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Seattle Times Highlights Importance of Pension Funding Policy

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The Seattle Times published an article yesterday that outlined the State Treasurer’s desire to pursue a state constitutional amendment that would require the Legislature, starting in 2015, to invest more money into pension plans up front to help the state avoid ever entering ‘pay-go’ status where pension obligations must be covered from the state general fund.

In the meantime, the Treasurer, Jim McIntire, has requested that the Legislature invest $1.4 billion in existing pension plans for the 2011-13 biennium, a doubling of the $770 million invested in 2009-11.

The current estimated state budget shortfall for the 2011-13 biennium is $5.7 billion, and pension policy will play an important role as the state is forced to reorganize a shrinking budget.

For more information about this issue, read the OPB Brief published earlier this month.

Additional Near- and Long-Term Cuts Expected as State’s Revenue Forecast Worsens

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After the November 18, 2010 release of the state’s November revenue forecast, Vice Provost of Planning and Budgeting Paul Jenny released the following information to UW leadership:

As most of you are aware, the November revenue forecast for the state was released yesterday, and it was not good news.  The forecast projects a shortfall of $385 million in the current fiscal year budget and a deficit for the upcoming 2011-13 biennium (FY12 and FY13) of $5.7 billion. There are many factors for the continuing lack of improvement in state revenues:  the real estate market remains weak, expected revenue increases will not materialize due to voter rejection of the soda and candy sales tax measure, case loads continue to increase, and so forth.The most immediate concern is the reduction in revenue of $385 million for the current fiscal year.  To bring the budget back into balance, there are three options available:

  • The governor could impose across the board reductions as she did following the September revenue forecast.
  • The governor could call a special session of the legislature to balance the budget.
  • The legislature could take up this issue in passing a final supplemental budget for FY11 that addresses this shortfall as the beginning agenda item in the normal legislative session that commences on January 10, 2011.

While we do not know what course of action will ultimately be taken, we need to anticipate another mid-year reduction as a result of any of these options. As a point of reference, the shortfall in the September revenue forecast of $520 million resulted in a cut to the UW of $17.1 million.  If the response to the current shortfall of $385 million is consistent with the September actions, we may see a reduction of approximately $10 million -$13 million.  Again, this is just our best guess at this point. My office will provide greater detail as it becomes known to us.

Longer term, we need to understand that the solution to a $5.7 billion deficit in the 2011-13 biennium will not be pleasant. We don’t know what our share of the cut will be.  What we do know is that only 30 percent of the budget can be touched at this point – the rest considered ‘off-limits’. We can safely assume that because higher education is the biggest part of the discretionary budget, we will be hit very hard. While we had to model a 10% reduction in a response to a request by OFM, we should anticipate that our cut may be higher than 10%.  Cuts of these magnitudes will inevitably place more pressure on the discussion surrounding tuition increases as a mitigating factor to these cuts.

While this is distressing news, the Offices of Planning & Budgeting, External Affairs, and State Relations will be working with our elected officials to consider different solutions that can stave off some of the impact these cuts, if not mitigated, would create.

Fall 2010 Submissions to the Office of Financial Management (OFM)

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UW administration recently submitted four budget exercises to not only close out the current biennium (2009-11), but also to plan for the coming biennium (2011-13). Each submission was required by OFM.

Information to make final adjustments to the current, 2009-11 biennium:

Information to help the Governor and the Legislature write initial budgets for the 2011-13 biennium:

  •  The state’s budget forecast for the coming biennium (2011-13) calls for a shortfall in state funds that could be between $4.5 and $6 billion. In an effort to understand how agencies would be affected by further state funding reductions in 2011-13, OFM ordered all agencies to submit information about the possible effects of a 10 percent reduction in funds, $58 million for the UW (please note this was an illustrative exercise and does not represent existing UW plans for implementing future budget cuts). The UW’s plan was submitted on September 30, 2010.
  • On September 13, 2010, the UW submitted its 2011-13 operating and capital budget requests, including all required university data plus any requests for funds for the coming biennium. As we’ve noted in the past, we do not anticipate any new operating resources from the state for new endeavors on campus. The UW’s operating budget and capital budget were submitted to OFM on September 13, 2010.

The University anticipated and responded to any requests for information about prior and future budget cuts by working with appropriate units that have experienced the most significant reductions in the past, and which will likely be affected by further reductions in the future. The reductions we’ve made in the past two fiscal years were strategic in nature; academic units were largely shielded from reductions and various administrative units were targeted for larger reductions.

While each unit had to take an immediate cut in funds to reconcile the $17.1 million October reduction, any future cuts will once again be strategic, differential, and the result of collaboration between units, the Provost, and Planning & Budgeting.

Increasing Support for Higher Ed not a Taxpayer Priority

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The Pew Center on the States teamed up with the Public Policy Institute of California to assess taxpayer attitudes toward state government, budget cuts, and funding priorities during the Great Recession. The survey was conducted in five states– Arizona, California, Florida, Illinois and New York– , which, together, comprise 1/3rd of the nation’s population, 1/3rd of the nation’s output, and almost 45 percent of the total projected state budget gaps for 2011.

The resulting report, Facing Facts: Public Attitudes and Fiscal Realities in Five Stressed States, highlights surprising similarities across the five states where respondents, in general, agreed on the following points:

  • That state government could deliver the same services with fewer resources (even up to 10-20% less).
  • That state government is untrustworthy and could be more effective.
  • That taxes on the wealthy, corporations and particular goods or behaviors like alcohol, smoking and gambling are favored.
  • That state governments are relying too heavily on borrowing money.
  • That K-12 Education and Health and Human Services are seen as the most essential services worth protecting, even if general tax increases are required.

Notably, survey respondents were significantly less likely (by 20-30 percent) to support tax increases to protect higher education than they were to protect K-12 education. These results seem to confirm that while providing a K-12 education is seen as a public obligation, a college education is seen as less essential and something that the student and family should help pay for.

The mere presence of tuition in the funding model for public higher education might also be affecting how citizens view increasing taxpayer support to institutions. Tuition simultaneously provides a reason to believe that universities can better handle state budget cuts because they can raise money elsewhere, and provides a visible and increasing price tag that frustrates citizens who think that this represents inefficiency.

These survey results are consistent with recent polling in Washington.

CA to Vote on Budget that would Restore Some UC Funding

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The California State Legislature is set  to vote on the budget for FY10-11 (current fiscal year) today; 99 days after the start of the fiscal year.  Based on negotiations among the gang of five (governor and majority and minority leaders from senate and assembly) the budget should pass.

The starting problem for California was a $17.9 billion shortfall, To ‘solve’ this problem the state did the following:

  • Expenditure Reductions  -$7.5
  • Use of one time Federal Funds  $5.3
  • Additional Revenues $2.5
  • Fund Shifts, Other Revenues  $2.8
  • Alternative Funding $0.5
  • Baseline Workload Adjustments -$0.2
  • Total Solutions $18.3
  • Final Reserve $0.4

The $18 billion deficit represents ~20 percent of the state’s $87.5 billion general fund, compared to an estimated 2011-2013 biennial shortfall in Washington State of $4.5 billion, ~14 percent of a $31 billion biennial budget (pre mid-year cuts in FY 11).

One area California chose not to reduce was its university systems.  The University of California received an increase of $370 million in new state funding – an increase of 14 percent over their FY10 state funding base of $2.6 billion.  The funding is broken out as follows:

  • $199m in permanent dollars as a start of restoring the base
  • $106m in temporary funds (with a stated goal of converting these to permanent funds)
  • $51m in permanent funds for new enrollment
  • $14m in permanent funds for health benefit cost increases

While one could argue that this California budget proposal is based on overly optimistic revenue projections, it is clear that they have made a loud statement on the importance of their public universities.

State Budget Deficits Continue To Grow Across US

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As the UW works to address the recent 6.3% across the board state budget reduction for Fiscal Year 2011 ($17.1 million for the UW) ordered by Governor Gregoire last week, other states across the country also continue to struggle with growing state budget deficits.

While the recession may have technically ended in June 2009, the pace of recovery has been nonexistent or slow for state budgets that continue to experience reduced revenue collections in the face of continuing high levels of unemployment. For good continuing coverage on how the Great Recession continues to wreak havoc on state budgets, visit the Center on Budget and Policy Priorities’ frequently updated report on State budget cuts.

As we analyze and reconcile these new cuts for 2011, and prepare for the upcoming legislative session where additional cuts seem likely for the 2011-13 biennium, we will keep you updated on the likely impacts for the University.