical care.

The new expense report came a day after state economists predicted state revenue would fall by $247 million more than previously expected.

The state's estimated budget shortfall is now $1.6 billion.

The exact financial effect of the new medical cases won't be known until the actual medical bills come in, according to state Budget Director Marty Brown, but he said it puts the overall budget hole "a little over $1.6 billion."

The increases appeared to reflect rising jobless rates.

Republican Rep. Barry Sehlin of Oak Harbor said the new medical caseload number was another sign that lawmakers need to find ways to promote job creation rather than raise taxes to balance the budget.

Locke said he doesn't think a general tax increase is needed at this time.

Locke is weighing a possible across-the-board cut in state agency budgets. Locke also might ask lawmakers to consider freezing the pay of state employees and teachers.

Before cutting programs across the board, Locke is waiting to see how legislators react and what kinds of cuts they'll make to bring the state's budget shortfall back into line, Brown said.

The new numbers show that lawmakers have to consider a tax increase, said Senate Majority Leader Sid Snyder, D-Long Beach, and Senate Ways and Means Committee Chairwoman Lisa Brown, D-Spokane.

"I don't know how we can avoid some kind of minimal increase, on a temporary basis," Snyder said.

Lisa Brown said she hasn't decided on a tax plan to include in the budget she will unveil next week.

Raising the sales tax would bring in about $100 million for each one-tenth of one percent increase, she said.

Balance fluctuates

Although the general fund shows a deficit, the balance sheet for all accounts managed by the state treasurer show a positive balance of more than $2.5 billion, said Wolfgang Opitz, deputy director of the governor's Office of Financial Management.

That's true, Murphy said. But the state is covering the current cash flow problem by borrowing money, as it often does, from other state funds to cover red ink in the general fund, he said.

The general fund's balance fluctuates dramatically when property tax revenue is collected in April and November, and interfund loans are common.

However, it's also inappropriate for the state to be financing its operations by issuing short-term debt, which the cash-flow crisis could require, Murphy said.

The state's bond rating could be downgraded if the state has to borrow money to cover cash flow, Murphy said.

Murphy also said Locke's proposed budget is shaky because it assumes federal Medicaid repayments that aren't guaranteed.

The budget assumes $150 million from the federal government, and Locke has suggested that amount could be $350 million.

Murphy's letter said his cash-flow projections assume that the state will collect $80 million in federal Medicaid repayments by Nov. 19.

However, not one penny in federal Medicaid repayments has arrived in state coffers, Murphy said in an interview.

"It's a big number, but the cash flow is not occurring," Murphy said. "I don't deal in budgets. I deal in cash. That's what I pay out. Revenue that comes in in the middle of June of '03 doesn't do me a darned bit of good this year."

Opitz, who said he was annoyed by the letter, questioned why Murphy wrote it and why it carried such an urgent tone.

Lawmakers can take care of the problem by approving a supplemental budget to bridge the budget deficit, Opitz said.

"I don't know why they are talking so precipitously. They're acting like the Legislature isn't here or something," Opitz said. "There's an annoyance on my part in that its tone is inappropriate. Laying out stuff in this way doesn't help folks focus on what they need to do."

Murphy: no surprises

Murphy said one of his goals in sending the letter, which he copied to legislative leaders, was to avoid surprising people if he has to borrow money in the fall.

He also wanted to encourage lawmakers to adopt a budget that doesn't rely on what he called "accounting stunts" that leave him with a cash flow problem.

Some lawmakers saw a more serious message in the letter.

"The governor's people are not taking this $2 billion problem seriously," said Senate Minority Leader Jim West, R-Spokane, who said that the state's bond rating might be harmed if the state can't rein in its spending.

"Part of me wants to think he (Locke) doesn't want to panic anybody," West said. "Part of me thinks everyone should."

Although Locke announced Tuesday that he was freezing state hiring and equipment purchases and limiting travel, Republicans had called for similar actions long before.

"I told him in a Sept. 13 meeting to stop spending and start saving cash," West said, referring to a meeting of leaders two days after the Sept. 11 attacks punched a hole in the state's aerospace economy and sent ripples that have resulted in an 8.2 percent jobless rate.

"Nevertheless, we've got a problem, and where's the leadership?" West said.

Holding his hands up as if cradling a newspaper headline, West mocked: "Popular governor presides over sinking ship."

Murphy said the state is not going bankrupt, but the cash flow problems must be dealt with soon.

Lawmakers and the state budget director said the budget shortfall and cash flow problem will be handled.

Brown said the budget will be balanced and the cash-flow needs addressed.

Brad Shannon, political editor for The Olympian, can be reached at 360-753-1688 and at shannonbrad@hotmail.com. The Associated Press contributed to this report.

On the Web:

- Washington State Treasurer

- Gov. Gary Locke

- Washington State Legislature

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