Washington got a clear warning that its reliance on reserves and one-time maneuvers to balance the budget endangers the state’s strong credit rating, which could worsen financial challenges.

Moody’s, one of the big three credit rating agencies, on April 22 revised its outlook for Washington finances from stable to negative, signaling deep concern with the state’s propensity to enact budgets that spend more money than it takes in, and uses reserves and other measures to make ends meet.

It did affirm Washington’s strong triple A rating on bonds, acknowledging the state’s economy is fundamentally strong. But if the current budgeting approach continues in future years, Washington will be less able to “absorb unexpected revenue or expenditure shocks” that might occur, the ratings agency noted. 

Democratic state Treasurer Mike Pellicciotti has been delivering a similar message to state lawmakers and Democratic Gov. Bob Ferguson the past two legislative sessions. 

“A check engine light just flashed on our state finances,” Pellicciotti said in an email. “Credit rating agencies have warned for years that reliance on reserves to balance an otherwise structurally imbalanced budget could result in a negative credit action.”

But, he added, “there is still time to fix this immediate issue next session before the costs of a potential credit downgrade start piling on.”

Financial landscape

In the past two sessions, lawmakers and the governor wrestled with multibillion-dollar shortfalls  as state revenue growth isn’t keeping pace with spending.

In March, Ferguson signed a roughly $79.4 billion plan that made adjustments to the $77.8 billion two-year budget lawmakers passed last year, which covers state spending from July 1, 2025, to June 30, 2027.

Democrats, who hold majorities in both chambers, wrote and passed the budget. To balance it, they siphoned $880 million from the state’s rainy day reserves and transferred $375 million from the Public Works Assistance Account, which provides low-interest loans and grants to local governments for infrastructure projects.

In the meantime, the state is facing a deficit in the next budget cycle with total reserves predicted to dip to 1.4% by the end of the 2028 fiscal year. Pellicciotti has recommended the state’s total reserves amount equal at least 10% of general fund revenues.

Ferguson and Democratic lawmakers are counting on the new tax on households with annual incomes above $1 million to provide a stabilizing stream of revenue. But collections won’t begin for three years, presuming the tax is upheld in court and at the ballot box. 

That uncertainty was not lost on Moody’s which said its revised outlook “reflects rising downside risks to the state’s financial flexibility given continued reliance on one-time budget solutions to support General Fund spending, a projected narrowing of budgetary reserves and ongoing legal challenges to new revenues intended to help restore budget balance.”

Meanwhile, Republicans have consistently and loudly criticized Democrats for moving too quickly to spend down reserves and use gimmicks to balance the budget, rather than make tougher choices on how tax dollars are spent.

During the session, Sen. Chris Gildon, R-Puyallup, the GOP budget lead in the Senate, called Democrats’ spending plan an “$80 billion House of Cards that’s built on a very shaky foundation.” 

“It’s going to force really difficult budgeting decisions in future years,” he said.

Lower rating, higher costs

Washington’s credit ratings are an “independent indicator of our state’s finances,” said Pellicciotti. Each session he makes recommendations to lawmakers aimed at improving the state’s fiscal health and sustaining the state’s current Aaa credit rating.

If it is lowered, it would hit the state’s budget directly.

If Moody’s dropped it to Aa1, it would result in an estimated 0.1% increase in interest rates on issuances of state bonds. With Washington issuing around $4 billion in bonds each year, this would add roughly $60 million a year in debt costs to be paid out of the budget, according to the treasurer’s office.

Depleting reserves carries a cost, too. The state invests reserves and can earn $30 million to $40 million per billion dollars. Under the current budget, total reserves are declining from $2 billion last July to a projected $558 million in July 2027. 

This story is republished from the Washington State Standard, a nonprofit, nonpartisan news outlet that provides original reporting, analysis and commentary on Washington state government and politics.