In a June 5 memo sent to state agency directors, the OFM director issued the official guidelines for the upcoming 2027-29 biennial budget cycle, warning of significant, impending shortfalls across both the operating and transportation budgets

Andrew Paxton
The Center Square Washington

Washington is facing a new financial reality as the Office of Financial Management signals an era of severe fiscal constraint ahead.

In a June 5 memo sent to state agency directors, OFM Director K.D. Chapman-See issued the official guidelines for the upcoming 2027-29 biennial budget cycle, warning of significant, impending shortfalls across both the operating and transportation budgets.

Characterizing the current landscape as perhaps the most challenging fiscal environment state leaders have ever navigated, the state’s budget office has explicitly thrown out a “business as usual” approach in favor of aggressive cost-containment strategies.

“To be direct, there will be significant budget shortfalls next biennium in both operating and transportation budgets,” Chapman-See wrote in the memo. “I want to be clear that we do not yet know precisely how significant the shortfalls will be.”

According to the directive, the state’s financial foundations are being heavily pressured by rapid inflation and a surging population.

Over the past decade, inflation across Washington has climbed by 39%, heavily eroding the purchasing power of dollars utilized for public materials, fuel, utilities and state-level construction.

Compounding this problem is a 14.2% population spike between 2015 and 2025, which added more than 1 million new residents to the state and created unprecedented baseline demand for public services, according to the memo.

The state’s fiscal vulnerability is further heightened by deep economic uncertainty, cuts to incoming federal funding and costly court decisions.

Even with recent adjustments to the tax code, standard revenue forecasts are no longer sufficient to maintain existing baseline programs, much less support the creation or expansion of any new state initiatives.

Furthermore, the memo explicitly instructs agencies not to count on funds from the controversial “millionaire’s tax.”

This new income-tax mechanism is already facing legal challenges in court and mounting opposition from taxpayer advocates seeking to stop it via ballot measures.

OFM acknowledges that the realization of any such revenue remains highly volatile and legally unstable, meaning agencies cannot utilize it to bail out their spending requests.

Consequently, Gov. Bob Ferguson is ordering all state agencies to strictly freeze program expansions and restrict their policy-level requests to legally mandated caseload increases or emergent issues.

Executive cabinet agencies have been ordered to pause the phase-in of most new programs and generate “significant and ongoing” reduction options targeting non-essential services.

In a bid to maximize efficiency, the state is ordering a forensic audit of base budget expenditures, focusing heavily on winding down programs launched or expanded after January 2019, scaling back areas where Washington provides disproportionately higher service levels than other states, and rejecting maneuvers like trying to shuffle operating deficits over into the capital budget.

“We recognize reductions necessary to address this shortfall will come on top of billions in reductions adopted in the last 16 months, making these further savings additionally challenging without significant impacts to services the state provides,” the memo states.

Despite the aggressive push for cost-cutting, the memo notes that Ferguson remains committed to equity, urging agencies to carefully weigh how budget reductions might disproportionately impact historically underserved communities.

State agencies, budget officers and advisers will spend the summer collaborating with OFM to finalize their scaled-back proposals. Formal budget requests and mandatory reduction decision packages must be submitted to the OFM by Sept. 14.

This report was first published by The Center Square Washington.