A Guide to the Office of Financial Management Washington State STATE OF WASHINGTON Budget Process

July 2019 Biennial budget cycle This guide contains information on: Washington enacts budgets on a two- Biennial budget cycle year cycle, beginning July 1 of each odd- Roles and responsibilities in the budget process numbered year. The budget approved for –21 biennium remains in effect Budget development approach the 2019 from July 1, 2019, through June 30, 2021. Budget and accounting structure By law, the Governor must propose a Source of state revenue biennial budget in December, the month Size and distribution of the state budget before the Legislature convenes in regular General Fund-State operating budget session. The biennial budget enacted by State staffing levels the Legislature can be modified in any legislative session through changes to the Budget drivers original appropriations. Since the inception State spending limit of annual legislative sessions in 1979, it has Debt limit become common for the Legislature to Budget Stabilization Account enact annual revisions to the state’s biennial Glossary of budget-related terms budget. These revisions are referred to as supplemental budgets.

Ongoing June 2020 September 2020 Fall 2020 December 2020

Agency OFM issues Agencies OFM review Governor strategic budget submit and proposes planning instructions budget Governor’s budget to requests decisions Legislature

January 2021 April/May 2021 May/June 2021 July 1, 2021 Ongoing

Legislature Legislature Governor Biennial Performance convenes passes signs budget takes measure 2nd Monday budget budget effect tracking of January

1 Roles and responsibilities in the budget process

State agencies are responsible for developing in the Senate and 98 members in the House budget estimates and submitting budget of Representatives. Specific fiscal committees proposals to the Governor. Once the budget is have primary responsibility for preparation enacted by the Legislature and approved by the of the legislative budget. These include Governor, agencies implement approved policies the Appropriations, Capital Budget and and programs within the budgetary limits Transportation committees in the House; imposed by legislation. Under Washington’s and the Ways & Means and Transportation budget and accounting statutes, individual committees in the Senate. agency directors are accountable for carrying out the legal intent of appropriations. The House and Senate employ staff analysts to review and evaluate the state budget and The Governor recommends a budget to the to prepare appropriation bills. As with other Legislature consistent with executive policy legislation, if the two houses cannot agree on a priorities. Appropriation bills, like other budget or revenue proposal to implement the legislation, are subject to gubernatorial veto budget, a conference committee of legislators authority and may be rejected in part or in their may be convened to reconcile the differences. entirety within a defined number of days after legislative passage. After a budget is enacted, the Beginning with the 2013–15 biennium, the Governor’s general administrative duties include Legislature must enact a budget that leaves a monitoring agency expenditures and helping to positive ending fund balance in the General implement legislative policy directives. Fund-State (GF-S) and related funds.

The Economic and Revenue Forecast Council Office of Financial Management The (OFM) (ERFC) is composed of representatives from coordinates the submittal of agency budget both the legislative and executive branches. Each requests and prepares the Governor’s budget fiscal quarter, the council adopts an official recommendation to the Legislature. Budget staff forecast of GF-S revenues for the current and from OFM work closely with state agencies (at some point) the ensuing biennia. These to explain and justify planned expenditures. forecasts, together with any reserves left over Analysts evaluate all budget requests for from previous biennia, determine the financial consistency with executive policy priorities and resources available to support estimated to ensure that proposed expenditures match expenditures. fiscal constraints. OFM is also responsible for maintaining the state’s central accounting Beginning in 2012, the ERFC also became system and developing certain population and responsible for overseeing preparation of demographic forecasts. GF-S expenditure outlooks for future biennia. With the technical assistance of a State Budget Washington Through appropriations bills, the Outlook Work Group composed of legislative State Legislature mandates the amount of and executive staff, expenditure outlooks money each state agency can spend and, in are published in November, January (for the varying degrees of detail, directs agencies Governor’s budget proposal) and within 30 days where and how to spend it. Washington’s of enactment of the operating budget. bicameral Legislature consists of 49 members

2 The Caseload Forecast Council was created The State Expenditure Limit Committee, by the 1997 Legislature and began operations composed of legislators and representatives in the 1997–99 biennium. The council consists of the Governor and Attorney General, was of two members appointed by the Governor established in 2000 to determine the state and four appointed by the legislative political General Fund expenditure limit created by caucuses. The council prepares official caseload Initiative 601. forecasts for state entitlement programs, including public schools, long-term care, medical assistance, foster care, adoption support, adult and juvenile offender institutions and others.

Budget development approach

In general, Washington state’s budget process In working with the Governor to develop his cannot be characterized by any single budget 2019-21 biennial budget, OFM used Results decision model. Elements of program, Washington goals, outcome measures and action target and traditional line item budgeting plans — along with agency strategic plans and associated with objects of expenditure (e.g., performance measures — to prioritize spending salaries, equipment) are all used, along with a within and across agency budgets. Improving performance budgeting approach in decision- efficiency and streamlining the operations of making. state government is an expectation Governor Inslee has of all agencies. In 2017, meeting the state’s constitutional duty to fully fund K-12 education was an enormous challenge and the top budget priority. Agencies were directed to limit their requests for new funding and to focus on the highest priority services that deliver significant performance improvements and outcomes for the people of Washington. While agencies are always expected to strive to reduce costs and find new ways to save resources, these efforts will be especially important over at least the next two biennia.

3 Budget and accounting structure State government is organized among 119 The state’s budget and accounting system agencies, boards and commissions representing includes more than 730 discrete accounts, a wide range of services. While many state which operate much like individual bank agencies report directly to the Governor, others accounts with specific sources of revenue. are managed by statewide elected officials or The largest single account is the GF-S. State independent boards appointed by the Governor. collections of retail sales, business, property, Most agencies receive their expenditure and other taxes are deposited in this account. authority from legislative appropriations that Expenditures from the GF-S can be made impose a legal limit on operating and capital for any authorized state activity, subject to expenditures. Appropriations are authorized for legislative appropriation limits. a single account, although individual agencies frequently receive appropriations from more Other accounts are less flexible. Certain than one account. revenues (for example, the motor vehicle fuel tax or hunting license fees) are deposited A few agencies are “nonappropriated,” meaning in accounts that can be spent only for the that they operate from an account that is legally purpose established in state law. In budget exempt from appropriation. Expenditures by terms, these are referred to as “dedicated these agencies are usually monitored through a accounts.” biennial allotment plan. There is no dollar limit as long as expenditures remain within available revenues and are consistent with the statutory purpose of the agency.

Sources of state revenue Washington receives most of its revenue from taxes, licenses, permits and fees, and federal grants. Each individual revenue source is designated by law for deposit in specific accounts to support state operating or capital expenditures.

Licenses, permits, fees 3.4% Sources of State Revenues – All Governmental Funds 2019–21 Biennium Estimates

Category $$ in millions

Federal grants Taxes $55,047 24.4% Charges/misc. revenues 27,426 Taxes 48.2% Federal grants 27,834

Charges & Licenses, permits, fees 3,818 miscellaneous revenues 24.0% Total $114,125 Source: 2019–21 OFM budget database

Office of Financial Management

4 The chart below displays the major revenue sources for GF-S expenditures in the current biennium. The Department of Revenue collects most of these revenues. Sources of General Fund–State Revenue 2019–21 Biennium Estimates

Real estate Category $$ in millions exise tax 3.9% Other* Retail sales & use tax $25,120 11% Business & occupation tax 9,560 Property tax 7,679 Retail sales Property tax Real estate excise tax 1,956 15.4% & use tax 50.4% Other* 5,489

Business & Total $49,804 occupation tax 19.3% *Other includes revenue from liquor sales, tobacco taxes, insurance premiums, etc. Note: This chart reflects forecasted revenues only. Additional resources, such as prior biennium balances or transfers from other funds, may be included in the budget balance sheet.

June 2019 Revenue Forecast Office of Financial Management Size and distribution of the state budget The state’s current operating budget for the State operating expenditures can be grouped 2019–21 biennium (from all fund sources) is into seven broad categories of services: $99.7 billion. A separate capital budget finances »» Human services, such as mental health and major building, renovation and land acquisition other institutions, public assistance, health care projects. The 2019–21 (non-transportation) and correctional facilities. capital budget for new projects provides $4.9 »» Public schools, which represent state support billion. An additional $3.8 billion is available in for kindergarten-through-grade 12 (K-12) reappropriated funds to allow the completion education. of capital construction projects authorized »» Higher education in public universities, in previous biennia. Roads, bridges and other community colleges and technical schools. transportation capital projects are budgeted at »» Natural resources include expenditures for $5.1 billion. (Total operating/capital budget = environmental protection and recreation. $118.4 billion.) »» Transportation, which includes highway maintenance, state ferry operations and the Operating expenditures are supported by Washington State Patrol. general state tax revenues, federal funds, »» General government, including the dedicated tax and fee revenues, and other administrative, judicial and legislative agencies. miscellaneous sources, such as earned interest and lottery receipts. The capital budget is »» Other (miscellaneous) expenses, such as the payment of debt service and pension primarily funded through general obligation contributions for local law enforcement, bonds ($3.2 billion in 2019–21) and cash firefighters and judges. revenues from dedicated accounts. The debt service on non-transportation general obligation bonds is paid by GF-S resources in the operating budget. 5 The chart below shows the distribution of operating expenditures from all funds for the 2019–21 biennium. Distribution of 2019–21 State Operating Expenditures - All Funds

Other* Category $$ in millions 5.0% Natural Resources 2.1% Transportation 3.2% Human Services $43,664 General Govt. 5.0% K-12 Schools 29,349 Higher Education 15,815 Other* 4,952 Human Higher Education Services 41.8% General Government 5,255 15.1% Transportation 3,367

K-12 Schools Natural Resources 2,141 28.1% Total $104,543 *Other includes debt service, pension contributions to Law Enforcement Officers and Fire Fighters and Judges, other education agencies and special appropriatons

Source: 2019-21 operating budget database Office of Financial Management General Fund-State operating budget Approximately $50.3 billion of the state operating budget for 2019–21 is supported by GF-S tax and fee revenues and reserves. Because the Governor and Legislature have the greatest discretion over how these revenues are spent, programs supported by GF-S receive substantial attention during budget deliberations.

The following chart shows the distribution of estimated GF-S expenditures for the 2019–21 operating budget. The majority of the GF-S is spent on education, which includes the state share of funding for public schools (K-12), four-year colleges and universities, and two-year community and technical colleges. Distribution of 2019–21 State Operating Expenditures - State General Fund Natural Resources 0.9% Category $$ in millions General Govt. 2.4% Other* 6.1% K-12 Schools $25,801 Higher Education 7.0% Human Services 16,401 Higher Education 3,546 Other* 2,996 K-12 Schools 51.1% General Government 1,213 Human Natural Resources 438 Services 32.5% Total $50,395 *Other includes debt service, pension contributions to Law Enforcement Officers and Fire Fighters and Judges, other education agencies, transportation and special appropriatons Source: 2019–21 operating budget database; does not reflect $354 million in assumed underexpenditures

Office of Financial Management 6 General Fund-State Expenditure Trends 1991–93 to 2019-21*

Biennium Dollars in millions Change in millions 1991–93 $15,179.9 $2,357.6 *The 2019–21 biennial amount is based on appropriations as of 1993–95 16,315.1 1,135.2 May 2019. The 2019–21 amount 1995–97 17,732.4 1,417.3 does not reflect $354 million in assumed underexpenditures. 1997–99 19,157.8 1,425.4 Dollars have not been adjusted for 1999–01 21,046.4 1,888.6 inflation. 2001–03 22,548.8 1,502.4 Legislation passed in 2009 merged 2003–05 23,671.7 1,122.9 six accounts into GF-S (Public Safety and Education, Equal 2005–07 27,766.1 4,094.4 Justice, Water Quality, Violence 2007–09 29,233.1 1,467.0 Reduction and Drug Enforcement, Student Achievement and Health 2009–11 29,858.7 625.6 Services accounts). Dollars in 2011–13* 30,758.5 899.8 biennia prior to 2009–11 have not 2013–15 32,750.3 1,991.8 been adjusted for this merger. 2015–17 37,509.9 4,759.6 2017-19 43,451.3 5,941.4 2019-21 48,885.3 5,434.0

State staffing levels Budget drivers

For budget purposes, the number of state In addition to new policies adopted by the employees is measured in full-time equivalent Governor, Legislature or federal government, (FTE) staff years (i.e., one person working 40 the state budget can also be significantly hours a week for a full year is counted as one influenced by demographic and economic FTE staff year). Two persons working half- factors. Differences in these “budget drivers” time also count as one FTE. Although the state affect the cost of services or number of provides funding for compensation for local persons requiring services. An example of school teachers, this support is in the form the demographic connection appears in K-12 of grants. Therefore, K-12 teachers are not education, where expenditures for the state’s considered state employees in statewide FTE constitutionally mandated responsibilities for counts. basic education are closely tied to the number of school-age children in the state. Higher-than- The current state budget assumes approximately average inflationary costs — such as those for 118,416 FTEs on an annual basis, with the largest medical expenses — also affect expenditures in number of people employed in higher education the state budget. institutions, correctional facilities, state social service and health agencies, and transportation agencies.

7 State spending limitations

State expenditures are restricted to available and projects a limit for the following two years. revenues and governed by the GF-S expenditure Temporary expenditures above the limit are limit (Initiative 601) and balanced budget allowed after declaration of an emergency and a requirements. law passed by two-thirds vote of the Legislature and signed by the Governor. Expenditure limit (Initiative 601): Annual expenditures from GF-S are restricted Balanced budget requirement: by the expenditure limit. Generally speaking, Beginning in 2013–15, the Legislature the expenditure limit is the actual spending is required by law to adopt an operating level from the prior year multiplied by the fiscal appropriations bill that leaves a positive growth factor, plus or minus any adjustments ending balance in the General Fund and required by statute. The fiscal growth factor is related accounts. Furthermore, the projected the average growth in state personal income for maintenance cost of the budget must not the prior 10 fiscal years. Each November, the exceed available fiscal resources in the next State Expenditure Limit Committee adjusts the biennium. limit for the previous and current fiscal year,

Debt limit With certain exceptions noted below, the »» retirement system moneys and performance amount of state general obligation debt that bonds and deposits; may be incurred is limited by the Washington »» trust fund money, including money received State Constitution. The constitutional debt from taxes levied for specific purposes; and limitation prohibits the issuance of new debt »» proceeds from sale of bonds or other if the aggregate debt contracted by the state indebtedness. would exceed the amount for which payments of principal and interest in any fiscal year In November 2012, voters approved an would require the state to expend more than amendment to the constitutional limit 9 percent of the arithmetic mean of general specifying that (1) beginning July 1, 2014, state revenues for the three immediately general state revenues will be averaged over the preceding fiscal years. This limitation restricts six immediately preceding fiscal years; (2) for the incurrence of new debt and not the amount the purpose of the calculation, the definition of debt service that may be paid by the state in of general state revenue will be expanded to future years. include property taxes received by the state; and (3) the 9 percent constitutional limit on debt Under the constitution, “general state revenues” service will be reduced to 8 percent by July 1, includes all state money received in the state 2034 (in downward steps to 8.5 percent starting treasury, with certain exceptions, including: July 1, 2014, to 8.25 percent starting July 1, »» fees and revenues derived from the operation 2026, and finally to 8.0 percent starting July 1, of any undertaking, facility or project; 2034). The amendment was intended to stabilize »» certain moneys received as gifts, grants, and smooth the state’s ability to borrow, donations, aid or assistance; gradually reduce the state’s long-term debt

8 Debt limit Budget Stabilization Account burden and lower the share of the operating Senate Joint Resolution 8206, passed by the budget used to pay principal and interest on voters in November 2007, established the debt. In some years, the new constitutional Budget Stabilization Account, also referred to limits are anticipated to be more restrictive than as the “Rainy Day Fund.” the previously approved statutory working debt limits. By June 30 of each fiscal year, the State Treasurer transfers an amount equal to 1 The amount of new bonded capital program percent of the general state revenues deposited that is affordable under the debt limit can in the General Fund for that fiscal year to the change depending upon: Budget Stabilization Account. »» the amount of previously approved projects Moneys may be appropriated from the Budget carried forward in the capital budget; Stabilization Account by a majority vote of each » » changes in revenue forecasts that increase or house of the Legislature if: (1) forecasted state decrease general state revenues; employment growth for any fiscal year is less »» changes in the make-up of funds included in than 1 percent; or (2) the Governor declares an general state revenues; and emergency resulting from a catastrophic event »» changes in the interest rates at which bonds are that requires government action to protect life sold. or public safety. Other withdrawals from the Budget Stabilization Account may be made only by a three-fifths vote of the Legislature.

Glossary of budget-related terms

Account – An independent budget and accounting Bow wave – Any additional cost (or savings) that entity with a self-balancing set of accounts occurs in the future because a budget item in the representing all related resources, obligations and current biennium is not fully implemented. Example: reserves. Most accounts are set up in state law to A program started in the last six months of this isolate specific activities. biennium might cost $100,000. If that program operates for a full 24 months next biennium, costing Allotment – An agency’s plan of estimated $400,000, then the current biennium budget decision expenditures and revenues for each month of the is said to have a bow wave of $300,000. biennium. Budget drivers – Economic or demographic Appropriation – The legislative authorization to factors that have a significant effect on the state make expenditures and incur obligations from a budget. Examples: inflation rate changes or state particular account. Appropriations typically limit population in certain age groups. expenditures to a specific amount and purpose within a fiscal year or biennial timeframe. Budget notes – A legislative fiscal staff publication that summarizes the budget passed by the Biennium – A two-year fiscal period. The Legislature. This publication is usually distributed a biennium in Washington runs from July 1 of an few months after the end of the legislative session. odd-numbered year to June 30 of the next odd- Budget notes provide guidance but do not have numbered year. the same legal implications as appropriation bill language.

9 Capital budget and 10-year capital plan – General Fund-State – The general fund The long-term financing and expenditure plan for represents all financial resources and transactions acquisition, construction or improvement of fixed not required by law to be accounted for in other assets such as land and buildings. accounts. GF-S refers to the basic account that receives revenue from Washington’s sales, property, Debt limit – Washington’s legal restriction (RCW business and occupation, and other general taxes, 39.42.130) on the amount that can be paid for debt and is spent for operations such as public schools, service on bonds, notes or other borrowed money. social services and corrections. The Washington State Constitution (Article 8, Section 1(b)) mandates that payments of principal General obligation bonds – Bonds whose and interest in any fiscal year cannot exceed repayment is guaranteed by the “full faith and 9 percent of the arithmetic mean of general state credit” of the state. revenues for the three preceding fiscal years. This debt limit of 9 percent of revenues is to be reduced GMAP – Government Management, Accountability in downward steps to 8 percent by July 1, 2034. and Performance was a management initiative to improve the results of state government. Agency Dedicated accounts – Accounts set up by law directors reported in regular meetings with the to receive revenue from a specific source and to be Governor on the most important management and spent for a specific purpose. policy challenges. Reports focused on performance in measurable terms. GMAP was closed out April Entitlement – A service or grant that, under 24, 2013, to transition to Results Washington. state or federal law, must be provided to all eligible applicants. Incremental budgeting – Any budget development approach that focuses on incremental Fiscal note – A statement of the estimated fiscal changes to a previous spending level or other impact of proposed legislation. This cost estimate is defined expenditure base. usually developed by the state agencies affected by the bill, and then approved and communicated to the Initiative 601 – A law on state budget restrictions Legislature by the Office of Financial Management. approved by voters in the November 1993 general election. Its primary requirements are an Fiscal year – A 12-month period used for budget expenditure limit based on inflation and population and accounting purposes. The state fiscal year growth (applicable to GF-S expenditures only); an runs from July 1 through June 30 of the following emergency reserve account for any GF-S revenues year, and is named for the calendar year in which above the expenditure limit; a percentage limit it ends (e.g., July 1, 2016, through June 30, 2017, is on how much state fees can be raised without fiscal year 2017). The federal fiscal year runs Oct. 1 legislative approval; and a two-thirds legislative vote through Sept. 30. requirement on certain state tax increases.

Full-time equivalent (FTE) – As a unit of Lean – Lean is a systematic approach to improving measure of state employees: refers to the equivalent value to customers by eliminating waste. The of one person working full-time for one year focus is on the customer and the work steps (or (approximately 2,088 hours of paid staff time). Two “value stream”) that create products or services for persons working half-time also count as one FTE. customers. Lean thinking, tools and techniques offer As a unit of measure of students in K-12 or higher an opportunity to streamline business processes to education facilities: refers to the equivalent of one save time, effort and money that can be better used student attending class full-time for one school year on what customers value most. (based on fixed hours of attendance, depending on grade).

10 Maintenance level – A projected expenditure RCW – The Revised Code of Washington is the level representing the estimated cost of compilation of all permanent state laws now in providing currently authorized services in the effect. It is a collection of session laws (enacted ensuing biennium. It is calculated using current by the Legislature and signed by the Governor, appropriations, the bow wave of legislative or enacted via the initiative process), arranged by intentions assumed in existing appropriations (costs topic, with amendments added and repealed laws or savings) and adjustments for trends in entitlement removed. It does not include temporary laws such as caseload/enrollment and other mandatory expenses. appropriations acts. This number establishes a theoretical base from which changes are made to create a new budget. Reappropriation – Capital budget appropriation that reauthorizes the unexpended portion of Nonappropriated funds – Moneys that can be previously appropriated funds. Capital projects expended without legislative appropriation. Only often overlap fiscal periods, and it is necessary to funds in accounts specifically established in state law reauthorize some expenditure authority to ensure as being exempt from appropriation fall into this project completion. category. Reserve or fund balance – In budget Operating budget – A biennial plan for the terminology, the difference between budgeted revenues and expenditures necessary to support resources and expenditures. the administrative and service functions of state government. Results Washington – Results Washington combines the best aspects of previous performance Performance measure – A quantitative management and performance budgeting efforts indicator of how programs or services are directly such as Government Management, Accountability contributing to the achievement of an agency’s and Performance and Priorities of Government with objectives. These indicators may include measures a significantly expanded Lean initiative that involves of inputs, outputs, outcomes, productivity and/or all state agencies. quality. Reversion – Unused appropriation authority. If an Priorities of Government (POG) – Washington's agency does not spend all its appropriation in the adaptation of the “Price of Government” budget time frame specified by the budget, the authorization approach first developed by Peter Hutchinson and to spend that dollar amount expires. David Osborne. This form of budgeting focuses on statewide results and strategies as the criteria for Supplemental budget – Any legislative change to purchasing decisions. the original budget appropriations. Proviso – Language in budget bills that places conditions and limitations on the use of appropriations. Example: “Up to $500,000 of the General Fund-State appropriation is provided solely for five additional inspectors in the food safety program.”

11 To accommodate persons with disabilities, this document is available in alternate formats by calling the Office of Financial Management at 360-902-0555. TTY/TDD users should contact OFM via the Washington Relay Service at 711 or 1-800-883-6388. Visit our website at www.ofm.wa.gov