WashACE Blog

WashACE Competitiveness Brief Examines $5.1 Billion budget Shortfall

We just released a new report on the November revenue forecast.

With last week?s forecast, the frame is set for Gov. Gregoire, who will release her budget proposal next month. She predicts that it will be?uglyƒ� and few will disagree. The governor has also said that this is not the time for raising taxes. And, again, few will disagree. Tax increases would
deepen the recession and delay recovery.

The brief, prepared for WashACE by the Washington Research Council, adds useful perspective on the dominant competitiveness issue before us.

New Competitiveness Brief Looks at Labor Costs

In this new competitiveness brief, prepared for WashACE by the Washington Research Council, we examine several areas in which state policy may drive up labor costs. Citing several well-known studies of interstate competitiveness that find Washington a high-cost state, the brief examines unemployment insurance, workers' compensation, paid leave, and other issues that are likely to be considered in the coming legislative session.

The cost of doing business has many components, but labor costs make up the largest variable. And within the larger labor cost picture, it is employment taxes and mandated benefits that make the big difference from one state to another. Washington already has among the highest average wage
rates in the country, so adding additional costs through taxes and regulation further threatens to let labor costs overwhelm the state?s competitive advantages.

It's a thoughtful and timely analysis.

Governor Orders Additional State Budget Cuts

The memo you knew was coming arrived today. OFM director Victor Moore calls on elected officials, agency directors, and other top state administrators to cut an additional $260 million from their current budgets. The memo includes specific targets and lays out criteria the budget-cutters should use.

1. Identify and take under-expenditures and efficiencies that go beyond those already taken;
2. Continue to pull back on new programs not yet fully implemented; and
3. Scale back existing programs and activities that fall lower in the Priorities of Government
process and/or have been identified in your work with OFM as 2009-11 Biennial Budget
reduction items. 

Stories by Rich Roesler and the Associated Press.

Roesler also has a good article on how state workers see things.

The largest state workers union, the Washington Federation of State Employees, argues against job cuts. It represents about 40,000 of the state's more than 100,000 employees.

"We believe, as some economists believe, that the worst thing to do during an economic downturn is to lay off, especially public employees," said Tim Welch, the union's spokesman. Demand for state services rises in tough times, he said.

Welch prefers to see tax exemptions repealed. And, as Roesler notes, he has an important ally.

Some lawmakers, notably Senate Majority Leader Lisa Brown, D-Spokane, make a similar argument.

"I think we will absolutely be looking at current tax breaks," she said.

There's already a system in place for evaluating tax exemptions. And, if preserving consumer spending during a recession, an argument Welch makes, it's much more important to create a strong investment climate. Tax incentives that spur capital investment by private firms play a critical role in assuring job creation in Washington. AWB president Don Brunell and I discuss one of those incentives here.

It's also important not to overdramatize the state's fiscal challenge. As the Seattle Times editorialized Sunday, it's possible - not easy - to balance the budget within current revenues. The Times offered a list of $5 billion in savings.

The Olympian also editorialized Sunday on the "bloodletting."

Echoing WashACE's education priorities, the Thicket at State Legislature's blog, has a good podcast on STEM programs.

Within current revenues, it's critical that lawmakers preserve the investments that spur economic growth, including tax incentives.

A Competitiveness Warning and a Pair of New Reports

This morning, the Puget Sound Business Journal wrote out loud what a lot of folks had previously just been whispering. The aggressive courting of The Boeing Company by Southern states gained momentum with the recent machinists' strike. And the South has plenty to offer.

Right-to-work laws in Southern states ... would prevent such costly walkouts.

But the South has another compelling selling point: its industrial muscle. Increasingly, the nation?s aerospace center of gravity is shifting south, creating an extensive and growing base of hundreds of aerospace companies producing helicopters, aircraft assemblies? even Boeing rockets.

The in-depth article by Steve Wilhelm includes solid comments by economic development pros in the South. As this quote by Gray Swoope, executive director of the Mississippi Development Authority, makes clear, the Southern strategy is comprehensive, looking for a long-term relationship that goes beyond the shop floor.

?We?re not just interested in manufacturing, we?re interested beyond that, and how do you build capacity,ƒ� he said.?We?re even more thrilled GE is going to be working with (Mississippi State University) to partner with them in building the next generation of aircraft.ƒ�

In the same issue, PSBJ editor George Erb sounds the alarm.

Over the long run, the [aerospace] industry is surprisingly mobile. Just ask any old-timer in Long Island or Southern California. Both areas lost major aerospace manufacturers in the 1990s.

A similar aerospace retreat from Washington would be a severe blow. The industry accounts for about 17 percent of Washington?s gross state product, according to 2006 data gathered by Deloitte Development LLC.

He concisely inventories the factors putting Boeing and the aerospace cluster here at risk. And, he places them in the context exactly as we would.

Washington needs to improve its business climate and change its attitude.

Starting with the governor and the state Legislature, elected officials need to make Washington more competitive for all companies, including Boeing.

All Washington residents also need to stop taking the aerospace industry for granted. On this issue, the state?s biggest enemy may be its own complacency.

Read it all. And see earlier WashACE posts on the issue here, here, and here.

MORE  About the "pair of new reports" in the header: Here they are.

The 2008 State New Economy Index came out earlier this week, ranking Washington No. 2. (Download the whole report here.) What's it mean? Here's what the authors say.

Rather than measuring state economic performance or state economic policies, the Index focuses more narrowly on a single question: To what degree does the structure of state economies match the ideal structure of the New Economy?

So it's something quite a bit less than a competitiveness index. Not a bad thing, certainly, and being posed to succeed in the "new economy" (I though that expression had been retired) doubtless gives a state an edge when the economy rebounds. 

The Beacon Hill Institute has also released its 2008 State Competitiveness Index (press release and full report). I've not had a chance to evaluate this yet. If you have thoughts on the reports, please post them in comments. Here's Gov. Gregoire's press release on them.

Reactions to the $5 Billion Budget Shortfall

This line in Andrew Garber's Seattle Times story pretty well sums it up.

"This is about as real as it gets," said House Majority Leader Lynn Kessler, D-Hoquiam.

We have no recent history to draw upon in responding.

This kind of financial crisis is unprecedented," [Arun] Raha said. "We have not had this kind of problem since the Great Depression."

..."Our state revenues are dependent on people buying cars and homes and gifts over the holidays. Right now no one is buying cars and houses," he said, adding that holiday shopping is looking dismal as well.

In fact, the state expects to collect less money from taxes in the 2009 fiscal year, which runs from July 1 to June 30, than in 2008.

Garber's report identifies the options under consideration, including layoffs, taxes, health and social services cuts in reimbursement and tighter eligibility. Read the whole thing. It's a good preview of the legislative session.

In The News Tribune, Joe Turner has the union response.

The Washington Federation of State Employees, which represents 40,000 of the more than 100,000 state workers, expects the governor and the Legislature to eliminate tax loopholes and exemptions. Federation spokesman Tim Welch said the union doesn?t believe its recently negotiated contract, which will cost the state $70 million over the next two years, is in jeopardy.

?Our goal would be to avoid layoffs, which would make the problem worse,ƒ� he said.

What problem would that be? And, clearly, the negotiated contract must be in jeopardy. How do you justify service cuts while giving public employees pay increases and heavily subsidized health insurance?

Good coverage also in the Everett Herald, Seattle PI, and in Rich Roesler'

Waiting for the Revenue Forecast to Define Budget Shortfall...and Wondering about Performance Audits

In about a half hour, the Economic and Revenue Forecast Council will adopt the official forecast of state revenues though the 2009-2011 budget cycle. Joe Turner blogged yesterday that the "usually nerdish" event has become high drama. Like car crashes, I guess.

In my column in the Herald of Everett (also The News Tribune), I speculate that the forecast will again produce bad news. (I do not expect the Nostradamus award for that prediction.) More important, I discuss the harm tax hikes would inflict on struggling families and businesses, further deepening the recession here. And I mention the array of tools lawmakers and the governor have at hand to develop a balanced budget without raising taxes.

State officials have developed an array of tools for evaluating spending and setting priorities. Gov. Chris Gregoire continues to use the Priorities of Government program former Gov. Gary Locke pioneered in 2001 to balance a recession-hammered budget without tax increases. Three years ago voters authorized performance audits of all government programs. And Gregoire's GMAP program (Government Management, Accountability and Performance) focuses on performance and program effectiveness. Lawmakers should use the tools, control spending, and avoid punishing tax hikes.

So it's passing strange to note that the Priorities of Government exercise placed performance audits on the do-not-buy list. Adam Wilson's blog has State Auditor Brian Sonntag's reaction. Of course, the audits come from a dedicated fund stream approved by the voters when they passed Initiative 900. But still, why recommend eliminating a tool that can help you identify waste and inefficiency in tight budget times?

New Forecast Puts State in Current Year Deficit; $5 Billion Shortfall Ahead

If Apocalypse Now hadn't been taken, pundits would be affixing the label to today's revenue forecast: Down $1.9 billion for this biennium and the next, deepening the hole to $5 billion.

Although the link is not yet up on the Economic and Revenue Forecast Council site, The Council just finished the grimmest session in memory. Here is the press release and notebook. Adam Wilson has his preliminary story here.

New forecaster Arun Raha maintains a long tradition of deadpan delivery, matter-of-factly reporting that "an official recession has not yet been called, it it's certain it will be." Following a recitation of grim economic news, including historically low consumer confidence, he states, "We are not immunce to these immense headwinds that are buffeting the economic landscape." His best-case prediction for holiday shopping is no decline in sales from the previous year.

Then, the hard news: In the current biennium, revenues will come in $503 million below forecast, dropping the total to $28.6 billion.

The big drop comes in the 2009-2011 biennium: Down $1.4 billion.

Raha points out that, biennium to biennium, there wil be a 5 percent increase in revenues. State budget director Victor Moore later comes back to that point, observing that in 2009 there is an absolute decline of about 4 percent in revenue, the uptick comes in the second year of the coming biennium.

State agencies will immediately be asked to find additional savings in the current biennium, in the neighborhood of $300-400 million. Legislative action to further reduce or reshape current biennial spending can wait until the session convenes in January. Sen. Joe Zarelli says lawmakers' first order of business should be putting together a supplemental budget that reduces spending.

Zarelli, who has been a consistent budget hawk, says, "A crisis is defined by your ability to respond to it." And sounds confident that lawmakers will find a way to do it.

With a $5 billion gap to close, the question of tax hikes came up. So far, the members of the forecast committee, which includes legislators who will play critical budget-writing roles, said that their focus would be on budget development. Rep. Ross Hunter mentioned the Priorities of Government process used by then-Gov. Gary Locke to write a no-new-taxes budget following the 2001 recession. Sen. Craig Pridemore, while saying "everything's on the table," kept the focus on priorities and acknowledged the damage tax hikes would inflict on the economy.

Rep. Ed Orcutt asked the right rhetorical question: "If the economy is this tough, how could the citizens afford more taxes?"

Raha estimates that the economy will begin to recover in the third quarter of 2009, but there will be no "real traction" until the middle of 2010.

Bleak as the budget picture is, our long-term focus must be on laying the foundation for sustained economic growth and a healthy business climate. Increasing costs now would severely damage our prospects for emerging from this recession in a strong competitive position. The WashACE agenda remains the best prescription for the times.

Quick Roundup of Responses to $5 Billion Budget Shortfall

A $5 billion budget shortfall quickly captures everyone's attention.

First, the pressblog coverage from The News Tribune and Seattle PI.

Joe Turner for the TNT says,

In addition to lower than expected tax collections over the next 2 and 1/2 years, demand on state spending also is on the rise. Last week, the state Caseload Forecast Council reported that it is raising its forecast for public school enrollment by an additional 10,000 students during the 2009-11 biennium because it expects at least 7,000 private school students to transfer to state schools in light of the recession.

The PI's Strange Bedfellows blog sees a wobbly commitment by Senate Democrats to the governor's no-new-taxes approach.

Democratic leaders were wary of making the same no-tax-hike promise as Gregoire Wednesday.

"That is something we will attempt to do to the best of our ability," said Sen. Craig Pridemore, D-Vancouver.

Think tanks weighed in quickly as well. The Budget and Policy Center sent out an email citing unidentified "economic theory" to justify higher taxes.

Revenue increases will likely be necessary. Economic theory suggests that contrary to conventional wisdom, tax increases would be preferable to spending cuts in terms of economic growth.

I'll go with conventional wisdom on this one.

Paul Guppy at the Washington Policy Center was quick out of the gate with an extended assessment. 

Boosting taxes to get out of the deficit is wrongheaded for three reasons.

First, it is not fair for state leaders to turn to working citizens and businesses that already shoulder a heavy tax burden and make them pay even more to fix Olympia?s budget mess.

Second, tax increases depress economic growth, so raising the sales tax would only make a dire situation worse.

Third, it doesn?t make sense to reward the very Olympia leaders who created the deficit by letting them ratchet up the state?s financial commitments.

There will be more, much more, tomorrow.

Federal Bailout for States: Good or Bad Idea?

As lawmakers here brace for more budget bad news tomorrow, the arguments against a federal bailout for the states appear to be gaining momentum. South Carolina Gov. Mark Sanford testified against federal funding in Congress recently. Jason Mercier has the best links here. The video is worth watching.

And in this morning's Wall Street Journal, the Manhattan Institute's Steve Malanga argues a federal bailout would just encourage more bad behavior.

Thoughts?

Puget Sound Business Journal Reports on Competitiveness Agenda

This week's Puget Sound Business Journal has a good story on the competitiveness challenges faced by our state's entrepreneurs in the coming legislative session. In a front page article, Deirdre Gregg writes (sigh, subsciption required) of the WashACE competitiveness themes.

As Washington state confronts an economic downturn that appears deeper and more painful than any in decades, the business community is coming together to present state lawmakers with a common set of messages.

... In addition to developing a budget that preserves public services without tax increases, state lawmakers should focus on higher education spending that will contribute to economic growth, according to the Washington Alliance for a Competitive Economy, a coalition of business groups that includes the Association of Washington Business and the Washington Roundtable. The group says the budget should finish already-funded transportation projects and reform the state?s unemployment and workers? compensation programs to keep costs down.

An PSBJ op-ed by this year's chair of the Greater Seattle Chamber of Commerce, Tayloe Washburn, further outlines business concerns. Again, you'll need to be a subscriber to gain access to the online coverage.