The legislature passed its agreement on the 2026 supplemental operating budget and adjourned yesterday. The budget now sits on Governor Ferguson’s desk, where he can sign it, veto sections, or veto it entirely. I broke down all three proposals last month. Here’s what survived.
Top-Line Numbers
The conference report on ESSB 5998 lands at $80.2 billion in near-general fund (NGF-O) spending for 2025-27, up from the $77.9 billion the legislature enacted in 2025. Of that $2.3 billion increase, $1.7 billion is maintenance level and $621 million is net new policy. That’s about 11% above 2023-25 spending.
Both the House ($79.2 billion) and Senate ($79.3 billion) had come in lower in their initial proposals.
That $621 million net figure deserves some unpacking. The conference report contains $1.592 billion in gross new spending against $970 million in reductions. But as the Washington Research Council’s Emily Makings noted, $432 million of those reductions are fund shifts — the spending still happens, it just moves off the NGF-O ledger.
Strip those out and the legislature is looking at roughly $538 million in actual reductions against $1.6 billion in new spending. The legislature continues to grow spending at a pace rapidly outpacing expected revenues, which is why we are facing multi-billion-dollar shortfalls every session.
Spending
Almost a billion dollars of the new spending comes from one line: $956 million NGF-O ($2.2 billion total funds) for the state self-insurance liability account. These are lawsuit settlements and jury verdicts, primarily from child welfare system failures. The Senate had proposed roughly $1 billion for this; the House had offered around $400 million. The conference sided with the Senate.
Beyond the liability payouts, the conference report adds spending across the board. The OPR summary documents show:
- $64 million for cannabis revenue distributions
- $50 million responding to federal HR 1 policy changes
- $25 million each for Cascade Care and immigrant/refugee supports
- $19.4 million for crime victim services
- $19.1 million for close custody beds in corrections
- $15 million each for UW behavioral health and permanent supportive housing
- $14.9 million for state hospital staffing.
Two additional items are worth flagging. The conference report adds $71 million to “restore” Medicaid program integrity savings that were assumed in the enacted budget but never materialized. That is not new spending so much as admitting that last year’s assumed savings were fiction.
$11.8 million goes to revenue legislation implementation, the cost of building the income tax infrastructure at the Department of Revenue, which grows to $123 million over four years. The state is spending money now to build the collection apparatus for a tax that is both unconstitutional and does not start generating revenue until 2029.
Savings
The largest single reduction on the NGF-O line is a $239.9 million higher education fund shift. The institutions’ operating costs get moved from the NGF-O to an operating fees account backfilled by capital budget building accounts. The spending does not go away; it’s just being shifted to another account.
The biggest real policy savings come from child care. Changes to Working Connections Child Care through SHB 2689 (attendance policies, enrollment-based pay, and regional rate adjustments) save $143.3 million in 2025-27 and roughly $781 million over four years.
K-12 takes a hit:
- $27.3 million from the Transition to Kindergarten program
- $25.8 million from the bus depreciation formula
- $25.1 million from reducing Local Effort Assistance by $100 per pupil
- $7 million from a Running Start enrollment cap.
After that, the reductions get smaller and the fund shifts pile up.
- A $70 million Disproportionate Share Hospital reduction is a bet that federal cuts get delayed, not an actual state policy change.
- WorkFirst ($38 million) and emergency housing ($24 million) just move to other accounts.
The across-the-board administrative reductions that the governor proposed at 3-6% landed at $22.7 million total. That is what survived the legislative process. Agencies that have seen double-digit budget growth every biennium gave back less than three hundredths of one percent.
All told, over $112 million in additional cost shifts to dedicated accounts appear throughout the conference report. Every one of them reduces the NGF-O number without reducing actual state spending.
Tax Changes and Fund Raids
The revenue side of the conference report leans on a mix of one-time transfers, accounting assumptions, and the new income tax.
- The rainy-day fund takes a hit to the tune of an $880 million transfer to the General Fund, matching the House’s number and exceeding the Senate’s $750 million.
- Another $375 million comes from the Public Works Assistance Account.
- Capital gains tax revenues that normally flow to the school construction account get redirected to the NGF-O, adding $395 million.
It also assumes an $880 million transfer from the Pension Surplus Holding Account to the Budget Stabilization Account on June 30, 2029. That is the mechanism for moving LEOFF 1 pension money into the state’s general reserves. This is a smaller number than the House’s original $4.5 billion proposal, but it keeps the pipeline open to use the rest of that money in future years (sort of a quasi-rainy-day fund itself).
This is the second straight session where the majority has gone after pension systems to cover a spending-driven deficit. Last year it was ESSB 5357 and the rate of return gimmick. This year it is directly tapping a retirement trust fund.
On tax legislation, the conference report assumes $36 million net in 2025-27 and $2.2 billion in 2027-29.
- The income tax on millionaires (ESSB 6346) is a net cost of $55.4 million this biennium (implementation costs prior to collections) but is projected at $2.29 billion in 2027-29.
- The data center tax exemption repeal (SB 6231) adds $63 million now and $140.5 million next biennium.
- Prescription drug B&O tax changes (SB 6228) bring in $24 million and $141.7 million. An insurer tax clarification (HB 2487) adds $55.6 million this biennium.
Going the other direction, the estate tax rate rollback (SB 6347) costs $44.8 million in 2025-27 and $389.9 million in 2027-29. The fact that rolling back a 35% estate tax rate required a political hostage exchange tells you how reluctant this legislature is to give back any revenue it has already claimed.
The conference report also assumes $766.5 million in reversions, which is the amount agencies are expected to leave unspent. The FY 2027 reversion rate was bumped from 0.75% to 0.9%. That is not a policy choice, it is an assumption about what agencies will fail to spend, and it mechanically inflates the ending balance.
The Budget Does Not Actually Balance
As Emily Makings at the WRC documents, the conference report’s balance sheet relies on two accounting assumptions that are far outside historical norms.
The first is the prior period adjustment assumption. These adjustments, which are routine true-ups between projected and actual revenues, normally account for about $41 million per biennium. The conference report assumes $250 million per biennium, six times the normal level. The second is the elevated reversion rate.
These inflated assumptions combined are doing significant work to make the ending balances look positive. Remove both, and the 2025-27 ending balance drops to negative $786 million. The 2027-29 ending balance drops to negative $1.472 billion.
The four-year outlook assumes 2.8% spending growth in 2027-29. Average biennial spending growth going back to 2003-05 runs about 11%, and the 2027-29 estimate by law cannot include future collective bargaining costs with state employees. Last session’s CBAs cost over $1.4 billion and were a major driver of the deficit the legislature is now scrambling to close. There is no reason to think the next round will be cheaper.
In other words, the supplemental budget that passed the legislature does not balance without the gimmicks.
Bottom Line
The conference report spends $80.2 billion. It drains $880 million from reserves, sweeps hundreds of millions from dedicated accounts, and inflates accounting assumptions well beyond historical norms. The entire next biennium rests on an income tax that may never survive the courts or the ballot box.
And even if everything breaks the legislature’s way, the income tax doesn’t solve the structural problem.
Run the math at the historical average of roughly 11% biennial spending growth and the state will consume every dollar of projected income tax revenue in 2027-29 and still faces a deficit of roughly $7 billion.
