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November 2008
Wednesday, November 26, 2008
WashACE Competitiveness Brief Examines $5.1 Billion budget Shortfall
Posted by Richard Davis on 11/26/2008 3:46:00 PM
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 ?ugly 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.
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Wednesday, November 26, 2008
New Competitiveness Brief Looks at Labor Costs
Posted by Richard Davis on 11/26/2008 11:26:00 AM
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.
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Tuesday, November 25, 2008
Governor Orders Additional State Budget Cuts
Posted by Richard Davis on 11/25/2008 4:19:00 PM
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.
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Friday, November 21, 2008
A Competitiveness Warning and a Pair of New Reports
Posted by Richard Davis on 11/21/2008 5:38:00 PM
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, 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. 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.
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Thursday, November 20, 2008
Reactions to the $5 Billion Budget Shortfall
Posted by Richard Davis on 11/20/2008 7:20:00 AM
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, 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'
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Wednesday, November 19, 2008
Quick Roundup of Responses to $5 Billion Budget Shortfall
Posted by Richard Davis on 11/19/2008 3:30:00 PM
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.
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Wednesday, November 19, 2008
New Forecast Puts State in Current Year Deficit; $5 Billion Shortfall Ahead
Posted by Richard Davis on 11/19/2008 11:06:00 AM
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.
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Wednesday, November 19, 2008
Waiting for the Revenue Forecast to Define Budget Shortfall...and Wondering about Performance Audits
Posted by Richard Davis on 11/19/2008 9:43:00 AM
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?
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Tuesday, November 18, 2008
Federal Bailout for States: Good or Bad Idea?
Posted by Richard Davis on 11/18/2008 6:34:00 AM
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?
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Monday, November 17, 2008
Economic Relief v. Economic Stimulus
Posted by Richard Davis on 11/17/2008 9:54:00 PM
The Walla Walla Union-Bulletin nicely distinguishes today between economic relief and stimulus. I blogged on this, without the same nice precision, near the end of this earlier post. The U-B assesses state plans this way.
In an interview with an AP reporter, Gregoire said she's taking immediate steps to free up millions in federal dollars that would subsidize energy costs, boost the salmon industry and spur the sluggish construction and housing markets.
... If these three specific spending plans can be called "economic stimulus," then just about anything that involves spending money can be labeled "economic stimulus."
And we suspect that's exactly what's going to happen over and over again. Calling a spending request an economic stimulus package provides political Teflon -- criticism doesn't seem to stick.
Clarity of purpose is the key. Relief may be justified, but when the distinctions between relief and stimulus are blurred, neither objective is likely to be achieved. Better, I think, are the governor's calls for spending control. By not increasing taxpayer costs, the governor and legislature will reduce the need for direct stimulus by mitigating the uncompetitive costs of excessive taxation.
Already, an overemphasis on relief risks stifling economic recovery. Michelle Singletary's syndicated column, published here in the Seattle P-I, provides a clear example. She calls for enhanced unemployment insurance benefits.
Amid all the hustle and bustle to fix the economy, there's one thing we can't forget to address: the extension of unemployment insurance benefits and a broadening of the program to provide benefits to more people.
She's writing nationally. Lawmakers here should be very clear that her comments have little applicabiity in Washington, one of the most generous - and highest cost - states in the nation.
Finally, while the governor has put out a call for public comments on ways to save state money, it's disheartening to see the Senate majority leader indicate that she's not prepared to accept a living-within-our-means state budget. Senate Majority Leader Lisa Brown, D-Spokane, said she knows Gregoire is serious about a no-new-taxes budget. But Brown adds, "I think it's too soon to say whether I share that goal." It's the right goal. And it's achievable.
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Monday, November 17, 2008
Puget Sound Business Journal Reports on Competitiveness Agenda
Posted by Richard Davis on 11/17/2008 5:22:00 AM
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.
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Sunday, November 16, 2008
State Stimulus: Retaining and Attracting Jobs and Investment
Posted by Richard Davis on 11/16/2008 1:32:00 PM
As we posted yesterday, state governments, most of which are reeling from recessionary revenue downturns, are desperate to turn their economies around. Further discussion comes from the legislative analysts at StateNet. They make a strong case for a stimulus package targeted at state government.
...there are sound reasons why the next federal stimulus should give preference to the states ahead of individuals or favored industries. Traditionally, the objection to subsidizing states is that the money takes so long to work its way into the economy that mild recessions often end before the infusion has a substantial effect. This doesn't feel like a mild recession. Douglas W. Elmendorf of the Brookings Institution, a former economist with the Federal Reserve and the Clinton White House, wrote a paper last January opposing infrastructure spending because it was not fast-acting enough. Now, seeing a "prolonged downturn," Elmendorf has endorsed infrastructure spending.
And they provide report alignment between a couple of groups that don't always agree.
"Jobs are the key," said William Hauck, president of the California Business Roundtable. The U.S. economy has shed 1.2 million jobs this year, with the numbers certain to go far higher. The Economic Policy Institute, a liberal group, estimates that $75 billion in infrastructure spending will create a million jobs. That may be optimistic, but there is no question that infrastructure spending is a good economic value in a down economy.
While I'm not confident anything coming from Congress can be delivered without a larding of inefficient earmarks, the infrastructure case makes sense.
While waiting for Congress, though, we should be careful to preserve what we have here. Don Brunell's latest column looks at Boeing executive Scott Carson's speech and puts it in good perspective. Boeing has the ability to command the attention of media and public officials. In reality, company officials are speaking on behalf of all private job-producing taxpaying employers in our state. Boeing has laid out the answer to our state?s economic dilemma. Hopefully, the right people are listening.
PowerLine reports that Congress may be considering corporate tax relief, certainly appropriate for a nation that imposes one of the highest corporate tax rates in the world.
What we're seeing is the two-prongs of competitiveness strategy: One prong uses tax revenues to spur job creation through infrastructure investment; the other allows entrepreneurs to invest more of their own money by providing tax relief and maximizing the potential return on their investment. Public spending may provide necessary short-term stimulus. Long-term, it's essential we create an environment that encourages business to invest and create jobs here.
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Friday, November 14, 2008
From Deficit to Stimulus: States Looking to Revive Economies
Posted by Richard Davis on 11/14/2008 2:58:00 PM
As they did in 2001-2002, state governments are again looking at "economic stimulus" packages to get their economies growing again. Stateline.org has a nice roundup of state efforts. Sujit CanagaRetna, senior fiscal analyst for the Council of State Governments provides a frame for the efforts.
CanagaRetna said state stimulus packages need to be ?timely, targeted and temporary to be effective. That guarantees that money will be spent quickly and people will get work right away, he explained. But the economic downturn is doubly troublesome for states. The states with economies most in need of reviving are also the ones with treasuries that are most likely to be empty ? too empty to be doling out stimulus packages. ...One way cash-strapped states are paying for stimulus packages is through bonding, said CanagaRetna. The focus on economic growth is welcome. Until we see more details, however, it will be wise to withhold judgment. As important - arguably, more important - as a jump-start stimulus package is a long-term strategy for attracting and retaining jobs and investment. The WashACE four-point program shows how that can be done: 1. Develop a sustainable budget that preserves essential public services without raising taxes.
2. Target higher education investments to programs that contribute directly to economic growth and recommit to education accountability.
3. Emphasize timely completion of authorized transportation projects for which funding has been committed.
4. Reform the state unemployment and workers? compensation programs to prevent uncompetitive increases in employer costs.
New reports on state and municipal deficits underscore the urgency of recovery. The Christian Science Monitor quotes the Center on Budget and Policy Priorities as saying 41 states are or will experience deficits that could reach a combined total of $100 billion by 2010. Here's what they're looking for. If the states had their way, they would like Congress to give them help in four areas: help with the growing number of people applying for Medicaid, more funding for the rising unemployed, help with the growing number on food stamps, and an injection of funds to jump-start infrastructure projects that are ready to go. "We're not asking for a stimulus package because it will fill budget gaps," says Michael Bird, federal affairs counsel of the National Conference of State Legislatures in Washington. "We think it will provide additional benefits for those most disadvantaged by the downturn and create economic activity through the infrastructure package." Midst all the bleak economic news, it's encouraging to read in The Columbian of Seattle economics editor Michael Parks's optimism. Despite declines, Washington?s economy remains above average, said Parks, editor and publisher of Marple?s Pacific Northwest Letter, a data-rich twice-monthly economic publication.
As of August, the state was sixth fastest-growing in population, ranked No. 1 in manufacturing job growth and No. 8 for total goods produced. The state?s above average profile, however, will be much less satisfying, Parks said, because those averages are declining...
And yet, he sees an upturn in the near future.
He shared his optimism that the worst of the recession could be over by the time President-elect Barack Obama takes office and that consumers could soon regain their footing.
?Americans love to spend and their confidence will return once housing values stop falling and their jobs become more secure, he said. ?It?s during times like these that entrepreneurs look for opportunities ? things start to bubble and gel.
That's more encouraging than most of what I read. In Nevada recently, economist Arthur Laffer painted a less rosy picture of the recession and the economic competition it spurs.
We have a rough road ahead. Holding on to the optimism expressed by Parks will be important. We also must recognize that the policy foundation that we set down today will determine whether we're among the winners or the losers when the economy rebounds, as it surely will.
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Thursday, November 13, 2008
Grim Reports on State Revenues
Posted by Richard Davis on 11/13/2008 5:18:00 PM
In reporting on the 6 percent drop in October revenues, the Olympian confirms the commonplace.
The latest monthly figures reinforce expectations that the revenue forecast, due Wednesday, will show a wider budget gap.
The repetition of lousy economic news has a desensitizing effect. We're not shocked by much anymore. But some of these declines are nonetheless shocking.
Taxes from vehicle dealers were down 21 percent from last year. Stores selling furniture, building materials and garden supplies were down 12 percent in tax receipts. October real estate excise taxes were down 41 percent. More troubling, perhaps, is the absence of any reasonable expectation for a quick turnaround. Meanwhile, three Western state governors want to add to the woes of struggling families and businesses by raising taxes. California Gov. Schwarzenegger, Nevada Gov. Gibbons, and Oregon Gov. Kulongoski have all proposed tax hikes. The tax packages are not fully baked yet, and the Stateline.org story provides good context. Here, Stateline.org reports: In Washington state, Gov. Chris Gregoire (D) won a second term on Election Day, but promised during a hard-fought campaign against Republican challenger Dino Rossi that she would not raise taxes. That pledge could complicate Gregoire?s second term as she addresses a state budget shortfall projected at $3.2 billion over two years.
Breaking the pledge, of course, could also complicate matters.
Adding to the budget mix is the expected final report of the Basic Education Finance Task Force. Peter Callaghan thinks the task force has a few things going for it, as he writes in his column in The News Tribune. Liv Finne of the Washington Policy Center also has a nice assessment of the bold changes that may lie ahead. Just in time to inform some of the budget debate is the final Priorities of Government report. Jason Mercier summarizes the POG's list of low priorities. In about a month, the governor will produce her 2009-2011 budget plan. I'd expect the low priorities to be gone. And the trimming won't stop there. We'll keep you posted.
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Wednesday, November 12, 2008
State Budget Deficit Growing to $4.6 B?
Posted by Richard Davis on 11/12/2008 3:53:00 PM
Austin Jenkins reports that a key lawmaker believes the state budget shortfall will reach $4.6 billion when the new revenue forecast is released next week. He quotes Hans Dunshee, vice-chair of the House Appropriations Committee, as saying any tax hike would go to a vote of the people. ?We really do govern at the consent of the governed and if they?re not open to options like using the rainy day fund or to targeted tax increases then there?s no point in going forward with them. Dunshee expects the state budget deficit will balloon to as much as $4.6 billion after next week?s revenue forecast. That's a lot higher than anything I've predicted. It bears repeating that the size of the shortfall relates directly to the size of the spending plan. Maybe Dunshee just wants to spend more than has been previously rolled into the projections. Certainly, revenues are falling below the September forecast. Magnifying the size of the shortfall, however, may also be a strategy for building support for revenue increases. I'm not saying that's what's happening here - the state budget is obviously in bad shape - but it has happened before. UPDATE The revised state economic forecast is out. Makes me think that Dunshee nay not be exaggerating.
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Wednesday, November 12, 2008
States Continue Their Spending Even As Revenues Shrink
Posted by Richard Davis on 11/12/2008 12:04:00 PM
USA Today reports that despite falling revenues state spending continues apace. Curiously, the report runs under the headline, "States cushion slumping economy." To make sense, the ongoing spending should at least be tied to programs and services that directly nurture economic growth. But the article offers no evidence of that. Thelead paragraphs suggest, rather, that the spending simply continues business as usual. Even as the economy slides into recession, many state and local governments continue to spend freely and expand their workforces.
States are hoping a federal bailout may ease their fiscal stress. Unsurprisingly, conservative critics disagree.
Budget analyst Chris Edwards of the fiscally conservative Cato Institute says states should not be rewarded for high spending. "State governments are like drivers coming off the interstate and having a hard time slowing down," he says.
The Council of State Governments notes that a number of states are now slamming on the brakes.
Perhaps surprisingly, governors are looking for a waiver from federal requirements that they maintain current levels of higher education spending. The Chronicle of Higher Education reports it this way: the [National Governors Association] argued that states should receive a reprieve from the requirement for the budgets they set for the next fiscal year (or the next two fiscal years, in the case of states with biennial budgets), ?given the current national and state economic crises.
Given the demonstrated positive economic impact of targeted higher education spending, cutbacks at this time may be exactly the wrong prescription "given the current national and state economic crises."
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Wednesday, November 12, 2008
Washington Policy Center Releases New B&O Tax Study
Posted by Richard Davis on 11/12/2008 10:34:00 AM
The Washington Policy Center has just released the latest in a series of reports on the Washington Business and Occupation tax. This one looks at tax pyramiding. What's that? Here's how the Policy Center describes it. The "Committee" referred to below is the Washington State Tax Structure Study Committe3, which released its final report in 2002. One of the consequences of the gross receipts tax policy is the extra layer of taxation applied at each stage of production, an effect called ?pyramiding. Pyramiding, according to the Committee, is the payment of taxes by different companies to produce the same good or service. The B&O tax is similar to a sales tax, yet it is applied to all inputs (raw material needed to produce a good) as well as to the final sale.
While the B&O tax always attracts vocal opposition, particularly from small business owners, efforts to reform it routinely stumble as B&O critics rarely reach consensus on acceptable alternatives. That's one of the reasons the Tax Structure Study Committee recommendations, which included a value added tax and a personal income tax, landed with a thud in Olympia.
A lingering recession may alter the traditional dynamic. Unprofitable businesses in states that tax profits see tax relief during the downturn. Meanwhile, folks here continue to pay on gross receipts. I'm not taking sides - this is complicated stuff right now - but it just may be that we'll see opinions shift over the next several months. It's worth watching.
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Wednesday, November 12, 2008
A Good Entrepreneurial Blog
Posted by Richard Davis on 11/12/2008 10:06:00 AM
I've enjoyed reading Jeff Cornwall's Entrepreneurial Mind blog. Cornwall's a business professor at Belmont University and frequently posts on topics that are likely to interest WashACE readers. Today, he takes on what he sees as flashes of academic hostility toward entrepreneurial small businesses. Some earlier Cornwall posts relative to competitiveness include his link to NFIB's index of small business optimism and the four factors that may determine small business survival in this economy. Give it a look.
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Wednesday, November 12, 2008
Washington Ranks 37th on New U.S. Economic Freedom Index
Posted by Richard Davis on 11/12/2008 9:31:00 AM
The Pacific Research Institute recently released its 2008 Economic Freedom Index. Here's how they describe it: ...a ranking of economic freedom in the 50 states. Published in association with Forbes, the Index scores states based on 143 variables, including regulatory and fiscal obstacles imposed on businesses and residents.
This year, Washington comes in at 37, meaning 36 states exhibit more economic freedom or, I guess, fewer "regulatory and fiscal obstacles." In 2004 Washington ranked 31st; in 1999, we were 40th. The top ranked states this year are South Dakota, Idaho, Colorado, Utah and Wyoming. (h/t to John LaPlante at the State Policy Blog.)
Having previously called into question the validity of "best places" rankings, I was pleased to see this response to critics by study author Lawrence J. McQullan,
Businesses locate based on many factors including land and housing costs, transportation and school systems, labor and energy costs, weather, proximity to distribution networks, and government rules and regs, what we call ?economic freedom. We measured only economic freedom, not the ?business climate generally, which is beyond the scope of our study. This explains why our results diverge from other indexes that measure concepts such as business
climate or competitiveness. Apples must be compared to apples. The weight that a business (or an individual) places on any given factor can vary tremendously. Economic freedom might be important and determinant for one business, but not for another. Thanks to the U.S. Economic Freedom Index, however, researchers now have a yardstick by which to measure economic freedom across states and assess its impact on business and personal decisions.
That's about right.
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Tuesday, November 11, 2008
Budget Hole Deepens; Governor Says She'll Not Raise Taxes
Posted by Richard Davis on 11/11/2008 2:08:00 PM
Yesterday's revenue collections report continues the downward trend.
General Fund-State (GFS) tax payments in the October 11, 2008 - November 10, 2008 collection
period once again fell short of the September forecast. Receipts for the month were $52.8 million
(4.4 percent) lower than expected.
There's some serious bleeding among major retail sectors, particularly automobile sales.
Eight of the twelve 3-digit NAICS retail sectors reported declines this month. The
sectors with the largest declines were motor vehicle dealers (-20.7 percent), furniture
stores (-11.8 percent), building materials/garden supply retailers (-12.0 percent), apparel
and accessories stores (-9.4 percent) and sporting goods, toys, books and music stores (-
6.1 percent). The auto sector, the largest retail trade category, has now reported a year-
over-year decline in tax payments for ten consecutive months.
So far, Gov. Gregoire is sticking by her no-new-taxes pledge. The Seattle Times has this story on the budget. [Gregoire] reaffirmed a pledge made during the campaign not to increase taxes or fees to help balance the budget. The governor said she's considering dozens of options, including suspending certain state programs and possibly eliminating some entirely. She wouldn't say which ones. In addition, the governor said, lawmakers could soon face a choice of either giving state workers a pay raise or laying people off. Reopening the collective bargaining agreement sounds right. First, though, the legislature needs to vote it down and send everyone back to the table. The governor's quote suggests she's prepared to tell the unions that the negotiated agreement guarantees layoffs. Clearly, it does, so that may help frame the conditions that would make it easier for lawmakers to reject the contract. Gregoire also has announced her ideas for a stimulus package. The details will be decisive. Here's the Times shorthand version. The immediate stimulus package is made up of: More than $200 million in tax-exempt bonds for housing programs. The money can used for rental housing for poor families, assistance for first-time homebuyers, and refinancing of mortgages at risk of default. About $85 million to help low-income Washingtonians pay heating and energy bills and make weatherization improvements to their homes. Since the money is funneled through utility companies, Gregoire hopes it also will create jobs. An additional $13 million in aid for the salmon-fishing fleet, meant to help those hurt by the sudden collapse of the Pacific Coast salmon industry. Gregoire said she's pushing federal officials to release that money faster. I'm not sure how much long-term job creation any of that provides. On first reading, it sounds more like assistance to those hard hit by the recession than long-term economic stimulus. What do you think? Am I misreading it? I do like the sound of this approach to the budget, though. "This should not be simply a budget-cutting exercise. We should be thinking about how do we grow our economy, how do we create jobs, and what reforms we can put in place," she said. "Government is really going to have to get back to the absolute, essential basics." Jason Mercier offers some good thoughts on this at the Washington Policy Center blog. UPDATE The Olympian's Adam Wilson has the union response to layoff talk.
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Monday, November 10, 2008
Armageddon?
Posted by Kris Tefft on 11/10/2008 12:35:00 PM
That's how the US Chamber's labor policy official, Randel Johnson, describes the coming fight over card-check in the next Congress, with President-elect Obama in the White House. It's in a weekend New York Times piece, "After Push for Obama, Unions Seek New Rules" that's worth a read. (Cross posted at Olympia Business Watch)
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Saturday, November 08, 2008
Boeing Commercial Airplanes CEO Delivers A Competitiveness Agenda
Posted by Richard Davis on 11/8/2008 10:17:00 AM
Scott Carson, CEO of Boeing Commercial Airplanes, told about 800 of the Puget Sound region's business, civic and governmental leaders what they must do to assure the state's long-term competitiveness. His speech, delivered at the annual luncheon of the Prosperity Partnership (speech text here) provided a sober assessment of the challenges facing global businesses - all businesses, as he points out - in an intensely competitive marketplace. I attended the luncheon and was struck by Carson's sincerity and obvious desire to see Boeing succeed in Washington state. There are, however, no guarantees. "Location is a choice," he reminded the audience. And, reflecting on the often bitter rhetoric of the just-concluded campaign season, he acknowledged the "urgent sense of desperation" felt by Americans in this turbulent economic period. After outlining a series of 21st Century business realities, he concluded with a concise list of legislative priorities. WashACE members will recognize them. First, develop a sustainable budget that preserves essential public services without raising taxes. We need a budget we can all live with as we navigate through tough times and try to strengthen our economy for the long term.
Second, reform state unemployment and workers? compensation programs to prevent uncompetitive increases in employer costs. Such reforms are overdue.
Third, finish up all authorized transportation projects for which funding has been approved. Complete these projects on time?and preferably as soon as possible.
Fourth and finally, recommit to education accountability and target higher education investments to programs that contribute to economic growth. Let?s strive for an education system that supports a healthy, better economic future for our state.
The payoff from adopting the right policies can be, will be, tremendous. If we can commit to and accomplish these four critical tasks?a sustainable budget, unemployment and workers? comp reform, transportation improvements and education investments?we?ll have a great start in getting Washington back on track. A friendlier, more supportive business climate will help insure that the Evergreen State has an evergreen economy led by healthy companies in robust competitive positions.
Our collective success will in turn continue to fuel the economic growth Washington needs. Growth to create more family wage jobs, to improve our education system, and to take care of our state?s most vulnerable citizens.
Carson hit the right tone for our times. As we face economic uncertainty and volatility, he offered a prescription for sustainable growth. No glib judgments about present conditions. No threats to pull up stakes tomorrow. And, most important, no assurance that vital businesses will remain here if conditions do not improve. Excellent coverage in several of the regional papers. Read them all. The Herald of Everett: Boeing: Operating globally means keeping jobs locally
"We want and need Washington state ... to be increasingly competitive over the long haul," Carson said.
The Seattle Times: Boeing's Carson: "Location is a choice"
"Companies have to make investment and expansion decisions based on remaining competitive," said Carson. "Location makes a difference."
The Puget Sound Business Journal: Carson advises on how Washington state can keep Boeing
The Boeing Co. can remain as an essential part of Washington?s economy, but only if leaders here recognize that change is needed for this region to compete in a 21st century global economy.
At Olympia Business Watch, Don Brunell points out that Boeing's concerns are those of all businesses in our state.
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Thursday, November 06, 2008
A Blurb on Paid Family Leave in Washington
Posted by Kris Tefft on 11/6/2008 11:58:00 AM
As Don Brunell pointed out last month at Olympia Business Watch, rumors of the demise of the paid family leave program in Washington may be exaggerated. Sure, the program, enacted in 2007, has not made it out of the gates yet; true, there has been no funding source identified for its administration and benefits; yes, the law must be amended to actually specify a state agency to run it. And of course, Governor Gregoire did say in September the program is officially suspended, which makes its statutory roll-out of October 1, 2009, highly unlikely without a major inflow of cash next session. Today, in passing on his blog, Adam Wilson at the Olympian describes this: Meanwhile, the paid family leave program is still alive in statute, even if Gov. Chris Gregoire pulled the plug on its computer. Sen. Karen Keiser says she's working on a new bill to address funding now. Neither the Legislature nor the governor could agree on how to pay for benefits for new parents, although proposals have included general funds and a payroll tax. All Keiser would say is, "I don?t think there are any surprises. The Senate?s position on paid family leave is pretty clear." Senator Keiser is also on record, in a recent talk to the Washington Senior Citizens Foundation (here, 30 minutes into the video), minimizes the Governor's suspension of the program as a "a little bit of an interruption" and yet an "opportunity to revisit the idea of expanding family leave to parents and grandparents." Remember, the currently projected 3.2 billion + budget shortfall includes about $72 million for paid family leave next biennium. Will the Senate recommend a tax increase to cover that, or even, expand the program and add to it? (Cross-posted at OBW).
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Thursday, November 06, 2008
The National Election and Employment Law
Posted by Kris Tefft on 11/6/2008 10:16:00 AM
Yesterday at Olympia Business Watch I commented on the post-election alerts going out from the law firm and HR world about major anticipated changes in federal labor and employment law. This article is a notable example, in that it specifically focuses on two less sweeping changes the author thinks are likely to be first up: a bill related to the statute of limitations for filing pay discrimination cases, and another relating to the ability to unionize "supervisors."
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Thursday, November 06, 2008
Budget Leadership Begins with the Governor
Posted by Richard Davis on 11/6/2008 9:44:00 AM
Governors go first.
By law, Gov. Chris Gregoire will propose a balanced budget next month. Then in January the legislature takes over. But the governor's budget leadership involves more than just the chronological rollout of spending plans. As the state's elected executive, the governor has more than just managerial and administrative authority. She, the only statewide elected official involved in budget development, pulls together the diverse interests of the state, sets priorities, and uses her political clout to see those priorities enacted into law. So it was a bit puzzling to read this morning's Seattle Times, which has this odd quote from the governor. When asked recently if she'd support sending a tax increase to voters, Gregoire said, "I will leave that to my colleagues in the Legislature. I will forever maintain that the voters ought to be able to decide that. ... I wouldn't be involved in it. It would bypass me. It would not be something that the governor would sign on to or sign off on."
One thing a governor, especially one recently re-elected with 54 percent of the vote, may never be is a budget bystander. When she proposes a budget in December, does she say, "Here it is. I won't be involved in it further."
Not likely. More to the point is The News Tribune's editorial, addressing the challenges the governor faces with her own party. Add the looming $3 billion-plus deficit to the picture, and you?ve got the makings of a ruthless tug-of-war over the state budget. During an economic downturn, tax increases can only be a last, desperate resort. You cannot tax an economy out of slump; you can tax an economy deeper into one. That leaves major spending cuts on the table, with the 600-pound Democratic gorillas maneuvering to make sure no cuts will be coming their way. Gregoire ? the only politician in the mix elected by the whole state ? must referee this bruising free-for-all. She?ll have to jump into the spending decisions early in the session, and cajole and threaten as necessary. She must not allow herself to be bypassed. Having accumulated political capital, she has the ability and the responsibility to use it, to be the driving force in Olympia for the next four years. There's also the peculiar challenge of budget timing. Commenting on the Times story referenced above, Jason Mercier of the Washington Policy Center writes this morning on what some have seen as newly-found wiggle room on taxes. Jason points to Sen. Lisa Brown's lawsuit to overturn voter-approved tax limitations. Here's Brown's comment in the Times.
... Senate Majority Leader Lisa Brown, D-Spokane, didn't rule out the prospect of tax or fee increases.
Brown also said lawmakers could look at targeted taxes or fees, or consider ending certain tax exemptions. "If you look at a tax exemption and you decide you need to close it or limit it somehow, is that raising a tax? Some of it comes down to definitions," she said. This isn't about the meaning of is. If my taxes go up because an exemption is repealed or altered, it's a tax increase. The state Supreme Court should rule in the next few months on Brown's challenge. Currently, popular votes on tax increases above the expenditure limit my only occur at the November general election. It may be that the next revenue forecast shows that we are already in a deficit position for the current budget cycle. Certainly, we're in a nearly $4 billion hole in the budget to be written next year, which taxes effect July 1, 2009. If lawmakers want to raise taxes, the timing of a public vote under current law appears to be too late to provide them the revenue boost they're seeking. Which brings us back to the original point. Next month, Gov. Gregoire will present a balanced budget, one that does not rely on new taxes. She needs to defend it. It's the right decision. UPDATE Typos corrected. (Most of them, anyway.)
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Wednesday, November 05, 2008
More on the Site Selection Rankings
Posted by Richard Davis on 11/5/2008 3:20:00 PM
Yesterday I briefly linked to November's Site Selection business climate issue. Today, I want to call attention to two features the magazine highlights. First, this list of the factors corporate real estate executives consider important in their location decision making could be a good punch list for our state legislature. - Ease of permitting and regulatory procedures
- Transportation infrastructure
- Existing work-force skills
- State and local tax scheme
- Utility infrastructure
- Land/building prices and supply
- Workers' comp rates
- Flexibility of incentives programs
- Higher education resources
- Availability of incentives
Excepting flexibility and availability of incentives programs, which are constitutionality limited here, each of the ten has been the subject of considerable legislative and business dialog. In Gov. Gary Locke's Competitiveness Council, which made frequent use of WashACE materials, transportation, regulation, and infrastructure became top priority issues. (Check out WashACE archives for competitiveness briefs on most of these topics.) More work must be done. With Washington failing to reach the top 25, it's clear objective outsiders have taken a look at our state and found it wanting. Our top four legislative priorities track well with the Site Selection list. 1. Develop a sustainable budget that preserves essential public services without raising taxes.
2. Target higher education investments to programs that contribute directly to economic growth and recommit to education accountability.
3. Emphasize timely completion of authorized transportation projects for which funding has been committed.
4. Reform the state unemployment and workers? compensation programs to prevent uncompetitive increases in employer costs.
The second bit from the magazine I want to highlight is the value of the NASCAR analogy I glossed over yesterday. Here's how North Carolina Gov. Mike Easley (D) puts it in the article.
"NASCAR is a microcosm of the economy in the world today," says Easley. "It's all about competition, it's all about high tech and it's knowledge-based. The guys in the pit are not good-ol' grease monkeys. They are engineers, and their average salary is about $75,000. They have to get faster and better not just every week and every year, but in every race. They're making all these adjustments and as they do so, whoever can adjust their car the most, wherever the communication is best between the crew and the driver and the talent ? that car will win the race, absent bad luck.
"I use that analogy to explain to people that we have to be faster, smarter and stronger in America than we have ever been before," he adds.
Good analogy. Good attitude
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Wednesday, November 05, 2008
Now the Real Work Begins
Posted by Richard Davis on 11/5/2008 9:14:00 AM
With the election behind us, state leaders must immediate turn their attention to addressing the state's competitiveness challenges. That's the argument I make in The Herald of Everett this morning.
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Tuesday, November 04, 2008
Washington Not In Site Selection's Top 25 Business States
Posted by Richard Davis on 11/4/2008 5:06:00 PM
Site Selection, one of the premier economic development magazines, just released its annual ranking of the best 25 states for business. (H/T Dan Voelpel at the Biz Buzz blog) Here's Dan's take: Part of the ranking criteria came from a survey of business executives, who graded the states. You won't find why Washington came up short. But you will see what made North Carolina No. 1: Growth of NASCAR, which makes its home there; a state grants fund that can underwrite corporate relocations in targeted, job-producing sectors; a massive reinvestment in higher education.
I'm guessing you can be a great state for business without NASCAR and maybe without the grants fund. But the higher education investment, plus these other factors surely make a big difference. From the magazine:
Great incentives. Low taxes. A receptive economic development department.
That's how one corporate site seeker described North Carolina in a survey of such respondents that makes up half of Site Selection's annual ranking of state business climates. Add a track record of consistently strong business expansion activity as tracked by the publication's proprietary New Plant database ? the other half of the ranking ? and a state has what it takes to land at the top of that ranking.
Check out the rankings. The top listings will be familiar to regular readers of this blog: North Carolina, Tennessee, Alabama. Texas, and Indiana. Costs matter.
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Tuesday, November 04, 2008
State Economic Forecast: From Bleak to Bleaker
Posted by Richard Davis on 11/4/2008 3:38:00 PM
Yesterday, the Economic and Revenue Forecast Council released the preliminary November economic forecast. Consider it a preview of the November revenue forecast, which sets the revenue platform on which the governor must build her budget. Unsurprisingly, things don't look good. Here's a summary paragraph. The whole thing is worth a read. Recently available employment, wage, and housing data all indicate the state?s economy is weaker that assumed in September. This forecast assumes that the housing sector will not show any significant improvement until the second half of 2009. It also assumes that construction employment will decline by about 22,100 (10.6 percent) from its peak in the fourth quarter of 2007 through the first quarter of 2010. This is larger than the 12,500 peak-to-trough decline expected in the September forecast. The software employment forecast is also weaker than the September assumption. Software employment is expected to rise just 500 (0.9 percent) from the fourth quarter of 2008 to the fourth quarter of 2009 compared to 2,600 (5.0 percent) in the September forecast. Software employment growth during 2010 and 2011 is now expected to average 1,600 (3.0 percent) per year compared to 2,900 (5.4 percent) per year in the September forecast. The Washington aerospace forecast incorporates the impact of the Boeing strike on both wages and employment. Aerospace employment is expected to continue to rise through the end of 2008, reaching 86,200 in December which is 900 lower than assumed in September. The forecast assumes no further changes in aerospace employment through 2011.
Remember, in September the revenue forecast sliced projections by $529.3 million. The folks who win legislative races today could be looking at a deficit approaching $4 billion. Thank them for accepting the challenge. And remind them that this problem must be solved without raising taxes.
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Saturday, November 01, 2008
More on State Revenue Losses
Posted by Richard Davis on 11/1/2008 3:14:00 PM
We buried this in an earlier post. But Don Brunell highlights the news here. According to the Center [on Budget and Policy Priorities], identified as a liberal-leaning think tank, Washington and Idaho were among 15 states with significant revenue drops between July and September. Washington's revenues are down by 11.3% and Idaho is down by 9.3%.
That 11.3 percent number is the same one used by the Wall Street Journal in its October 25 story. But when you follow the link to the CBPP site, you're taken to an October 31 update that shows Washington losing 10 percent (Table 2) in inflation-adjusted revenues from July through September. The US average is -5.9 percent and Idaho is down 9.1 percent.
I don't know why the numbers vary. Regardless, Washington remains the state posting the largest quarterly revenue decline, by a wide margin, of the 15 states that reported complete data.
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