With the August 2 deadline less than a week away before the federal government reaches its debt limit, state budget officials across the country are preparing for the potential impact on state budgets depending on what Congress and the President agree (or don’t agree) to.

According to at least one state budget director, there will be “no happy endings” for states regardless of what occurs.

Washington’s budget director, Marty Brown, however, is a little more optimistic.

I had a chance to talk with Brown today about the state’s contingency plans depending on what scenario unfolds in D.C. on the debt debate. He said for at least 6-8 weeks after August 2, Washington would be in position to ride out the storm due to the state Treasurer’s cash management strategy of moving away from investing in short term treasuries and into cash holdings. Here are details on a letter Washington’s Treasurer sent the state’s congressional delegation earlier this week about the need for quick resolution of this problem.

The biggest unknown for state officials is how the federal government would prioritize payments if the debt ceiling is reached. While the state could weather reductions in most federal matching funds for the short term, it could not withstand prolonged absence of Medicaid matching funds.

In an ideal world according to Brown, a deal would be reached that raises the debt limit and makes reductions in federal spending except for Medicaid funds.

Brown’s biggest concern about a short-term failure to resolve the debt debate is the impact on the state economy and future revenue forecasts (Washington currently has an ending fund balance of only $163 million or less than 0.5% of spending).

With little traction to date on solving this problem, some in Congress have floated the possibility of providing a framework for the federal government to prioritize which bills it pays if the debt limit is reached.

This has drawn another warning, however, from Standard and Poor’s. According to Reuters:

“Prioritizing debt payments to avoid a default would be ‘deeply disruptive’ to the economy, Standard & Poor’s global head of sovereign ratings said in an interview with CNBC on Tuesday.

David Beers’ warning comes as Republican and Democratic leaders scramble to agree on a plan to raise the U.S. debt ceiling before the Treasury runs out of cash to service its obligations on August 2.

Beers said the Treasury could ‘theoretically’ prioritize debt payments over other government obligations for some time while negotiations continue in Washington.

‘But it’s worth remembering what that would mean — it would mean a very sudden fiscal shock that the longer it lasted would filter powerfully through the system,’ Beers said.

‘Potentially that would be deeply disruptive to the economy.’”

If there is one positive that can come from all this it is perhaps the recognition in D.C. that the way to avoid this problem in the future is to stop approving budgets that require credit card payments. Since the discipline to do so voluntarily has proven to be elusive, one option is to follow the lead of the states that structurally require themselves to balance their budgets.

We may know later his week if Congress agrees. A vote is being discussed in the House to consider a proposed constitutional balanced budget amendment.

Jason Mercier is the director of the Center for Government Reform at the Washington Policy Center. He serves on the Executive Committee of the American Legislative Exchange Council’s Tax and Fiscal Policy Task Force and is the private sector chairman of ALEC’s Fiscal Federalism Working Group. He is a contributing editor of the Heartland Institute’s Budget & Tax News, serves on the board of the Washington Coalition for Open Government, and was an advisor to the 2002 Washington State Tax Structure Committee. In June 2010, Governor Gregoire appointed Jason as WPC’s representative on her Fiscal Responsibility and Reform Panel. Jason holds a Bachelor’s degree in Political Science from Washington State University.

COMMENTARY

In the waning hours of the “budget focused” special session, Democrats in the House and Senate both attempted to cue up votes on a tax bill not assumed in the budget that no one expected to pass. The strategy was to try to gain legal standing to sue the voters to overturn the 18-year-old 2/3 vote requirement for tax increases.

Today, this legislative charade has come to fruition as several House Democrats have joined the Washington Education Association (WEA) and the League of Education Voters to file a lawsuit to overturn the four-time voter approved 2/3 vote requirement for tax increases.

Here is a copy of today’s legal filing.

The lawsuit highlights the failure of the Legislature to fund Initiative 728 and 732 as proof of harm as to why taxes should be easier to raise.

Since funding was not identified for I-728/732 (other than surplus funds) when originally adopted and the measures were subsequently suspended during tough budget times, voters were asked in 2004 to approve I-884 and in 2010 to approve I-1098 to pay in-part for the policies of I-728 and I-732. Both measures were overwhelming rejected statewide.

Reading the tea leaves of I-728, 732, I-884 and I-1098, it appears the voters supported the policies of I-728 and I-732 when they were “free” and wouldn’t hurt the budget or require tax increases but were against them when asked to raise taxes to pay for them.

Here are additional details on what the voters were promised concerning tax increases when voting on I-728 and I-732.

As for the 4-time approval of the 2/3 vote requirement, however, voters have consistently said yes to imposing this restriction on lawmakers.

Voters first enacted the 2/3 vote requirement for tax increases in 1993 with I-601, reaffirmed it 1998 with Referendum 49, reenacted it in 2007 with I-960, and again last year with 64% approving I-1053.

The Legislature has also enacted the 2/3 vote restriction including a 2006 bill that was signed by Gov. Gregoire. That proposal (SB 6896) was primarily focused at redefining the spending limit adopted in 1993 to facilitate the large increase in spending that help set the stage for our current budget challenges. To throw voters a bone when rewriting the spending limit, Democrats also ended their 2005 suspension of the 2/3 vote requirement a year early. According to the bill report for SB 6896:

“The authority of the Legislature to increase state revenues without a two-thirds vote is terminated on June 30, 2006.”

Despite numerous legislative amendments to the law, the Legislature has never fully repealed the mandate from voters that tax increases require a two-thirds vote and in the case of SB 6896 in 2006, Democrats voted to reinstate the restriction a year early.

Not able or willing to fully eliminate the 2/3 restriction legislatively, opponents have tried over the last 18 years to get the Court to throw out the requirement.

Here is what the Attorney General’s Office said (in-part) back in 2008 about the constitutionality of the 2/3 vote requirement when it was last challenged in court (page 37 – legal citations omitted):

“Petitioner attempts to meet her ‘responsibility of proving that [RCW 43.135.035(1)] is unconstitutional beyond a reasonable doubt’ on the basis of a constitutional provision that, by its own terms, does not prohibit the statute that she challenges. Article 2, Section 22 provides, ‘[n]o bill shall become a law unless . . . a majority of the members elected to each house be recorded thereon as voting in its favor.’ Article 2, Section 22 establishes a constitutional minimum number of votes for a bill to become law. It only describes the circumstances under which a bill does not pass. In other words, Article 2, Section 22 does not prohibit statutes by which the legislature (or the people) express their legislative policy judgment that certain types of bills warrant greater than simple majority consensus for passage. RCW 43.135.035(1) expresses such a legislative policy judgment—that a two-thirds majority vote of each house should be required for passage of bills raising taxes. The statute hardly conflicts with the constitutional floor set by Article 2, Section 22, as any bill receiving its supermajority support has met the requirement of Article 2, Section 22 . . .

Both the framers of the constitution and subsequent legislatures and voters have recognized that certain specified actions should command the support of more than a simple majority. Petitioners, to the contrary, urge that the same constitutional convention that embraced supermajorities for some purposes intended to prohibit statutes requiring supermajorities for any other purposes. The Constitution contains no language supporting this notion, however. The framers may not reasonably be presumed to have implied the prohibition of a political mechanism that they themselves adopted through language that does not say so. Given the plenary legislative authority of the people and the legislature, and the absence of a clear constitutional prohibition, the Court should not conclude otherwise.”

Seeing how the Court has had 18 years (since I-601 in 1993) and multiple opportunities to rule on 2/3 but has refused to do so there is no guarantee the latest ploy to gain legal standing will work.

As evident by the latest legal challenge, however, this issue needs to finally be put to rest. The only sure way to end this debate once and for all is for voters to have the opportunity to vote on a constitutional amendment.

Lawmakers opposed to this policy could simply use their talking points from 2005 when they placed a constitutional amendment on the ballot to reduce the vote threshold needed for voter approved school levies. At the time several lawmakers said they didn’t necessarily support the policy but the voters should have the opportunity to weigh in. Seeing how the voters have already weighed in four times for the 2/3 vote requirement for tax increases it would be better to let them resolve the debate instead of hoping for a judicial hailmary.

Of the sixteen states with supermajority tax restrictions, only Washington’s is statutory.

It is time to put all the cards on the table and let the voters decide with a constitutional amendment in a winner take all pot – not try to deal from the bottom of the deck with the ever elusive judicial card.

Jason Mercier

Jason Mercier is the director of the Center for Government Reform at the Washington Policy Center. He serves on the Executive Committee of the American Legislative Exchange Council’s Tax and Fiscal Policy Task Force and is the private sector chairman of ALEC’s Fiscal Federalism Working Group. He is a contributing editor of the Heartland Institute’s Budget & Tax News, serves on the board of the Washington Coalition for Open Government, and was an advisor to the 2002 Washington State Tax Structure Committee. In June 2010, Governor Gregoire appointed Jason as WPC’s representative on her Fiscal Responsibility and Reform Panel. Jason holds a Bachelor’s degree in Political Science from Washington State University.

One of the hot topics from the 2011 Legislative Session sure to resurface next year is what to do about the state’s various tax preferences. To assist the Legislature in answering this question, in 2006 lawmakers adopted HB 1069 which set up the Citizen Commission for Performance Measurement of Tax Preferences administered by the Joint Legislative Audit Review Committee (JLARC). WPC’s Vice President for Research Paul Guppy serves on the commission.

Today, JLARC released the commission’s 2011 tax preference report. Of the 25 tax preferences reviewed, JLARC recommends the Legislature:

Terminate one tax preference:

• Repaired Goods Delivered Out-of-State (Sales Tax) – $0

Allow two tax preferences to expire:

• Hog Fuel to Produce Energy (Sales & Use Tax) – $2.9 million
• Renewable Energy Machinery (Sales & Use Tax) – $40.9 million

Review and/or clarify the intent of eight tax preferences

• Aircraft Fuel Tax, Export and Commercial Use (Aircraft Fuel Tax) – $299.9 million
• Extracted Fuel (Use Tax) – $69.2 million
• Interest on Real Estate Loans (Business & Occupation Tax) – $172.6 million
• Limited Income Property Tax Deferral (Property Tax) – $271 thousand
• Meat Processors (Business & Occupation Tax) – $30.5 million
• Municipal Sewer Charges (Business & Occupation Tax) – $3 million
• Nonprofit Sheltered Workshops (Property Tax) – $4.4 million
• Shared Real Estate Commissions (Business & Occupation Tax) – $36 million

Continue 14 tax preferences:

• Boat Sales to Nonresidents/Foreign Residents (Sales Tax) – $13.7 million
• Church Camps (Property Tax) – $6.9 million
• Display Items for Trade Shows (Use Tax) – $5 million
• Interest from State and Municipal Obligations (Business & Occupation Tax) – $1.8 million
• Interstate Bridges (Property and Other Taxes) – $29 million
• Investment of Businesses in Related Entities (Business & Occupation Tax) – $14.4 million
• Laundry Services for Nonprofit Health Care Facilities (Sales Tax – $8.8 million
• Nonprofit Blood and Tissue Banks (Property Tax) – $6.1 million
• Nonprofit Day Care Centers (Property Tax) – $15.8 million
• Open Space Compensating Tax (Property Tax) – $3.9 million
• Real Estate Excise Tax Exemptions (Real Estate Excise Tax) – $1.4 billion
• Sales of Goods to Certain Nonresidents for Use Outside the State (Sales Tax) – $58 million
• Sales or Use Tax Paid in Another State (Use Tax) – $1 million
• State-Chartered Credit Unions (Business & Occupation Tax) – $60.9 million

Here is the report’s methodology according to JLARC:

“JLARC staff analyzed the following evidence in conducting these reviews: 1) legal and public policy history of the tax preferences; 2) beneficiaries of the tax preferences; 3) government data pertaining to the utilization of these tax preferences and other relevant data; 4) economic and revenue impact of the tax preferences; and 5) other states’ laws to identify similar tax preferences.

Staff placed particular emphasis on the legislative history of the tax preferences, researching the original enactments as well as any subsequent amendments. Staff reviewed state Supreme Court, lower court, or Board of Tax Appeals decisions relevant to each tax preference. JLARC staff conducted extensive research on other state practices using the Commerce Clearing House database of state laws and regulations.

Staff interviewed the agencies that administer the tax preferences or are knowledgeable of the industries affected by the tax (the Department of Revenue, the Department of Licensing, the Department of Transportation, and the Department of Financial Institutions). These parties provided data on the value and usage of the tax preference and the beneficiaries. JLARC staff also obtained data from other state and federal agencies to which the beneficiaries are required to report.”

A hearing on the report has been scheduled for Wednesday, July 20, at 10:00 a.m. in Senate Hearing Room 4.

 

Jason Mercier is the director of the Center for Government Reform at the Washington Policy Center. He serves on the Executive Committee of the American Legislative Exchange Council’s Tax and Fiscal Policy Task Force and is the private sector chairman of ALEC’s Fiscal Federalism Working Group. He is a contributing editor of the Heartland Institute’s Budget & Tax News, serves on the board of the Washington Coalition for Open Government, and was an advisor to the 2002 Washington State Tax Structure Committee. In June 2010, Governor Gregoire appointed Jason as WPC’s representative on her Fiscal Responsibility and Reform Panel. Jason holds a Bachelor’s degree in Political Science from Washington State University.

Washington State is faring better than Washington D.C. when it comes to governmental credit rating. While national credit rating firms have put the U.S. on their “watch” list for possible downgrade, Washington State has been given a “stable” rating for its response to balancing the state’s budget. That said, clouds remain on the horizon that could impact our future credit rating.

Here are the July 2011 reports for the state from Moody’s and Standard and Poor’s.

Moody’s Outlook:

“Washington’s rating outlook is stable reflecting Moody’s expectation that the state’s finances will remain well-managed despite its recent sizeable budget shortfalls and uncertainty surrounding the timing and strength of the economic recovery which could pose additional budget challenges. Given the substantial use of one-time actions to balance budget gaps thus far, Washington’s reserve levels will likely remain slim over the near term. In addition, out year structural gaps will likely be challenging to resolve.

Economic concentration in some industries that are historically volatile poses longer-term credit risk. However, the state demonstrated impressive financial flexibility through the 2001 recession as it accommodated economic and revenue swings and has shown a willingness to curtail spending during this economic cycle.

What Could Make The Rating Go Up

*Sustained trend of structural budget balance, plus restoration and maintenance of strong reserve levels.

*Economic expansion and improved industry diversification.

*Reduction of debt ratios to levels closer to Moody’s 50-state medians.

What Could Make The Rating Go Down

*Deeper and longer recession or muted recovery that restrains consumer confidence, leading to prolonged revenue weakness and employment erosion.

*Protracted structural budget imbalance.

*Increased reliance on one-time budget solutions.

*Deterioration of the state’s cash position.”

Standard and Poor’s Outlook:

“The ratings reflect our view of the state’s:

*Relatively well-educated workforce and good income indicators;

*Sales tax-based revenue structure that exhibits sensitivity to economic cycles, but to a lesser degree than those of states that rely primarily on personal and corporate income taxes;

*Strong financial policies and practices, including an automatic funding mechanism for its budget reserve; and

*Moderately high per capita debt burden and well-funded pension plans . . .

Washington’s $31.7 billion two-year budget, signed by Governor Chris Gregoire on June 15, 2011, addresses what had been a projected $4.9 billion deficit by making $4.5 billion in program reductions. The balance of budget solutions comes from fund transfers and from using the state’s beginning balance left from the prior biennium.

Although the legislature provided funding for a $723 million reserve through fiscal 2013, the budget reserve at the biennium ending in June 2013 is now projected to be $163 million, low in our view. The change is due to the recent downward revision to the revenue forecast for the biennium ending in 2013. By agreeing to a budget package that resolves the state’s anticipated deficit largely with recurring measures, the state has helped preserve its credit strength in our view . . .

The stable outlook reflects our view that the state’s financial management is strong, as demonstrated by its continued willingness to make timely and proactive budget amendments as it deems necessary to maintain budgetary balance. The state’s automatic budget stabilization fund deposits serve its credit well when the economy — and revenues — take a negative turn. Pending voter approval, the budget stabilization funding mechanism could become stronger, which would likely benefit the state’s credit quality. At present, the state’s reserves are low despite its practice of making regular reserve contributions — a reflection of the severity and duration of the recent recession.

The low reserves limit the state’s rating from moving upward and, in fact, render its rating vulnerable to downward movement if revenues deteriorate further without very timely corrective budget action.”

It is encouraging to see the state’s budget discipline this session be acknowledged and rewarded by the national credit rating firms. 

One of the major positive developments this year was at the time of its adoption, the 2011-13 budget was the first budget since 1997 that spent less than forecasted revenue.

It is important to note lawmakers accomplished this “Budgeting 101” feat of spending within the revenue forecast without raising general taxes though the budget does rely on $517 million in fee increases. The vast majority of these fee increases are for higher education tuition ($369 million).

As noted in the downside risk for our credit rating, however, lawmakers did not leave a big enough reserve which became apparent the day after the budget was signed by the Governor when most of the ending fund balance was wiped out by the June revenue forecast – leaving only $163 million in total reserves for 2011-13 or less than 0.5% of spending (prior to the forecast there was $723 million in total reserves or 2.3% of spending). This scant remaining reserve increases the possibility of a special session being necessary later this year should the economic outlook worsen.

This is one of the reasons why going forward the Legislature should consider adopting a structural requirement that lawmakers set aside at least a 5% reserve (not counting constitutional rainy-day account) when adopting the initial biennial budget (for a $32 billion budget this would be reserves of around $1.6 billion versus the $723 million initially set aside).

By building in adequate savings from the start of the budget cycle, the likelihood of being able to weather the economic ups and downs during a biennium without needing to make spending reductions dramatically improves.

Jason Mercier is the director of the Center for Government Reform at the Washington Policy Center. He serves on the Executive Committee of the American Legislative Exchange Council’s Tax and Fiscal Policy Task Force and is the private sector chairman of ALEC’s Fiscal Federalism Working Group. He is a contributing editor of the Heartland Institute’s Budget & Tax News, serves on the board of the Washington Coalition for Open Government, and was an advisor to the 2002 Washington State Tax Structure Committee. In June 2010, Governor Gregoire appointed Jason as WPC’s representative on her Fiscal Responsibility and Reform Panel. Jason holds a Bachelor’s degree in Political Science from Washington State University.

At the request of Governor Gregoire, State Auditor Brian Sonntag released a report last week detailing the state’s current use of performance-based contracting and identifying opportunities for improvements. The report stems from an Executive Order issued by the Governor last November.

From the report:

What do we mean by ‘performance-based’ contracts?  Traditionally, governments have used time-and-materials contracts that compensate vendors based on how much time they spent and the quantity of materials they used. Under performance-based contracts, businesses are paid based on providing deliverables or meeting pre-established outcomes or results. Government buys results instead of efforts.

For example, a team of educators might be contracted to help 500 job-seekers who never finished high school win general education diplomas (GEDs). A traditional contract might simply require the contractor to conduct the required classes. A performance-based contract might tie contractor pay to the number of people who actually received GEDs. A more advanced performance-based contract might tie compensation to the number who found jobs because they had GEDs.

We distinguish between two types of performance-based contracts:

• Deliverables-based contracts that link payment to specific products or project milestones. 
• Outcomes-based contracts that tie payment to results, connecting performance measures and/or outcomes to payment.

Performance-based contracting is not a one-size-fits-all solution. Deliverables, performance measures and outcomes must be tailored to support the purpose of the contract and the goals of the program it supports. Writing performance-based contracts offers many challenges, but some agencies are using promising techniques, such as setting due dates for deliverables, tying the distribution of funds to completion of specific deliverables, and withholding payments if grant recipients do not meet requirements.

Washington’s contracting systems are in transition, and contract oversight is divided among a number of agencies. For instance, the Office of Financial Management (OFM) provides guidance and oversees client services and personal services contracts, while the Department of General Administration oversees contracts for goods and purchased services. The Department of Enterprise Services, to be created later this year, will be structured in part to consolidate the oversight of most state contracts to ensure agencies and citizens receive maximum value. This transition period presents an ideal opportunity for agencies to expand their performance-based contracting.

Among the Auditor’s recommendations:.

• Increase the use of performance or outcome measures for payment;

• Improve contract management and contracting processes;

• Increase staff expertise and capacity; and

• Educate and collaborate with contractors.

One of the Auditor’s long-term recommendations as the state moves forward with robust performance-based contracting is to:

Create a centralized office or staff with a high degree of expertise in performance measurement and performance-based contracting to provide technical assistance to agencies in developing and improving their use of performance measures and outcomes.

The report notes that this is a “leading practice.” It also mirrors our recommendation for the state to create a competition council to help take the politics out of contracting and provide the business case and monitoring expertise necessary to ensure taxpayers are receiving contract value and results.

Though not identical to these recommendations, bills were introduced last session to create a version of this reform (HB 1873 and SB 5316) but they were not acted on by the Legislature.

Combined with the contracting reforms enacted with the adoption of SB 5931 earlier this year, the Governor’s November Executive Order and the State Auditor’s report help provide the framework for the state to transition more of its activities to real performance-based contracting. These are important steps to ensuring government spends more of its time buying meaningful results and not just intentions.

 

Jason Mercier is the director of the Center for Government Reform at the Washington Policy Center. He serves on the Executive Committee of the American Legislative Exchange Council’s Tax and Fiscal Policy Task Force and is the private sector chairman of ALEC’s Fiscal Federalism Working Group. He is a contributing editor of the Heartland Institute’s Budget & Tax News, serves on the board of the Washington Coalition for Open Government, and was an advisor to the 2002 Washington State Tax Structure Committee. In June 2010, Governor Gregoire appointed Jason as WPC’s representative on her Fiscal Responsibility and Reform Panel. Jason holds a Bachelor’s degree in Political Science from Washington State University.

 

Jason Mercier

One of the major points of contention this past year in the Legislature was the impact state employee compensation has as a cost driver of state spending and whether changes should be made to help rein in costs. Based on the razor thin margin the June revenue forecast has left for the state’s budget balance sheet, it is likely this conversation will continue in the future.

So how exactly does state employee compensation impact state spending?

There are a couple of ways to look at this question. One way is as a percentage of total spending. Another is as a percentage of spending after making adjustments for pass through grants to K-12 since those that work in public schools are not state employees but instead local employees and their compensation totals are not reflected in state data.

Here is a summary of how the data breaks down from 1997-99 to 2007-09. (Data for 2009-11 will not be finalized until mid summer so it is excluded from the comparison at this time.)

Total budget (dollars in thousands):

• FTEs increase: 16% (96,461 to 111,981)

• Salaries and wages increase: 67% ($7,455,654 to $12,463,774)

• Employee benefits increase: 91% ($1,872,692 to $3,573,893)

• Total Compensation increase: 72% ($9,328,346 to $16,037,667)

• Total budgeted spending increase (all objects): 74% ($39,449,322 to $68,492,870)

• 1997-99 total compensation as % of total spending: 23.6% ($9,328,346 of $39,449,322)

• 2007-09 total compensation as % of total spending: 23.4% ($16,037,667 of $68,492,870)

Total budget accounting for K-12 pass-through funds (dollars in thousands):

• 1997-99 total compensation as % of total spending minus Public School Grants, Benefits, & Client Services: 31.2% ($9,328,346 of $29,894,050)

• 2007-09 total compensation as % of total spending minus Public School Grants, Benefits, & Client Services: 30.4% ($16,037,667 of $52,760,048)

As previously mentioned, public school grants, benefits, & client services are removed for comparison since those are pass-through dollars to local K-12 education, which are not state FTEs but local FTEs so their compensation totals are not included in the total compensation figures for the state.

These pass-through K-12 funds equal $9,555,272,000 in ’97-’99 and $15,732,822,000 in ’07-’09.
 
This means state employee compensation costs accounted for 23.4% of total spending in 2007-09 or 30.4% of spending when accounting for K-12 pass-through funds.

Drilling down even further, however, there is a clear distinction between state employee compensation costs as a percent of spending when comparing general government employees versus higher education employees.

Looking at just general government employees and spending (excluding higher education), the percentage of compensation costs to spending drops to 15.5% in 2007-09. Comparing just higher education employees and spending, the percentage of compensation costs to spending was 64% in 2007-09.

This illustrates that when looking at compensation as a percent of spending, higher education employee compensation is a much larger cost driver for higher education spending than general government compensation is for general government spending.  

Here are additional details on the base data used to make these calculations.

As for whether this percentage trend has held true for 2009-11, though still preliminary data, as of April state employee compensation costs accounted for 23.2% of total spending or 30.2% of spending when accounting for K-12 pass through funds versus the 23.4% and 30.4% in 2007-09.

Whether these compensation figures are too high or too low will remain the subject of much debate but the fact remains state employee compensation costs are one of the budget cost drivers policymakers have totally in their control to make adjustments to.

Many thanks to staff at the Legislative Evaluation Accountability Program (LEAP) and the Office of Financial Management for their help in calculating this analysis of state employee compensation costs.

For those wanting to dig even deeper into state budget information you can visit the state’s budget website at www.fiscal.wa.gov.

 

Jason Mercier is the director of the Center for Government Reform at the Washington Policy Center. He serves on the Executive Committee of the American Legislative Exchange Council’s Tax and Fiscal Policy Task Force and is the private sector chairman of ALEC’s Fiscal Federalism Working Group. He is a contributing editor of the Heartland Institute’s Budget & Tax News, serves on the board of the Washington Coalition for Open Government, and was an advisor to the 2002 Washington State Tax Structure Committee. In June 2010, Governor Gregoire appointed Jason as WPC’s representative on her Fiscal Responsibility and Reform Panel. Jason holds a Bachelor’s degree in Political Science from Washington State University.

Remember all the “fun” last week as reporters and budget junkies tried to make heads or tails out of the June revenue forecast?

The revenue forecast showed a negative $12 million difference between the March and June forecasts for the two budgets yet the impact on the ending fund balance for 2011-13 showed a reduction of $575 million.

So how exactly does that math work?

Quite well when you account for the fact the Legislature didn’t assume any future revenue loss as a result of booking the tax amnesty funds in its budget balance sheet and then making adjustments for economic and non-economic activity since the March revenue forecast.

The real discrepancy between the June revenue forecast and the budget balance sheet from the day before was approximately $165 million. This is due to the Legislature not assuming what the potential revenue loss would be from net penalties and interest when booking the tax amnesty funds. Thus the Legislature booked the full amount without discounting the future loss penalties and interest.
 
The rest of the ending fund reduction from $738 million to $163 million for 2011-13 can be explained by both the economic and non-economic activity since the March revenue forecast.
 
So while the net difference between the two forecasts was only a negative $12 million, the actual economic revenue loss was much greater but was canceled out by legislative actions that added more revenue to available resources except for the before mentioned failure to account for the loss of net penalties and interest from the tax amnesty funds.

The bottom line for the budget as a result of the June revenue forecast is an $84 million deficit for 2009-11 and a scant $163 million reserve for 2011-13 (0.5% of spending).

Here is video of the somewhat confrontational Q&A between the forecast council members and reporters last week trying to make sense of the forecast:

(Click here for video)

One positive development as a result of last week’s chaos: Budget staff realize they need to all get on the same page in how they account for state spending and revenue. This development is well worth the week of confusion it took to decipher what actually happened.

 

Jason Mercier

Jason Mercier is the director of the Center for Government Reform at the Washington Policy Center. He serves on the Executive Committee of the American Legislative Exchange Council’s Tax and Fiscal Policy Task Force and is the private sector chairman of ALEC’s Fiscal Federalism Working Group. He is a contributing editor of the Heartland Institute’s Budget & Tax News, serves on the board of the Washington Coalition for Open Government, and was an advisor to the 2002 Washington State Tax Structure Committee. In June 2010, Governor Gregoire appointed Jason as WPC’s representative on her Fiscal Responsibility and Reform Panel. Jason holds a Bachelor’s degree in Political Science from Washington State University.

Tomorrow, Gov. Gregoire will take action on the remaining bills from the special session including a proposal to request a contract for running the state’s liquor distribution monopoly. Despite this proposal (SB 5942) not being assumed for the budget, an emergency clause was added to the bill meaning a referendum could not be run on the bill and the contract review process would take effect immediately. The emergency clause has worried supporters of a new initiative to end the state’s prohibition era liquor monopoly. They believe SB 5942 could short circuit voters’ opportunity to consider their new liquor reform proposal.

Not surprisingly supporters of SB 5942 have written the Governor requesting that she sign the bill in its entirety including the emergency clause. Among those writing was bill sponsor Sen. Zarelli who notes:

“I have no doubt that some will urge you to veto the bill in whole or in part. I hope that you will reject these requests. This bill, and all its elements, were heavily debated in both the House and Senate. In fact, the emergency clause that was removed on the Senate floor was put back on the bill in the House and we agreed to include it in the final legislation. While I believe this clause can sometimes be misused by the Legislature, in the case I believe that this RFP process should commence immediately according to the timeline in the legislation.”

House Democrats that supported SB 5942 concur that the bill should be signed with the “deliberate” emergency clause noting:

“Many of us would rather keep the liquor system as it is. And the voters agreed with us as shown in the last election cycle and the defeat of the two liquor privatization initiatives. However, it appears the debate about how we sell liquor in our state continues and there is a real threat that the whole system could leave the public domain and go totally private without much consideration of our workers or the revenue brought to the state . . . Before you is SB 5942 which is the result of our thoughtful consideration. All the sections in the bill are deliberate.”

Opponents of the emergency clause in the bill have written urging a veto of the clause.

Rep. Wilcox wrote:

“An emergency clause in this bill is unnecessary and premature. There is no emergency from a fiscal standpoint.”

Rep. Condotta notes:

“I do have a major concern with Senate Bill 5942 and the strong arm tactics used to add an emergency clause. It is obvious this is an attempt to preempt the Costco Initiative this fall. Please consider vetoing the emergency clause to make this a legitimate bill. I am not supporting the Initiative one way or the other but think it would be scandal (at best) to try and sign a contract before a vote of the people.”

Sen. Sheldon, Washington Retail Association, Washington Restaurant Association, Washington Food Industry Association, and Northwest Grocery Association have also asked the Governor to veto the emergency clause. The Joint Council of Teamsters No. 28 joined with supporters in urging the bill be signed in its entirety.

Here is a copy of all the letters (pro and con) sent to the Governor requesting various action on SB 5942.

The Governor has already vetoed the emergency clause off of four bills from this year:

• HB 1509 – Relating to the forestry riparian easement program

• HB 1663 – Relating to the purchasing authority of institutions of higher education

• HB 1861 – Relating to the sale or lease of surplus state-owned railroad properties

• SB 5788 – Relating to regulating liquor by changing tied house and licensing provisions and making clarifying and technical changes to liquor laws

As the current debate on the emergency clause for SB 5942 demonstrates, it is unfortunate the Legislature did not act on HJR 4200 to reform the use of the emergency clause. That proposal would have asked voters to amend the constitution to require a 60% vote of lawmakers to attach an emergency clause to a non-appropriation bill.

Had that standard been in effect for this session an emergency clause would not have been successfully added to SB 5942 based on the vote count (52-42 in House and 26-19 in Senate).

Surprisingly, the emergency clause on another controversial bill (workers’ comp reform) has not drawn veto requests despite complaints from opponents.

Former Rep. Brendan Williams wrote for Crosscut:

“Not only was the public given no opportunity to comment upon HB 2123 through a hearing (prior to its passage there wasn’t even a public fiscal note), but a Republican ‘emergency clause’ amendment was added to deprive the public their constitutional right of referendum.”

In writing the governor, however, state unions did not request a veto of the emergency clause or the whole bill for that matter, but only requested a veto of the “structured settlement agreements.”

Unlike SB 5942, HB 2123 would have met the standard set by HJR 4200 for attaching an emergency clause with the required supermajority approving the bill in both the House (69-26) and the Senate (35-12).

Jason Mercier is the director of the Center for Government Reform at the Washington Policy Center. He serves on the Executive Committee of the American Legislative Exchange Council’s Tax and Fiscal Policy Task Force and is the private sector chairman of ALEC’s Fiscal Federalism Working Group. He is a contributing editor of the Heartland Institute’s Budget & Tax News, serves on the board of the Washington Coalition for Open Government, and was an advisor to the 2002 Washington State Tax Structure Committee. In June 2010, Governor Gregoire appointed Jason as WPC’s representative on her Fiscal Responsibility and Reform Panel. Jason holds a Bachelor’s degree in Political Science from Washington State University.

COMMENTARY

It appears the new motto in Olympia is “If we can’t beat voters, sue ‘em.”

Gov. Gregoire has now joined with Democrats in the House and Senate calling on the courts to throw out the nearly 20-year-old requirement that tax increases require a 2/3 vote, claiming the restriction is unconstitutional.

According to The Olympian:

Gov. Chris Gregoire said Tuesday she thinks a court challenge is needed to show whether tax increases in the Legislature actually require a two-thirds vote to be enacted.

Several House Democrats set the stage for a possible court challenge when they brought a bill closing a bank-tax exemption to a floor vote May 24. The bill got 52 votes, enough for a majority, but it failed to meet the supermajority test of 66 yes votes required by Initiative 1053.

The tax vote came the night before lawmakers adjourned their 30-day special session. House Speaker Frank Chopp said from the podium that he could not rule on the constitutionality question as speaker but welcomed a court’s help on the issue.

“I think there is a real argument to be made that you can’t restrict the Legislature in that regard,” Gregoire, a former three-term attorney general, said Tuesday. “I don’t know what the court would say in the end, but I do think it is a legitimate legal challenge.”

In the waning hours of the “budget focused” special session Democrats in the House and Senate both attempted to cue up votes on a tax bill not assumed in the budget that no one expected to pass. The strategy was to try to gain legal standing to sue the voters to overturn the 18 year old 2/3 vote requirement for tax increases.

Voters first enacted this policy in 1993 with I-601, reaffirmed it 1998 with Referendum 49, reenacted it in 2007 with I-960, and again last year with 64% approving I-1053.

The Legislature has also enacted the 2/3 vote restriction including a 2006 bill that was signed by Governor Gregoire. That proposal (SB 6896) was primarily focused at redefining the spending limit adopted in 1993 to facilitate the large increase in spending that help set the stage for our current budget challenges. To throw voters a bone when rewriting the spending limit, Democrats also ended their 2005 suspension of the 2/3 vote requirement a year early. According to the bill report for SB 6896:

“The authority of the Legislature to increase state revenues without a two-thirds vote is terminated on June 30, 2006.”

Voting for SB 6896 were:

Senators Berkey, Brown, Doumit, Eide, Fairley, Franklin, Fraser, Hargrove, Haugen, Jacobsen, Kastama, Keiser, Kline, Kohl-Welles, McAuliffe, Poulsen, Prentice, Pridemore, Rasmussen, Regala, Rockefeller, Shin, Spanel, Thibaudeau, and Weinstein.

Representatives Appleton, Blake, Chase, Clibborn, Cody, Conway, Darneille, Dickerson, Dunshee, Eickmeyer, Ericks, Flannigan, Fromhold, Grant, Haigh, Hasegawa, Hudgins, Hunt, Hunter, Kagi, Kenney, Kessler, Kirby, Lantz, Linville, Lovick, McCoy, McDermott, McIntire, Miloscia, Moeller, Morris, Murray, O’Brien, Ormsby, Pettigrew, Quall, Roberts, Santos, Schual-Berke, Sells, Simpson, Sommers, Springer, Sullivan, B., Sullivan, P., Takko, Upthegrove, Williams, Wood, and Mr. Speaker (Chopp).

Despite numerous legislative amendments to the law, the Legislature has never fully repealed the mandate from voters that tax increases require a two-thirds vote and in the case of SB 6896 in 2006, Democrats voted to reinstate the restriction a year early.

Not able or willing to fully eliminate the 2/3 restriction legislatively, opponents have tried over the last 18 years to get the Court to throw out the requirement. Here are the Governor’s comments yesterday where she discussed her hope the Court would now intervene:

(Click here for video)

It was a little odd to hear the Governor point to California’s 2010 election results as proof voters don’t want a 2/3 vote requirement for tax increases. While it is true California voters adopted Proposition 25 last November which removed their 2/3 vote requirement for passage of the budget, Prop 25 explicitly retained the 2/3 for taxes. This is from the text of Prop 25:

“This measure will not change the two-thirds vote requirement for the Legislature to raise taxes.”

California voters also went a step further last November adopting Proposition 26 which extended the 2/3 vote requirement for tax increases to the adoption of new fees.

Regardless of what voters in California have done the ones that matter are here in Washington where on four separate occasions they have supported the requirement that tax increases receive a broad consensus to be enacted.

Seeing how the Court has had 18 years (since I-601 in 1993) and multiple opportunities to rule on 2/3 but has refused to do so there is no guarantee the latest ploy to gain legal standing will work.

The Governor is right, however, that this issue needs to be put to rest. The only sure way to end this debate once and for all is for voters to have the opportunity to vote on a constitutional amendment.

Lawmakers opposed to this policy could simply use their talking points from 2005 when they placed a constitutional amendment on the ballot to reduce the vote threshold needed for voter approved school levies. At the time several lawmakers said they didn’t necessarily support the policy but the voters should have the opportunity to weigh in. Seeing how the voters have already weighed in four times for the 2/3 vote requirement for tax increases it would be better to let them resolve the debate instead of hoping for a judicial hailmary.

Of the sixteen states with supermajority tax restrictions, only Washington’s is statutory.

It is time to put all the cards on the table and let the voters decide with a constitutional amendment in a winner take all pot – not try to deal from the bottom of the deck with the ever elusive judicial card.

Jason Mercier is the director of the Center for Government Reform at the Washington Policy Center. He serves on the Executive Committee of the American Legislative Exchange Council’s Tax and Fiscal Policy Task Force and is the private sector chairman of ALEC’s Fiscal Federalism Working Group. He is a contributing editor of the Heartland Institute’s Budget & Tax News, serves on the board of the Washington Coalition for Open Government, and was an advisor to the 2002 Washington State Tax Structure Committee. In June 2010, Governor Gregoire appointed Jason as WPC’s representative on her Fiscal Responsibility and Reform Panel. Jason holds a Bachelor’s degree in Political Science from Washington State University.