Financial State of the State
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Financial State-of-the-State
It’s the Day of Reckoning
By Bob Williams
February 4, 2011
In 2009 and 2010, Gov. Gregoire and Democrat legislative leaders crafted a financially irresponsible budget. They postponed necessary spending reductions, perhaps hoping for a miracle of sorts. But in political eschatology, it’s the day of reckoning.
The revenue forecast for the fiscal year (FY) 2011-13 biennium is an increase of 16 percent from 2009-11 revenue levels. The $4.6 billion deficit estimate includes significant policy level increases and costly assumptions—mostof which do not have to be included in the budget adopted by the Legislature.
In the current budget (FY 2009-11) the state is spending nearly $2 billion more than the revenue forecast. The failure of the governor and Legislature to balance the budget without resorting to accounting gimmicks, using one time federal funds and “sweeping” over $1.3 billion from dedicated funds is causing the 2011-13 budget deficit. If the Legislature had not spent more than the current revenue forecast, the state would have a surplus for the next budget.
In February 2010, the National Governors Association (NGA) estimated states would face budget deficits totaling $134 billion over the next three years. NGA Chairman and Vermont Gov. Jim Douglas believes the worst is probably yet to come.
The NGA released a report “The Big Reset” which makes it clear that “the long climb toward recovery of state fiscal health has not yet begun and this has prompted urgent efforts to redesign and downsize government.” Other states reduced their budgets to avoid pushing the deficits forward to next budget.
Executive Summary
• The state is facing a $7.5 billion unfunded retiree healthcare liability, massive pension contribution increases, a $12.8 billion unfunded liability in workers’ compensation and excessive state debt increases, among other financial problems.
• The 2010 supplemental budgets boosted total state spending by $3.3 billion, continuing the trend of higher government spending.
• This state spending is being propped up with underfunded pensions; altered actuary recommendations; use of one- time federal stimulus and money raided from other accounts, most of which will need to be refilled.
• Moody’s gave our state a negative bondrating outlook and noted that our per capita debt for bonds is twice the national average—now at $2,306.38 per Washingtonian.
• Our State Actuary, Insurance Commissioner, Treasurer and Auditor have all sounded alarms, as have the CAFR Report, Moody’s, the National Governors Association and the Pew Center. Their warnings have not been addressed.
In March 2010, the U.S. Government Accountability Office (GAO) released a report on the State and Local Government Fiscal Outlook. GAO projects that the sector’s long-term fiscal position will steadily decline through 2060 absent any policy changes. The report asserts, “The decline in the sector’s operating balance is primarily driven by rising health care costs.” GAO suggests “these governments will need to make substantial policy changes to avoid growing imbalances.”
Once again, the governor and Legislature ignored this warning. Most legislators seem unaware of the economic severity they face and the consequences of their budget votes. But their leaders know. Rather than fundamentally reshaping government to reflect declining state revenues for some time to come, legislators are relying on accounting gimmicks, one-time funds, underfunding pensions and federal stimulus money to balance state budgets. In the process, they are artificially propping up a higher level of spending that can’t be supported by the economy in the near-to-medium future.
This problem has been building for some time. It exploded exponentially last year. Gov. Gregoire is convinced that she cut $12 billion out of a $32 billion budget over the past two years. If she had, in fact, done that the state budget would be $20 billion and the state would have a multi-billion surplus. Instead, total state spending increased by more than $4.2 billion over the past two years.
Put this increased spending in context:
1) An $11.8 billion budget shortfall over two years.
2) Budgets that legislative leaders and our governor say have been cut to the bone.
3) Reductions in proposed spending that were counted as a “cut.”
The true financial status of the state is hidden from taxpayers because of the way in which liabilities are disclosed (or not). Following is my analysis of the true financial state-of-thestate.
I write as a former U.S. government auditor, certified public accountant and five-term State Representative who served on the budget committee each of my 10 years in office.
1. Level of spending: Unsustainable
State spending is being propped up with one-time accounting gimmicks: funds transferred from dedicated accounts ($1.7 billion in the past two years), most of which will need to be refilled; pensions that are underfunded, but whose obligations must be met; actuary recommendations that are changed for short-term gain; and use of one-time federal stimulus money for ongoing programs.
2. State employee salaries and benefits: Unsustainable
State employees earn an average of $4,302 more than private sector employees.i In addition, state employee benefit packages are worth 30 percent of their salaries on average.ii
a. State Employee Salaries
State employees earn an average of $4,302 more than private sector employees. From 2005-09 state employees received a 25.4 percent increase in salaries. Because generous retiree and benefit packages are based on salary levels, raising salaries heavily impacts long-term liabilities for taxpayers.iii
The National Governor’s Association recognizes this problem. “For many years, state and local governments have been increasing the benefit portion of employee compensation at a greater rate than the wage portion. Much of the reasoning behind this was the belief that state government salaries could not compete with the private sector. As a result, benefits for state employees gradually became more generous than those in the private sector while state salaries lagged. Today, the average compensation for state and local employees exceeds that of private workers. And, by using benefits as a compensation equalizer, states have placed long-term liabilities on their balance sheets.”iv
b. State Employee Benefits
From 2005-09 state employees received a 50.5 percent increase in benefits.v
• The state employee benefit fund faced a $220 million deficit in December 2009. In a letter to the governor, State Insurance Commissioner Mike Kriedler stated that the health care benefit account had “stunning declines in assets [$247 million in one year], capital and surplus, net income, and cash provided by operations.” He went on to say that if the Health Care Authority “were a domestic insurer, these outlier ratios would likely result in a finding of financially-hazardous condition, justifying my entry of corrective orders or my placing the insurer under administrative supervision.”
• Rather than requiring state employees to pay more than 12 percent of their healthcare premiums, the governor and Legislature provided more taxpayer dollars to continue these generous medical, dental, and vision benefits. The final 2010 supplemental budget added $82 per month to the state’s contribution of $768 per employee per month.vi
• A 2008 study by the Washington Roundtable determined that state employee health care costs were 5.8 percent higher than private sector employee costs of large employers, and that the average monthly contribution of state employees nationwide for family health care coverage was nearly four times that of Washington state employees.vii
• The governor asked state employees to increase their contribution from 12 percent to 26 percent but she settled at 15 percent. The state cannot financially support this level of employee contributions without cutting programs for the poor.
c. Retiree Health Care
Credit Suisse reported that Washington has an unfunded retiree health care liability of $10 billion. The Pew Center reported the unfunded liability was $7.9 billion. In the state’s latest Consolidated Annual Financial Report (CAFR) as of June 30, 2009, the state reported $7.5 billion.
d. Pensions
The state’s pension system lost $16 billion in the stock market in the past three years. Ethics and transparency demand that such facts be disclosed in the state’s Official Bond Statements. The June 15, 2010, report recommended that “all units of government and all teachers and PERS employees will have large increased contribution rates until at least 2024.”
Furthermore, the State Actuary notes the following:
• The state needs to contribute $1480 million in next biennium vs. $770 million this biennium.
• Local governments need to contribute $1710 million in next biennium vs. $950 million this biennium. Most local governments are unaware of the massive bill headed their way.
• PERS I and TRS I are “now ‘at risk’ of running out of assets prematurely.”
• Because the state is writing off pension losses over eight years (smoothing method), funding status for all plans is expected to drop over the next eight years.
• Expect a “25-30 percent drop in Plans 2/3” and a “15-20 percent drop in Plans I and PSERS” viii
In addition to the June 15, 2010 report, State Actuary Matt Smith sent a letter to Pension Funding Council Members on September 11, 2009 recommending tripling contributions from all employers by the 2011-13 biennium, with significant increases at least through the 2019-21 biennium. The need for such high contributions is due to a 30 to 40 percent drop in
funding status due to investment declines. The State Actuary estimates it will take 10 to 20 years to recover these losses.
Smith wrote, “Previously healthy plans remain healthy, but are now at risk of becoming unhealthy. Previously unhealthy plans are now at risk of running out of assets before all benefits get paid. This may call into question whether employers can afford such increases. The health of each plan weakens further if employers don’t make the expected contributions.
For example, healthy plans like the Plans 2/3 will likely become unhealthy. ‘At-risk’ plans like PERS 1 and TRS 1 will likely run out of money with large contractual benefit payments remaining.”ix
The Actuary observed “a propensity to increase benefits when returns exceed the assumed rate and delay or simply not make required increases in contributions when returns fall below the assumed rate.” The Pew Center criticized Washington state for contributing just 37 percent of what the pension system needed over the preceding five years. Only one other state made less effort to keep its pensions whole.
In 1989, legislators agreed to make up the unfunded liability for the state’s oldest pension plans by 2024. But, last year, the Legislature decreased contributions to the pension systems in response to decreased revenue caused by the economic recession. The 2009 Legislature also changed the funding method for paying off the unfunded past liability of PERS and TRS Plans 1. These actions have increased the unfunded pension liabilities.
3. Workers Compensation funds: In trouble
Washington State Auditor Brian Sonntag wrote in December 2010 that the state has a $12.8 billion unfunded liability in workers’ compensation funds that pay cost of living increases to disability pensions for injured workers and their dependents.x
Auditor Sonntag’s financial and actuarial audit of workers compensation revealed serious financial problems in the solvency of the accident fund. The response of Labor and Industry Director Judy Schurke was stunning. She said, “…one of the unique benefits of the Washington State Fund is that it can continue to make good on its benefit obligations when projected liabilities exceed its projected assets when private insurers would not be able to do so.” That’s because taxpayers are legally obligated to pick up the tab, something she neglected to mention.xi
The latest audit released on December 30, 2010, stated “The accident fund is insolvent and the proposed rate increase will not be sufficient to restore the contingency reserve and maintain the solvency of the account over the next few years. The proposed rate decrease for the Medical Aid Account will likely be inadequate to allow the Medical Aid Account to break even during calendar year 2011 and maintain the solvency of the account over the next five years.”
4. State bonds and debt per capita: Excessive
Washington state has gone from $8.5 billion in outstanding bonds as of June 30, 2003, to $16.6 billion as of June 30, 2010. The state has $9.5 billion in authorized bonds that remain unissued. Moody’s stated on January 13, 2011, “Washington’s debt ratios are about twice Moody’s 50-stat medium level; net tax-supported debt as a percentage of personal income is 5.3 percent, compared with Moody’s 50-state median of 2.5 percent in 2010.” At $2,226, Washington’s nettax supported debt per capita is more than twice the national median of $936.xii
5. Washington’s bond rating: Stable to negative
Moody’s downgraded Washington’s bond rating outlook to “negative” on December 31, 2009. They warned that the state’s significant use of one-time funds to balance the current budget reduced necessary flexibility to address unexpected revenue shortfalls. Moody’s further warned about factors that could lower the rating:
• “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.
• “Cash flow narrowing, leading to strained liquidity.
• “Failure to adopt a plan to cover expenditures once federal fiscal stimulus monies are no longer available” xiii
When Gov. Gregoire released her supplemental budgets both in December 2009 and again in January 2011, she did not address the structural budget imbalance, the State Treasurer’s concerns about cash flow, or the lack of a plan to cover expenses when federal stimulus funds are gone.
6. Plan to fix the bond rating problem: Creates deeper problems
The plan coming from the Legislature and the governor so far does not rely on sustainable cuts in spending. It relies on use of one-time funds, accounting gimmicks, and increased taxes and fees—some from sources that will also dry up.
7. Comprehensive Annual Financial Report (CAFR): Troubling trends
A. The state spent $408 million more than it took in during FY 2010. For FY 2009, the state spent $592 million more.
B. Workers Compensation activities reported a loss of $1 billion in fiscal year 2010 and an unfunded liability of $12.8 billion for supplemental pension cost-of-living increases (COLA) as of June 30, 2010.
C. The unemployment compensation fund had a net loss (deficit) for FY 2010 of $870 million, despite an increase in federal aid of $1.8 billion.
D. The state’s risk management fund (self-insurance) has a deficit of $611 million as of June 30, 2010.
E. The state has a deficit of $41 million in the health insurance fund.
8. Education Obligations: In question
A. Guaranteed Education Tuition (GET) Program: The state has a $254.6 million deficit as of June 30, 2010. What is the state’s potential liability for this program? GET benefits are guaranteed by the state, despite the uncertain outlook for the state’s economy and budget.
B. Basic Education Lawsuit: What is the state’s potential liability of Judge Erlick’s February 4, 2010, decision that the state is underfunding basic education?
Conclusion
In the face of this data, the governor and leaders of the majority party are in one of three positions, or perhaps a combination of several.
1. They do not understand the urgency of the situation.
2. They do not understand that taxpayers are on the legal hook for contractual obligations they have made.
3. They understand, but consider it their duty to keep the program spending levels high and are therefore willing to continue increasing taxes and fees to cover the costs. Voters will have to decide which answer works for them.
Bob Williams is the Co-Founder and Senior Fellow of the Freedom Foundation. He is known as a national expert in the areas of fiscal and tax policies, election reform, and disaster preparedness. He received his Bachelor of Science in Business Administration from Pennsylvania State University. Williams worked as a GAO auditor of the Pentagon and Post Office before moving to Washington state where he served five terms in the Washington State Legislature and was the 1988 Republican nominee for governor.
Nothing in this document should be construed as an attempt to support or oppose any legislation.
i www.effwa.org/main/article.php?article_id=3127&number=51
ii www.careers.wa.gov/benefits.html
iii www.senaterepublicans.wa.gov/budgettidbits/2010/011310BudgetTidbit.pdf
iv www.nga.org/Files/pdf/1002STATEGOVTAFTERGREATRECESSION.PDF
v www.senaterepublicans.wa.gov/budgettidbits/2010/011310BudgetTidbit.pdf
vi ESSB 6444, 2009-10
viiwaroundtable.com/2006/archives/Policy%20Publications%20Archive/HC%20Report%20Design%20Feb%2008.p
df
viii “Preliminary Results, Actuarial Valuation” report by Actuary Lisa Won to the Select Committee on Pension
Policy, June 15, 2010. www.leg.wa.gov/SCPP/Documents/2010/6-15/6.PPT-PreVal.pdf
ix osa.leg.wa.gov/Actuarial_Services/Publications/PDF_Docs/Pension_Studies/PFC_Ltr_Rpts_Combined9-16-
09.pdf
x Sonntag, Brian, “Time to resize Washington state government’s footprint.” Seattle Times, July 21, 2010.
seattletimes.nwsource.com/html/opinion/2012405500_guest21sonntag.html
xi www.sao.wa.gov/auditreports/auditreportfiles/ar1000474.pdf
xii www.tre.wa.gov/documents/MoodysBonds_Jan11.pdf
xiii www.tre.wa.gov/documents/Moodys_Dec09.pdf
February 4, 2011
In 2009 and 2010, Gov. Gregoire and Democrat legislative leaders crafted a financially irresponsible budget. They postponed necessary spending reductions, perhaps hoping for a miracle of sorts. But in political eschatology, it’s the day of reckoning.
The revenue forecast for the fiscal year (FY) 2011-13 biennium is an increase of 16 percent from 2009-11 revenue levels. The $4.6 billion deficit estimate includes significant policy level increases and costly assumptions—mostof which do not have to be included in the budget adopted by the Legislature.
In the current budget (FY 2009-11) the state is spending nearly $2 billion more than the revenue forecast. The failure of the governor and Legislature to balance the budget without resorting to accounting gimmicks, using one time federal funds and “sweeping” over $1.3 billion from dedicated funds is causing the 2011-13 budget deficit. If the Legislature had not spent more than the current revenue forecast, the state would have a surplus for the next budget.
In February 2010, the National Governors Association (NGA) estimated states would face budget deficits totaling $134 billion over the next three years. NGA Chairman and Vermont Gov. Jim Douglas believes the worst is probably yet to come.
The NGA released a report “The Big Reset” which makes it clear that “the long climb toward recovery of state fiscal health has not yet begun and this has prompted urgent efforts to redesign and downsize government.” Other states reduced their budgets to avoid pushing the deficits forward to next budget.
Executive Summary
• The state is facing a $7.5 billion unfunded retiree healthcare liability, massive pension contribution increases, a $12.8 billion unfunded liability in workers’ compensation and excessive state debt increases, among other financial problems.
• The 2010 supplemental budgets boosted total state spending by $3.3 billion, continuing the trend of higher government spending.
• This state spending is being propped up with underfunded pensions; altered actuary recommendations; use of one- time federal stimulus and money raided from other accounts, most of which will need to be refilled.
• Moody’s gave our state a negative bondrating outlook and noted that our per capita debt for bonds is twice the national average—now at $2,306.38 per Washingtonian.
• Our State Actuary, Insurance Commissioner, Treasurer and Auditor have all sounded alarms, as have the CAFR Report, Moody’s, the National Governors Association and the Pew Center. Their warnings have not been addressed.
In March 2010, the U.S. Government Accountability Office (GAO) released a report on the State and Local Government Fiscal Outlook. GAO projects that the sector’s long-term fiscal position will steadily decline through 2060 absent any policy changes. The report asserts, “The decline in the sector’s operating balance is primarily driven by rising health care costs.” GAO suggests “these governments will need to make substantial policy changes to avoid growing imbalances.”
Once again, the governor and Legislature ignored this warning. Most legislators seem unaware of the economic severity they face and the consequences of their budget votes. But their leaders know. Rather than fundamentally reshaping government to reflect declining state revenues for some time to come, legislators are relying on accounting gimmicks, one-time funds, underfunding pensions and federal stimulus money to balance state budgets. In the process, they are artificially propping up a higher level of spending that can’t be supported by the economy in the near-to-medium future.
This problem has been building for some time. It exploded exponentially last year. Gov. Gregoire is convinced that she cut $12 billion out of a $32 billion budget over the past two years. If she had, in fact, done that the state budget would be $20 billion and the state would have a multi-billion surplus. Instead, total state spending increased by more than $4.2 billion over the past two years.
Put this increased spending in context:
1) An $11.8 billion budget shortfall over two years.
2) Budgets that legislative leaders and our governor say have been cut to the bone.
3) Reductions in proposed spending that were counted as a “cut.”
The true financial status of the state is hidden from taxpayers because of the way in which liabilities are disclosed (or not). Following is my analysis of the true financial state-of-thestate.
I write as a former U.S. government auditor, certified public accountant and five-term State Representative who served on the budget committee each of my 10 years in office.
1. Level of spending: Unsustainable
State spending is being propped up with one-time accounting gimmicks: funds transferred from dedicated accounts ($1.7 billion in the past two years), most of which will need to be refilled; pensions that are underfunded, but whose obligations must be met; actuary recommendations that are changed for short-term gain; and use of one-time federal stimulus money for ongoing programs.
2. State employee salaries and benefits: Unsustainable
State employees earn an average of $4,302 more than private sector employees.i In addition, state employee benefit packages are worth 30 percent of their salaries on average.ii
a. State Employee Salaries
State employees earn an average of $4,302 more than private sector employees. From 2005-09 state employees received a 25.4 percent increase in salaries. Because generous retiree and benefit packages are based on salary levels, raising salaries heavily impacts long-term liabilities for taxpayers.iii
The National Governor’s Association recognizes this problem. “For many years, state and local governments have been increasing the benefit portion of employee compensation at a greater rate than the wage portion. Much of the reasoning behind this was the belief that state government salaries could not compete with the private sector. As a result, benefits for state employees gradually became more generous than those in the private sector while state salaries lagged. Today, the average compensation for state and local employees exceeds that of private workers. And, by using benefits as a compensation equalizer, states have placed long-term liabilities on their balance sheets.”iv
b. State Employee Benefits
From 2005-09 state employees received a 50.5 percent increase in benefits.v
• The state employee benefit fund faced a $220 million deficit in December 2009. In a letter to the governor, State Insurance Commissioner Mike Kriedler stated that the health care benefit account had “stunning declines in assets [$247 million in one year], capital and surplus, net income, and cash provided by operations.” He went on to say that if the Health Care Authority “were a domestic insurer, these outlier ratios would likely result in a finding of financially-hazardous condition, justifying my entry of corrective orders or my placing the insurer under administrative supervision.”
• Rather than requiring state employees to pay more than 12 percent of their healthcare premiums, the governor and Legislature provided more taxpayer dollars to continue these generous medical, dental, and vision benefits. The final 2010 supplemental budget added $82 per month to the state’s contribution of $768 per employee per month.vi
• A 2008 study by the Washington Roundtable determined that state employee health care costs were 5.8 percent higher than private sector employee costs of large employers, and that the average monthly contribution of state employees nationwide for family health care coverage was nearly four times that of Washington state employees.vii
• The governor asked state employees to increase their contribution from 12 percent to 26 percent but she settled at 15 percent. The state cannot financially support this level of employee contributions without cutting programs for the poor.
c. Retiree Health Care
Credit Suisse reported that Washington has an unfunded retiree health care liability of $10 billion. The Pew Center reported the unfunded liability was $7.9 billion. In the state’s latest Consolidated Annual Financial Report (CAFR) as of June 30, 2009, the state reported $7.5 billion.
d. Pensions
The state’s pension system lost $16 billion in the stock market in the past three years. Ethics and transparency demand that such facts be disclosed in the state’s Official Bond Statements. The June 15, 2010, report recommended that “all units of government and all teachers and PERS employees will have large increased contribution rates until at least 2024.”
Furthermore, the State Actuary notes the following:
• The state needs to contribute $1480 million in next biennium vs. $770 million this biennium.
• Local governments need to contribute $1710 million in next biennium vs. $950 million this biennium. Most local governments are unaware of the massive bill headed their way.
• PERS I and TRS I are “now ‘at risk’ of running out of assets prematurely.”
• Because the state is writing off pension losses over eight years (smoothing method), funding status for all plans is expected to drop over the next eight years.
• Expect a “25-30 percent drop in Plans 2/3” and a “15-20 percent drop in Plans I and PSERS” viii
In addition to the June 15, 2010 report, State Actuary Matt Smith sent a letter to Pension Funding Council Members on September 11, 2009 recommending tripling contributions from all employers by the 2011-13 biennium, with significant increases at least through the 2019-21 biennium. The need for such high contributions is due to a 30 to 40 percent drop in
funding status due to investment declines. The State Actuary estimates it will take 10 to 20 years to recover these losses.
Smith wrote, “Previously healthy plans remain healthy, but are now at risk of becoming unhealthy. Previously unhealthy plans are now at risk of running out of assets before all benefits get paid. This may call into question whether employers can afford such increases. The health of each plan weakens further if employers don’t make the expected contributions.
For example, healthy plans like the Plans 2/3 will likely become unhealthy. ‘At-risk’ plans like PERS 1 and TRS 1 will likely run out of money with large contractual benefit payments remaining.”ix
The Actuary observed “a propensity to increase benefits when returns exceed the assumed rate and delay or simply not make required increases in contributions when returns fall below the assumed rate.” The Pew Center criticized Washington state for contributing just 37 percent of what the pension system needed over the preceding five years. Only one other state made less effort to keep its pensions whole.
In 1989, legislators agreed to make up the unfunded liability for the state’s oldest pension plans by 2024. But, last year, the Legislature decreased contributions to the pension systems in response to decreased revenue caused by the economic recession. The 2009 Legislature also changed the funding method for paying off the unfunded past liability of PERS and TRS Plans 1. These actions have increased the unfunded pension liabilities.
3. Workers Compensation funds: In trouble
Washington State Auditor Brian Sonntag wrote in December 2010 that the state has a $12.8 billion unfunded liability in workers’ compensation funds that pay cost of living increases to disability pensions for injured workers and their dependents.x
Auditor Sonntag’s financial and actuarial audit of workers compensation revealed serious financial problems in the solvency of the accident fund. The response of Labor and Industry Director Judy Schurke was stunning. She said, “…one of the unique benefits of the Washington State Fund is that it can continue to make good on its benefit obligations when projected liabilities exceed its projected assets when private insurers would not be able to do so.” That’s because taxpayers are legally obligated to pick up the tab, something she neglected to mention.xi
The latest audit released on December 30, 2010, stated “The accident fund is insolvent and the proposed rate increase will not be sufficient to restore the contingency reserve and maintain the solvency of the account over the next few years. The proposed rate decrease for the Medical Aid Account will likely be inadequate to allow the Medical Aid Account to break even during calendar year 2011 and maintain the solvency of the account over the next five years.”
4. State bonds and debt per capita: Excessive
Washington state has gone from $8.5 billion in outstanding bonds as of June 30, 2003, to $16.6 billion as of June 30, 2010. The state has $9.5 billion in authorized bonds that remain unissued. Moody’s stated on January 13, 2011, “Washington’s debt ratios are about twice Moody’s 50-stat medium level; net tax-supported debt as a percentage of personal income is 5.3 percent, compared with Moody’s 50-state median of 2.5 percent in 2010.” At $2,226, Washington’s nettax supported debt per capita is more than twice the national median of $936.xii
5. Washington’s bond rating: Stable to negative
Moody’s downgraded Washington’s bond rating outlook to “negative” on December 31, 2009. They warned that the state’s significant use of one-time funds to balance the current budget reduced necessary flexibility to address unexpected revenue shortfalls. Moody’s further warned about factors that could lower the rating:
• “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.
• “Cash flow narrowing, leading to strained liquidity.
• “Failure to adopt a plan to cover expenditures once federal fiscal stimulus monies are no longer available” xiii
When Gov. Gregoire released her supplemental budgets both in December 2009 and again in January 2011, she did not address the structural budget imbalance, the State Treasurer’s concerns about cash flow, or the lack of a plan to cover expenses when federal stimulus funds are gone.
6. Plan to fix the bond rating problem: Creates deeper problems
The plan coming from the Legislature and the governor so far does not rely on sustainable cuts in spending. It relies on use of one-time funds, accounting gimmicks, and increased taxes and fees—some from sources that will also dry up.
7. Comprehensive Annual Financial Report (CAFR): Troubling trends
A. The state spent $408 million more than it took in during FY 2010. For FY 2009, the state spent $592 million more.
B. Workers Compensation activities reported a loss of $1 billion in fiscal year 2010 and an unfunded liability of $12.8 billion for supplemental pension cost-of-living increases (COLA) as of June 30, 2010.
C. The unemployment compensation fund had a net loss (deficit) for FY 2010 of $870 million, despite an increase in federal aid of $1.8 billion.
D. The state’s risk management fund (self-insurance) has a deficit of $611 million as of June 30, 2010.
E. The state has a deficit of $41 million in the health insurance fund.
8. Education Obligations: In question
A. Guaranteed Education Tuition (GET) Program: The state has a $254.6 million deficit as of June 30, 2010. What is the state’s potential liability for this program? GET benefits are guaranteed by the state, despite the uncertain outlook for the state’s economy and budget.
B. Basic Education Lawsuit: What is the state’s potential liability of Judge Erlick’s February 4, 2010, decision that the state is underfunding basic education?
Conclusion
In the face of this data, the governor and leaders of the majority party are in one of three positions, or perhaps a combination of several.
1. They do not understand the urgency of the situation.
2. They do not understand that taxpayers are on the legal hook for contractual obligations they have made.
3. They understand, but consider it their duty to keep the program spending levels high and are therefore willing to continue increasing taxes and fees to cover the costs. Voters will have to decide which answer works for them.
Bob Williams is the Co-Founder and Senior Fellow of the Freedom Foundation. He is known as a national expert in the areas of fiscal and tax policies, election reform, and disaster preparedness. He received his Bachelor of Science in Business Administration from Pennsylvania State University. Williams worked as a GAO auditor of the Pentagon and Post Office before moving to Washington state where he served five terms in the Washington State Legislature and was the 1988 Republican nominee for governor.
Nothing in this document should be construed as an attempt to support or oppose any legislation.
i www.effwa.org/main/article.php?article_id=3127&number=51
ii www.careers.wa.gov/benefits.html
iii www.senaterepublicans.wa.gov/budgettidbits/2010/011310BudgetTidbit.pdf
iv www.nga.org/Files/pdf/1002STATEGOVTAFTERGREATRECESSION.PDF
v www.senaterepublicans.wa.gov/budgettidbits/2010/011310BudgetTidbit.pdf
vi ESSB 6444, 2009-10
viiwaroundtable.com/2006/archives/Policy%20Publications%20Archive/HC%20Report%20Design%20Feb%2008.p
df
viii “Preliminary Results, Actuarial Valuation” report by Actuary Lisa Won to the Select Committee on Pension
Policy, June 15, 2010. www.leg.wa.gov/SCPP/Documents/2010/6-15/6.PPT-PreVal.pdf
ix osa.leg.wa.gov/Actuarial_Services/Publications/PDF_Docs/Pension_Studies/PFC_Ltr_Rpts_Combined9-16-
09.pdf
x Sonntag, Brian, “Time to resize Washington state government’s footprint.” Seattle Times, July 21, 2010.
seattletimes.nwsource.com/html/opinion/2012405500_guest21sonntag.html
xi www.sao.wa.gov/auditreports/auditreportfiles/ar1000474.pdf
xii www.tre.wa.gov/documents/MoodysBonds_Jan11.pdf
xiii www.tre.wa.gov/documents/Moodys_Dec09.pdf
PERS Retirement System Projections
