Budget gimmick endorsed by Ferguson downplays WA's huge lawsuit costs

SEATTLE — In signing Washington's new $78 billion two-year operating budget this week, Gov. Bob Ferguson praised what he called a "balanced" approach to solving a multibillion-dollar shortfall.

The budget, signed by the new governor with minimal changes, mixes major business tax increases with some cuts to agencies, funding pay raises for state workers and boosting spending on K-12 schools.

But the spending plan also relies on fiscal sleight of hand to kick some IOUs down the road — leaving it likely the state will face more financial woes as early as next year.

One glaring example lies in how Ferguson and majority Democrats handled Washington's explosively rising legal bills for lawsuits against the state.

In a nutshell, they shorted the state's self-insurance fund, which pays for those lawsuit settlements and verdicts. On paper, that freed up more than $500 million for the budget, making it easier to pass the budget and wrap up the legislative session.

But it doesn't mean the costs will actually go away.

"These are legally binding payments that the state can't get out of," said House Minority Leader Drew Stokesbary, R-Auburn, in an interview. "We are going to have to pay whether we budget for it or not."

Republicans have pointed to other budget gimmicks or spending delays too. For example, the budget only allocates one year of funding for a major state IT upgrade even though it is likely to continue for both years of the budget. And Democrats postponed, but did not eliminate, a massive expansion of child care subsidies.

In the short term, the lawsuit payouts will be handled with cash balances sloshing around in other state budget accounts. But Ferguson's office and a top Democratic budget writer acknowledge that's a short-term fix that will have to be revisited.

Over the past two fiscal years, the state has shelled out more than $500 million to settle lawsuits and tort claims alleging negligence or misconduct, mostly for claims against the Department of Children, Youth and Families, which oversees child welfare investigations and foster care.

The flood of lawsuits shows no signs of abating, and actuaries told the state last year it faces based on cases already in the legal pipeline.

The expenses have more than doubled in the last several years, outpacing the state's budget to pay for them — so much so that the state's self-insurance fund is now operating in the red.

State law normally prohibits agency heads from running cash deficits and says those who do so "shall be subject to summary removal." But some exceptions can be made.

On April 15, K.D. Chapman-See, director of the Office of Financial Management, cited such an exception in a memo authorizing a "temporary cash deficiency" of up to $580 million for the self-insurance liability account.

If the fund remains negative through June 30, the state's risk management office will need to ask again for permission to operate in the red and include "updates on the account status and further steps to resolve the deficit," Chapman-See wrote in the memo, which was disclosed to the Washington Research Council, a business-backed think tank.

Emily Makings, the think tank's senior research analyst, called the decision to not account for the lawsuit money in the budget "a big problem that the Legislature has kicked down the road," in a blog post.

Senate Democrats included about $500 million for the state's liability account in their initial budget proposal earlier this year.

But Ferguson's office told lawmakers they could get away with not adding the money, said state Sen. June Robinson, D-Everett, the lead budget writer for Senate Democrats and chair of the Senate Ways and Means Committee.

"Yes, it was welcome as a budget writer to not have to spend that $500 million. But it is something we are going to have to deal with in the future," Robinson said in an interview. "The costs are high. We know that."

Robinson said lawmakers will have a chance to review such budget decisions over the next several months before the next legislative session in January, when they'll pass a supplemental budget plan.

OFM declined to make Chapman-See or other budget analysts available for an interview with The Seattle Times about the memo and liability concerns.

In an email, OFM spokesperson Hayden Mackley said the temporary deficit authorization "gives us time to work with state agencies to solve this problem over a longer horizon."

Ferguson spokesperson Brionna Aho said in an email the move on lawsuit payouts gives the state more flexibility in the short term.

"The Governor recommended approaching the issue that way, spreading out the impact, rather than taking critical dollars away from essential services or raising more taxes," Aho said.

As governor, Ferguson has promoted himself as a fiscal reformer, at times chiding fellow Democrats for irresponsible budgeting. Republicans argue his decision to sign a budget that relies on questionable fiscal maneuvers punctures that image.

"Governor Ferguson warned his fellow Democrats about using gimmicks to balance the budget, but they did it anyway, and he didn't veto it," state Sen. Nikki Torres, R-Pasco, said in a written statement this week.

Aho defended Ferguson's record, pointing out he had won some substantial budget reforms.

For example, Democrats had previously used overly rosy projections on taxes, assuming 4.5% increases in revenues even when the state's economic forecasting council predicted less money would come in. At Ferguson's insistence, the new budget abides by expert forecasts.

Aho said Ferguson will continue to push for additional reforms as he develops his first budget proposal later this year — for example, trying to scale back "the state's practice of too often using one-time funding to partially fund ongoing needs."