HARTFORD (S&P Global Ratings) April 17, 2020--Although the State of Washington faces economic headwinds in the near term due to COVID-19, S&P Global Ratings believes strong fiscal management practices will help the state navigate the economic effects of the pandemic. In January 2020, Washington (AA+/Stable) became the first state in the U.S. to report a confirmed case of the coronavirus. In the subsequent weeks, the governor elevated the state's response to the outbreak by declaring a state of emergency on Feb. 29, 2020, and issuing a stay-at-home order effective March 23, 2020. In our opinion, the state's strong revenue forecasting practices and history of making budget adjustments based on material changes to forecast will help Washington's budgetary performance stay the course during the pandemic.
Washington's most recent revenue reporting has only begun to incorporate the economic effects of COVID-19. The state's Economic and Revenue Forecast Council (ERFC) reports that fiscal year-to-date general fund revenue collections through April 10, 2020, were $6.1 million or 0.2% above its February 2020 forecast (conducted before the declaration of a global pandemic). Officials report that the bulk of collections in March stem from taxable activity in February and do not yet reflect the effects of COVID-19-related shutdowns. The ERFC expects to release the next preliminary quarterly forecast on June 2, 2020, and official quarterly forecast on June 17, 2020. S&P Global Economics forecasts a 5.3% contraction in the U.S. economy this year (see "An Already Historic U.S. Downturn Now Looks Even Worse," published April 16, 2020, on RatingsDirect), which we expect will contribute to significant revenue declines for the biennium.
Given that the main sources of revenue into Washington's general fund are retail sales taxes and business and occupation taxes (representing 49% and 18% of near general fund revenues, respectively, in fiscal 2019), we anticipate a material shock in collections in the short term with a gradual albeit hampered recovery. Unlike most states, Washington is not affected by the postponement of the federal income tax filing deadline--and associated revenue delays--because the state does not levy a personal income tax. However, its dependence on exports (which accounted for 10% of gross state product in 2019 or the fifth-highest proportion in the country according to IHS Markit) and the related uncertainty plaguing Washington's largest employer, The Boeing Co., will continue to weigh on a meaningful recovery.
On the expenditure side, the governor has issued several line-item vetoes of new appropriations that reduce spending through the next biennium. Specifically, the fiscal 2020 supplemental operating budget was reduced by $235 million (0.4%) for the fiscal 2019-2021 biennium and by an additional $210 million for the 2021-2023 biennium. S&P Global Ratings expects that the state will remain committed to timely budget adjustments as it has in years past.
Management reports that the cash balance of the state treasury and treasurer's trust funds was $7.01 billion as of April 10, 2020, which we consider a strong 13.2% of near general fund expenditures enacted for the fiscal 2019-2021 biennium. The funds' average daily balance has significantly increased in recent years, but management reports that balances have varied widely generally ranging from $3.0 billion-$8.5 billion.
The state's rainy-day fund balance currently totals $1.7 billion or a good 3.2% of enacted fiscal 2019-2021 biennial near general fund expenditures (6.6% of annual enacted fiscal 2020 expenditures). Legislation passed on March 17, 2020, provided initial funding for the COVID-19 pandemic response and included appropriating $200 million from the budget stabilization account for disaster response and unemployment.
We expect that the state will use its approximately $2.2 billion of federal stimulus from the Coronavirus Aid Relief and Economic Security Act to alleviate some direct fiscal strain brought on by the pandemic. Washington is eligible for further support from the federal government through the Federal Reserve's municipal liquidity facility--short-term notes that can be used to manage cash flows, among other uses. Although officials report the state is reviewing its potential options, there is currently no plan for Washington to partake in cash-flow borrowing. Similar to other states, the extent of the fiscal impact will likely depend on the severity and the duration of the pandemic.
For information on the general creditworthiness of the State of Washington, please see our most recent analysis published March 9, 2020.
This report does not constitute a rating action.
| Primary Credit Analyst: | Jillian Legnos, Hartford (1) 617-530-8243; jillian.legnos@spglobal.com |
| Secondary Contact: | Oscar Padilla, Farmers Branch (1) 214-871-1405; oscar.padilla@spglobal.com |
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