WA State 2001-3 Budget - Wa Policy Brief

Ideas for Balancing the State Budget Without Raising Taxes


by Eric Montague, Policy Analyst
January 2002


Washington state is facing a serious budget deficit during the 2001-2003 biennium. Until early last year, state economists projected a surplus for the current budget. Since that time the national economy faltered and the state's business outlook weakened. In Washington, the burden of taxes and our state's costly regulatory environment are contributing to the slowdown. As a result, revenue is coming into the state treasury at a lower rate of increase than was predicted.

The current problem stems from the more optimistic revenue projections the legislature used last year in passing the two-year budget. Spending was set to increase substantially, but revenues were expected to keep pace. The revenue projections, however, turned out to be wrong. Beginning in March 2001 money coming into the treasury began to fall short of what the legislature anticipated. Budget experts now predict a shortfall of between $1.25 billion and nearly $2 billion in the current biennium. The state has budgeted for $22.8 billion in General Fund spending for the 2001-03 biennium, while the amount actually being collected in taxes and fees is today estimated at about $21.2 billion.

While projected spending is falling short of planned levels, in real terms state government spending continues to go up. The state spent $20.6 billion through the General Fund in the 1999-01 biennium. In the current biennium it will collect, and spend, at least $700 million more, for an increase of 3.4%. The state does not face a deficit in the sense of having fewer public dollars to spend than it had in past years. Instead, spending is simply increasing at a slower pace than budget writers estimated. The "deficit" the legislature faces this session is the difference between the level of increase the state planned on and the level of increase it is actually collecting in taxes.

The present rise in state spending reflects a long-term trend. Since 1990 General Fund spending has increased more than 78%, rising from $12.8 billion to $22.8 billion per biennium. Over the same period the number of people employed by the state has risen more than 25%, from about 81,000 workers in 1990 to more than 102,000 today.

While projected spending is falling short of enacted levels, in real terms state government spending continues to go up.

Both rates of increase are considerably greater than the growth in the state's population. Some of the widespread frustration people feel over the rising cost of government is reflected in voter support for recent popular initiatives to cut or limit the growth of the tax burden. In the last ten years, each time such a proposal has come before voters it has passed.

To address the deficit the governor and the legislature must chose one or a combination of three widely differing options: 1) increase taxes on residents and businesses to cover the deficit; 2) cut fixed costs and reduce the number of services and state employees; or 3) improve the efficiency of existing programs to maintain services while slowing the rising cost of providing those services.

The first option, imposing a broad based tax increase, is not a practical choice for policymakers. Our state is already the fifth highest taxed in the nation. Washington businesses shoulder 51% percent of the tax burden, fourth highest in the nation and higher than any other western state. In addition, residents now pay more in taxes than they do for food, clothing and transportation combined. The state unemployment rate stands at more than 7%, the second highest in the country. Increasing the tax bite in a time of economic slowdown is not a practical economic or political decision.

The second option, cutting programs and laying off employees, may be necessary but can be used sparingly with innovative leadership from the executive and legislature. In his proposed budget, Governor Locke proposes cutting 435 FTEs, or .004%, of the current state workforce. While this level would have minimal impact on reducing fixed costs, the proposal shows an encouraging willingness to address the underlying sources of the budget shortfall.

The third option, improving the efficiency of existing programs, offers the most effective long-term solution. It would allow the state to maintain service levels while holding the line on cost to taxpayers. The changes needed to improve the way state government operates require tough choices. Enacting change is never easy. Entrenched interests and powerful constituencies that directly benefit from public spending will naturally resist altering the status quo. Recognizing this condition is the first step to success.

Looking ahead, it is evident the falloff in expected revenue growth is not a short- term problem. Without significant restraint in the rate of spending increase, the legislature will face an even deeper fiscal dilemma in the 2003-2005 biennium. The future solvency of Washington's government hinges on decisions the legislature and governor make this year.

Washington's situation is not new or unique. Other states are facing similar tough choices, as increases in tax collections fall short of projections in state capitols across the country. Unlike other states however Washington has policies in place that build-in costs and make it difficult to adjust to lower-than-expected revenues. The following study presents a number of specific reforms that address the structural problems that have caused the current budget shortfall. With sensible reforms state policymakers can balance the current budget, avoid deficits in future years and ease the recurrent sense of crisis in government finance.

Proposal I: Adopt a Flexible Freeze in State Hiring

Over the past twenty years state spending has increased dramatically. Much of the responsibility for the increased spending can be attributed to the growth in government employment. Since 1980 state government employment has increased by nearly 20,000 positions, to more than 100,000 positions, with 9,000 FTEs added just within the last 5 years. State employees earn an average salary of $42,779 plus a generous benefits package that includes full medical coverage, ample vacation, sick leave and a 401(k) retirement plan, driving average total compensation over $53,000 per employee.



State spending on personnel totaled $5.4 billion last year. Over the last 10 years average total compensation for state workers has increased more than $13,000. During the same time the state added nearly 14,000 workers, increasing total state payroll from $3.5 billion to $5.4 billion. Today, Washington taxpayers and businesses spend $1.9 billion per year more than they did ten years ago to support a government payroll that is larger than any business in the state and provides an average compensation package more than $15,000 above that of the average private sector wage.

The governor's proposal to trim 435 full-time positions from the state workforce, which is about .004% of the current level, is inadequate to bring state salary and benefits spending under control. To help address the immediate need for budget restraint a simple flexible hiring freeze would limit total state employment to current levels, allowing the governor and agency managers breathing space to prioritize hiring in areas that need assistance. Increases in one agency would require decreases in another. This method of reigning in rising costs is often used in the private sector as a first step to regaining fiscal control.

Proposal II: Authorize the State Auditor to Conduct Performance
Audits

In other states independent performance audits have improved service and reduced cost by identifying and eliminating waste and inefficiency. The Joint Legislative Audit and Review Committee (JLARC) conducts performance audits at the direction of the Legislature. The quality of JLARC research is excellent, however the committee only audits specific agencies or programs as directed, which significantly restricts its effectiveness. Audit assignments can also face conflicts of interest because committee staff must audit programs that legislators initially approved and wish to continue to fund.

During the 2001 Session the legislature appropriated $300,000 for a pilot program to allow the state auditor to conduct three initial audits of state agencies. Governor Locke approved the funding, but vetoed the provision authorizing the actual program, even though it passed both the House and Senate by wide margins.

Three audits of individual agencies are clearly not enough. The independently- elected state auditor has the capability to conduct performance audits with a broad view of state government performance and agency or program interaction. The state auditor should be allowed to conduct a comprehensive statewide performance audit, identifying overlapping agencies and regulations, and helping to restore Washington residents' trust in government.

Conducting performance audits saves money for state taxpayers. In Colorado, performance audits completed in June 2000 identified over $12 million in easily adopted savings, and $41 million in additional near-term efficiency improvements during their initial audit. In Florida, an audit of the budget system helped the legislature and the governor enact changes that will significantly improve future efficiency. Texas is a pioneer in statewide performance audits. Over an eight year period that state has identified total savings of $8.1 billion.


Proposal III: End the Monopoly on Government Work by Competitively Bidding for State Services

Private companies should be allowed to compete equally with state employee groups to provide services to Washington residents. State law bans private competition for government services that are, or could be in the future, provided by government workers. Repealing the ban would allow agency managers to select the most efficient and effective method for delivering services to Washington residents.

Competitive bidding is a powerful planning tool that gives managers greater flexibility in working with scarce public resources. Competitive bidding does not mean privatization. In other states public employees compete for, and often win, competitions to perform government work. Competition, not privatization, achieves higher efficiency by allowing managers to choose the best-cost option while delivering improved services to the public. Even when government workers are selected as the ideal way to provide a given public service, the very existence of competition from the private sector tends to drive down the cost of the government's in-house operations.

Examples from other state and local governments show typical savings of ten to twenty-five percent. In 1998 an independent audit estimated the Department of Transportation could improve service levels and save at least ten percent, or more than $25 million, by competitively bidding highway maintenance. Other services would experience similar benefits by introducing competition. For the purposes of this analysis we assume a conservative ten percent in savings during the 2001-03 biennium from competitive bidding, unless otherwise noted. Specific opportunities for competitive bidding include:

A. Highway Maintenance

The state highway maintenance program covers nearly 18,000 lane-miles of state highways, ten major mountain passes, 45 rest areas and many other transportation related systems. Maintenance operations include roadway repair and operation, roadside and landscape maintenance, snow and ice control, rest area operations and many others.

In a department of this magnitude, one would reasonably expect there to be areas where the state could do its job more efficiently, uphold quality standards and gain major savings. Experience from other states, like Massachusetts and Virginia, demonstrate that competition for highway maintenance can be easily implemented, with minimal impact on state workers and significant improvement in cost savings and work quality. In Washington, competition between knowledgeable and experienced state workers and the innovative and vibrant private sector would benefit taxpayers and commuters alike.

Current Budget: $261 million, 1310 FTEs
Potential 10% Savings: $26.1 million

B. State Capitol Building and Grounds Maintenance

Government offices and grounds, like similar private facilities, require professional upkeep on a regular basis. At the Washington State Capitol, the Department of General Administration operates five million square feet of building space and 160 acres of landscaped grounds.

Long ago private companies found that they could save money and shift their energies to more important projects if they contracted out routine maintenance to companies that specialize in this type of work. Wisely, the state has already contracted out some responsibilities, but many opportunities for reform remain. By competitively bidding for services such as landscaping, parking management and building cleaning and repair, the state could significantly reduce the cost of maintaining an attractive, vibrant capitol campus.

Current Budget: $41 million, 230 FTEs
Potential 10% Savings: $4.1 million

C. Operation of the State Motor Pool

Washington state, like most states, owns fleets of cars, buses and vans. Basic maintenance of these vehicles, such as oil changes, tune-ups and other repairs, as well as managing equipment rentals, require a full assortment of public-sector staff. Yet there are high-quality companies that provide full motor pool services, including maintenance, ownership and operation, to governments and private companies throughout the country.


San Mateo, California, Coral Springs, Florida and Indianapolis have all opened their fleet services up for competitive bidding and all have saved money. In Indianapolis, a government employee group won the motor pool bid and increased productivity by 22 percent while saving taxpayers $4.6 million.

Current Budget: $27.9 million, 99 FTEs
Potential 10% Savings: $2.7 million

D. Liquor Sales and Distribution

The Liquor Control Board operates 157 state liquor stores and is responsible for selling all distilled spirits marketed in the state of Washington. Privatizing the sale and distribution of liquor would free up substantial revenue generated by liquor and beer taxes that could be better spent on alcohol education, enforcement of existing laws or to reduce the deficit.

By privatizing the sale and distribution of liquor, the state would no longer shoulder the cost of purchasing, storing, distributing and selling liquor to Washington residents. The taxes imposed on liquor sales would continue to be collected by the state, but they would no longer be used to support a large distribution and sales network, allowing that money to be used for increased enforcement or to balance the budget.

Current Budget: $108 million, 673 FTEs
Potential 100% Savings from Full Privatization: $108 million

E. Passenger Ferry Service

Washington State Ferries provide 27 million passenger trips each year. Many of those trips are on passenger-only ferries, where fare-box revenue only covers 60% of the cost of operation. Competition against the state's ferry service is currently illegal within ten miles of any existing route, an area that covers all Puget Sound ports. Revising the law to allow private companies to compete for passengers could improve service to thousands of commuters and reduce the burden on taxpayers of the heavily subsidized government ferry service.

Current Budget: $327 million, 1684 FTEs for operation of the entire ferry system
Potential 5% Savings for Private Competition for Passenger Ferries: $16 million


F. Park Operations and Maintenance

The State Parks and Recreation Commission operates and maintains 125 camping and day-use parks, land and water trails, winter recreation areas, historic sites, interpretive centers and environmental learning centers. Inviting private companies or non-profit organizations to compete for contracts to maintain and operate these facilities would improve efficiency for an agency that is increasingly constrained by budget pressures and threatens to close state parks.

In Canada many provinces have successfully contracted out park operations with the private sector. By tapping private companies and non-profit organizations they have saved money and maintained a high level of service to Canadian citizens.

Current Budget: $76 million, 548 FTEs
Potential 10% Savings: $7.6 million

G. Prison Construction and Management

Case studies from across the nation show that private competition in prison management can help increase quality and public safety while cutting cost. By allowing private contractors to compete with existing state workers for prison management and construction other states have reduced costs by 10 to 25 percent.

Private companies already manage a Whatcom County work release facility, a Spokane County juvenile detention center and a federal prison in the state. Instead of reacting to budget constraints by releasing prisoners back onto the streets, many of whom will quickly seek out new victims, competitive contracting should be used to reduce cost and increase quality of service at our state's correctional facilities.

Current Budget: $1 billion, 7,629 FTEs
Potential 10% Savings: $100 million

H. K-12 Busing and Student Transportation

Many private companies already provide transportation for thousands of Washington students. Competitively bidding the remaining government worker monopolies could free state funds and reduce the government workforce while maintaining a high level of safety and well being for the children of our state.

Current Budget: $387 million, 3,630 FTEs
Potential 10% Savings: $38 million

I. Department of Printing

The public printer binds, prints and delivers documents to all branches of state government. Printing firms in the private sector are capable of providing quality and cost-competitive printing services to the legislature, judiciary and executive, meeting all service requirements and employing the latest technology currently provided by the Department of Printing, a taxpayer subsidized monopoly.

Current Budget: $83 million, 155 FTEs
Potential 10% Savings: $8.3 million

J. State Convention and Trade Center

Supporting Washington state products and industries is an important element of ensuring a vibrant and innovative economy. By subsidizing the State Convention Center taxes must be increased on residents and citizens. The $30 million the state spends every two years to keep the Convention and Trade Center running is money that would otherwise be productively spent in the state economy, promoting actual trade and commerce between Washington businesses and the rest of the world.

Many states have privately run convention centers, and in fact, our state has a thriving privately-run convention and trade show industry. By continuing to fund a trade center with taxpayer dollars the state takes away much needed business from local merchants that could otherwise do the job. Washington state should sell the Convention and Trade Center, returning a private sector function to private hands.

Current Budget: $30.9 million
Potential 100% Savings from full privatization: $30.9 million


Proposal IV: Eliminate Prevailing Wage Requirements in School and
Highway Construction

A. Highway Construction and Prevailing Wage

Current law needlessly drives up government contracting costs. The prevailing wage statute, called the "little Davis-Bacon" law because it is modeled on federal law, interferes with the normal bidding process for highway construction contracts by imposing requirements that eliminate wage competition and artificially inflate costs. The state law, first enacted in 1945, provides that the hourly wage rate paid to laborers on any public works contract shall be "no less than the prevailing wage in the locality where the work is being performed."

The prevailing wage is defined as the wage paid to the majority of workers in the applicable trade, which in practice is not interpreted as the true market wage but as the going union rate. Unfortunately, the effect of this interpretation is to reverse the meaning of words. Normally, in our free economy the prevailing price of labor, or of any commodity, is set by open market forces, not by a government-administered process. By interfering in the market the government only drives up its own costs.

Federally-funded highway construction will continue to be governed by the national Davis-Bacon law, but repeal of the state law would permit major savings on transportation projects built with state funds. Repeal would be especially helpful in rural areas of the state that have a lower wage base than the high-priced Puget Sound corridor, allowing the state to provide more service with limited funding.

B. School Construction

Just as mandated prevailing wage laws increase the cost of highways, they also drive up the cost of school construction. Over the next two years $408 million in state funds will be used to match local spending on school construction. National studies show that prevailing wage regulations add up to 20% to the cost of building a new school. Elected leaders must ask themselves, "Why are we building only five schools for the price of six?" Allowing market forces to set wage rates would bring the state's labor costs down to a realistic level, one that reflects the actual cost of putting up a comparable building in the private sector.

New schools are sorely needed, as are trained teachers, computers and other educational equipment. Ten states have already repealed their prevailing wage laws. Washington should join them. We can make more efficient use of tax dollars to advance important educational goals if we eliminate the inflated cost of prevailing wage statutes.


Proposal V: Review the Need for Various Boards and Commissions

Washington state government supports more than 440 appointed boards and commissions. Most of these groups advise agencies and policymakers on constituent interests or industry practices. Many are not necessary for the quality delivery of government services to Washington residents and are a drain on scarce resources during difficult economic times. A thorough review is needed to determine whether to continue or eliminate many of these taxpayer-funded entities.

In some cases, the services provided by the board or commission can easily be turned over to private organizations and professional partnerships. A fee on a particular industry or classification of business funds many commissions. In these cases, there is no need for the industry group to be facilitated by the government. Instead, it should be organized and coordinated as a private entity funded and operated by the businesses concerned.

In many cases state commissions are not necessary for the safety and well being of Washington citizens, or were created decades ago and are no longer necessary. Often commissions are created only to satisfy certain political constituencies. Eliminating these programs and commissions may anger some influential interest groups, but will not jeopardize vital services to Washington residents.

Governor Locke has rightly proposed eliminating thirty programs and commissions. As part of the budget process, the legislature should carefully consider the role of all 440 boards and commissions and determine if the private sector could provide a similar service if state funding is ended. As an initial, cursory review, some of the programs that should be considered for elimination include:
Board / Commission Name Cost to Taxpayers
· Acupuncture Consulting Group $280,000 / year
· Advisory Council on Historic Preservation $6,000 / year
· Bicycling Advisory Group
$6,093,000 / year
· Blue Ribbon Panel on Ergonomics $34,000 / year
· Board of Boiler Rules $21,500 / year
· Board of Denture Technology $332,532 / year
· Board of Massage
$715,180 / year
· Naturopathy Committee $233,075 / year
· State Advisory Committee $14,450 / year
· Washington State Conservation Commission $20,295,000 / year

Many boards whose work overlap could be combined. For example, the Child Care Partnership Committee could become part of the Child Care Coordinating Committee, which coordinates child-care and early childhood services between the legislature and all state agencies. The Chiropractic Advisory Committee could be folded into the Chiropractic Quality Assurance Commission.

To ensure the rights of all Washington residents are protected the governor could consolidate the various minority relation boards into the existing Civil Rights Commission. Combining the commissions would end the need to pay for a separate commission for each racial or ethnic group. Similarly, the regional Developmental Disability Advisory Boards could be consolidated into the Developmental Disabilities Council, which already receives more than $2 million.


Proposal VI: Implement State Agency Self-Evaluation

One of the keys to maintaining a well-run government is to transfer proven management principles from private enterprise to the public sector. During a budget crisis each level of government must be capable of conducting an effective performance evaluation, providing agency managers and elected leaders with the tools to evaluate program effectiveness and determine how best to cut cost while maintaining service. In this spirit the Washington State Department of Transportation (WSDOT) has instituted a new, quarterly self-evaluation that can help policymakers identify areas where program performance or service delivery must be improved.

While the WSDOT model does not include cost modeling and return on investment measurements similar to that of a private enterprise, the initiative is a useful start in returning accountability to Washington state government. It is important that the evaluation not be a cheerleading or self-promotion opportunity for agency managers, but that the evaluation criteria present realistic measures of success and objective evaluations of performance.

Two keys to establishing an effective self-evaluation are setting attainable and measurable goals, and identifying and measuring yourself against your competition. When combined with the ability to contract-out government services, self-evaluation can be a valuable tool for agency managers and state legislators. By readily identifying areas for improvement, competition can then be selectively instituted to improve services and reduce cost.


Proposal VII: Open State Workers' Compensation Insurance to the
Private Sector

Washington state is one of only five states in the nation that does not allow businesses the choice of private workers' compensation insurance. Other states allow private companies to provide workers' compensation insurance. By ending Washington's monopoly on this service the state could significantly reduce its administrative costs. Why not give companies a choice to buy workers' compensation insurance like individuals buy car insurance?

In Oregon more than 200 insurance companies offer worker compensation plans tailored to the specific needs of businesses and employees. To protect the interests of injured workers an appointed Ombudsman for Injured Workers helps employees, employers and insurance companies to quickly and effectively resolve disputes. In Idaho more than 270 private insurance companies compete in offering high-quality service to meet employer's workers' compensation needs. By tapping the vigorous insurance market the burden on state taxpayers is reduced and the quality of insurance coverage is improved.


Proposal VIII: Sell the UW Metropolitan Tract

In 1860 the Legislative Assembly of Washington Territory established a 10-acre campus for the University of Washington overlooking Elliott Bay. In 1895 the University relocated to its present location along the shore of Lake Washington. As Seattle grew, the downtown area overlooking Elliott Bay became more developed and the 10-acre parcel of land became known as the UW Metropolitan Tract. Today the state still owns the property and holds leases, through property management firm UNICO Properties, Inc., with occupants of the Rainier Tower and Olympic Four Seasons Hotel.

While UNICO has fulfilled its contract requirements in good faith, the agreement signed with the University in the mid 1970's does not provide reasonable return for Washington taxpayers. A recent study by the Joint Legislative Audit Review Committee (JLARC) found that, "The operating return to UW on the Metro Tract office properties is about 49% of the operating return earned by the SIB (State Investment Board) on its Union Square commercial buildings."

UNICO's agreement allows them to use up to 50% of operating revenue to cover expenses. This formula was established in the 1970's in exchange for UNICO financing of capital improvements taken on by the University. UNICO also received a contract extension through 2014.

Based on the latest estimate the Metropolitan Tract property is worth $285 million. With higher education funding threatened by the looming budget deficit, it does not make sense to hold an investment that will generate below market returns for years to come.

Selling the Tract would generate significant revenue that could be used to address the current budget deficit, and over the long term would capture property and sales tax revenue that is now being lost.

The Metropolitan Tract represents a common situation, in which a government entity attempts to compete in a private sector enterprise, but cannot generate return on investment typical of a private company. Unfortunately, when this occurs it is not private investors that lose money, but the taxpayers of Washington state. Washington taxpayers cannot sell their stock. As residents, we are forced to carry a higher tax burden because of the state's poor business decisions. Instead of subjecting residents to the risks of rental price fluctuations and falling downtown occupancy rates, the University of Washington should get out of the real estate business and return the Metropolitan Tract to the private sector.


OTHER PROPOSALS

Government Services Contribution Fund

Policymakers across the state often call for tax increases to fund higher government spending. Undoubtedly, as the debate over the current budget deficit gets more heated, media pundits and citizen activists will ask the legislature to raise taxes, rather than cut government spending. Typically, people that support tax increases feel that other people are not paying their "fair share," or that society can "afford" to pay more to support government programs.

Once a tax increase is imposed, compliance is not voluntary. However, for those who feel their taxes are not high enough, they should be able to make additional contributions to government. To assist in collecting money from people who wish to contribute more Washington should create a Government Services Contribution Fund. The fund would be administered by the Department of Revenue. Payments would be added to the General Fund and allocated by the legislature during the normal budget process.

Streamlining the process for Washington residents to contribute more money to state government would help address the impending deficit without cutting programs. It would also add to the public debate over spending priorities. Instituting a formal process would allow individuals to first provide their own support for the programs they feel are the most important before advocating that higher taxes be imposed on their neighbors.

Budget Process Reform

Because the Washington legislature only meets for a limited time each year, and state budgets are enacted on a two-year cycle, it is often difficult to predict, and then react to, dramatic changes in tax revenue. The current budget deficit is largely a part of this disjointed process.

Large corporations have similar problems. Budgets and fiscal planning conducted at the beginning of the year often change dramatically during the course of the following 12 months. To address this problem, many corporations use concepts like program prioritization and zero-base budgeting to help them weather economic difficulties.

By first prioritizing all proposed initiatives, then assessing how many of the high priority programs can be funded using existing revenue, Washington state could adjust to changes quickly and without extended debate. In Texas, the Education Agency found zero-base budgeting to be particularly effective when overall spending must be reduced.

A prioritization system could be established by the legislature. Some of the questions to determine priority levels include:

· Is this a core government service?
· Could this service be provided by the private sector?
· Does this service or program affect the security of Washington residents?
· Does this program or service fit within the mission statement of the agency that will be administering it?

Reforming the budget process using proven tools from the private sector will help create a public finance system that is durable, fair and flexible - one that provides the vital services of government at the lowest cost to taxpayers.

CONCLUSION

Washington legislators arriving for the new session are faced with many tough choices. Without significant reforms, future legislatures will face similar problems. It will take leadership and innovation from the policymakers of our state to solve our fiscal problems and restore trust in state government. While the reforms proposed in this paper will not alone solve the budget deficit, they can help address the immediate problem and secure the advantages of lasting, successful reform in state government.

A conservative estimate of the savings generated by the fundamental reforms proposed in this paper offers the prospect of immediate change and long-term budget stability. Taken together, these reforms would reduce the cost of state government operations by nearly $1 billion. Tinkering around the edges by relying on sin taxes and unstable lottery funds will simply lead us back into the same situation, or worse, during the next biennium. With common sense reforms, services to state residents can be maintained at a high level, while the cost to taxpayers is reduced.