TABLE OF CONTENTS

• I. Introduction
• II. Controlling Costs and Limiting Spending
• III. Efficiency Improvements
• IV.  Ending the Government Monopoly on Public Sector Jobs Through Competition
• V. Opportunities for Privatization of State Services
• VI. Enhancing Economic Competitiveness
• VII. Other Recommendations
• VIII.  Conclusion
• Appendix

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A Policy Guide for Budget Reform
Strategies for Improving State Government Services and Reducing the Deficit

by Eric Montague, Policy Analyst
January 2002

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I. Introduction

State legislators face a serious budget deficit for the biennium starting in 2003.  Unlike last year, however, this year’s deficit is not a surprise.  A faltering economy, coupled with a band-aide budget solution enacted during the previous legislative session, leave the state with a biennial budget shortfall projected to reach $2.4 billion.[1]

The new deficit is primarily the result of two factors.  First, the cost of state government continues to increase.  Second, the state economy remains mired in recession, meaning tax revenues are not growing as fast as state officials predicted.  Most economists predict the slow economy will continue until at least the end of 2003.  While the cost of government continues to increase, tax revenue is now projected to rise at a slower rate, yielding a large gap between the level of planned spending and expected tax collections.

In order to understand the large difference between planned higher spending and actual revenue, it is important to consider this problem in more detail.  According to the Washington State Forecast Council, 2003-05 general fund revenues are projected to increase by $1.5 billion, or 7.6 percent, compared to the previous biennium.  The increase is lower than the ten-year average increase of 10.04 percent, but is much higher than the 0.7 percent decrease in general fund tax revenue collected in 2001-03.  Figure 1 shows the history of tax revenue growth over the past twelve years.[2]

As the chart shows, aside from the previous biennium, state tax revenues increased steadily over the past ten years.  The graph below shows that spending growth, while slowing during the last biennium, follows a similar steady upward trend.  Excluding the 2001-03 biennium, spending increases regularly outstripped both population and inflation growth, indicating the rapid expansion of general state government.[3]

This is particularly true for the government expansion of the 1990s.  During a time of unprecedented economic prosperity, when more people were employed and fewer social services should have been required, government spending still grew by an average 10.46 percent each biennium.  Instead of controlling spending and preparing for the downturn that was certain to come, state policymakers sharply increased spending and left the state with few reserves to help maintain state services during difficult economic times.

Projections show that at current growth levels, rising state spending will continue to exceed revenue.  The chart below illustrates the pressing need for a reduction in the rate of government spending growth.[4]

Even these estimates may be too optimistic.  The state’s official revenue projections through 2007 assume that a full economic recovery will begin in late 2003.  When policymakers use overly optimistic forecasts they are tempted to spend money they do not have.  If the projections prove incorrect, as they often do, the state will face yet another financial crisis.

Resolving the current budget deficit requires a new approach to government reform and strong, clear leadership from state policymakers.  Innovative efforts to control the growth in state government costs, combined with policy changes that help revive and maintain a strong economy will solve the existing budget deficit and ensure that future downturns do not force state government into yet another crisis.

This study presents practical and innovative policy changes that will reap immediate savings while also reducing the long-term structural costs of state government.  The ideas can be separated into four primary categories:

Employment reductions and spending limits.

Efficiency improvements for state services.

Elimination of the government monopoly on public sector jobs.

Economic competitiveness reforms.

Each of the following sections includes specific recommendations that can help reduce the state deficit, improve the quality and efficiency of state services and restore public trust in state government.

II. Controlling Costs and Limiting Spending

During a budget crisis it is necessary to make limited, but nonetheless difficult, cuts to state spending and employment in order to get spending under control.  With strong leadership and innovative reforms in the way state government operates, any needed cuts can be minimized.  Following are practical recommendations that can help address the immediate need for state budget reductions.

A. Adopt a Flexible Freeze on State Hiring

In his most recent proposal for addressing the 2003-05 deficit, Governor Locke recommends reducing the budgeted state workforce by a total 2,500 Full Time Equivalent employees (FTEs).[5]  Reducing the state workforce does not necessarily mean state employees will lose jobs.  In most circumstances, unfilled positions are eliminated and retirees are not replaced.  Nonetheless, the Governor’s commitment to limiting the growth of public sector labor costs is encouraging, and indicates a shift in the attitude toward the growth in state employment.  Since the Governor first took office in 1997 state employment has grown by almost 9,000 employees, reaching more than 102,000 FTEs in 2002,[6] making the State of Washington by far the largest employer in the state.

Adopting a flexible freeze on state hiring would maintain the Governor’s commitment to reducing state employment growth, while allowing agency managers to maintain existing staffing levels – prioritizing new hiring where it is most needed, while ensuring the overall size of state government does not continue to grow at a time when taxpayers can scarcely afford it.  This approach maintains the flexibility necessary for agency managers to focus on the most important programs and maintain adequate service levels.

B. Delay Automatic State Pay Increases

Average annual compensation for full-time state employees tops $53,000.  This includes a salary of more than $42,000, a generous benefits package including medical and dental insurance, a 401(k) retirement plan, minimum 12 days paid vacation and 10 paid holidays each year, combined with protective union rules that virtually guarantee lifelong employment.[7]

At the same time, the average annual salary for a typical Washington state resident is just over $32,000.[8]  During an economic downturn many people in the private sector face a reduction in pay or the loss of their jobs, while government workers are assured employment with regular raises.  Policymakers should delay automatic pay increases for state employees until the rising costs of government are brought under control.  Delaying automatic pay increases would save $351 million over the biennium.[9]

C. Restore Limits on Spending Growth

In 1993 voters passed Initiative 601 to place reasonable limits on the growth of state government spending.[10]  State policymakers suspended those restrictions during the 2002 legislative session.  In the four legislative sessions prior to 1993 state spending grew by an average 12 percent each biennium.  Following the adoption of spending limits, growth in the cost of government slowed to an average of 8.6 percent per biennium.[11]

With the limits suspended, state spending could once again begin to spiral out of control.  Returning to reasonable budget limits similar to those of Initiative 601 would bring greater discipline to public finances, ensure that future levels of public spending are sustainable and, most importantly, help restore citizens’ confidence in their government’s willingness to manage costs.

D. Adopt a Five-Year Sunset and Review Period for State Boards and Commissions

Washington state government includes 406 appointed boards and commissions.  The cost of administering these organizations in the 2001-03 biennium is over $400 million, with more than $1.3 billion allocated toward the programs they oversee.[12]  Most boards and commissions advise agencies and policymakers on constituent interests or industry practices, or serve as professional oversight or certification bodies.  Some were created years ago to serve a legitimate public need, but have long since outlived their purpose.[13]

In many 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 type of business provides funds for many commissions.  In these cases, there is no need for the industry group to be accredited by the government.  Instead, such commissions should be organized as private entities and funded by the businesses concerned.  Often state commissions are created only to satisfy certain political constituencies.  Eliminating some of these boards and commissions may anger some influential interest groups, but will not jeopardize vital services to Washington residents.

The legislature should establish a mandatory five-year sunset review for all boards and commissions.  Those that are no longer needed would automatically expire.  Those the legislature determines are still needed could be re-authorized for a further five-year term.

E. Eliminate Positions Vacant More than Six Months

State public employment levels are measured using a number of different methods.  One measure, typically used by agency managers when requesting budget increases, is the number of positions for an agency to meet its desired staffing level.  In many cases, this measurement includes positions that have been vacant for a long time.  Currently hundreds of positions in state government exist on paper, but are not filled.[14]

If a position remains open for more than six months, it is reasonable to assume the agency can do its work without an employee in that position.  By eliminating all positions that have gone unfilled for six months, the state can cut budgeted payroll in areas that are obviously not critical to public safety or the basic operation of state government.  This policy would provide more accurate budget information for the legislature and would lower costs to taxpayers.

III. Efficiency Improvements

Many policymakers argue that as the state population increases and incomes rise, government spending should increase at a roughly equivalent rate.  This assumption reveals a key difference between private sector managers and government managers.  While it is true that the burden on state government grows as the population increases and the economy fluctuates, it is also vital that policymakers learn from the private sector, and continually work to reduce taxes and regulations through innovative and entrepreneurial government reform.  In the private sector, the cost of producing a product is continually reduced over time because competition encourages companies to become more efficient in their delivery of services.  As a result, costs go down and consumers get more.

The evolution of the computer industry provides a clear illustration of how this concept works -- specifically with the price of a Central Processing Unit (CPU), otherwise known as the “brains” of the computer.  Since Intel first introduced the Pentium CPU in 1993, the price has continually fallen, while the processing power of the chip has skyrocketed.  As a result, the cost of a computer has continued to drop, eliminating the digital divide with record speed.  Today we can purchase a computer chip for about one third of the price as in 1993, but with 1000% more processing power.[15]

In Washington, government agencies are largely immune to the reforming incentives of competition.  Restrictive state laws, rigid union work rules and unwilling agency managers foster an insulated, risk-averse culture that fails to achieve the kind of efficiency improvements that are common in private industry.  The proposals in the following section can help state agencies become more efficient, allowing them to provide higher-quality services at a lower cost to taxpayers.

A. Achieve Savings Through Employee Incentive Program: “Gainsharing”

Private sector employers often develop innovative compensation tools to help retain quality workers and to reward them for coming up with ideas that save the company money.  Government agencies consistently struggle to offer performance incentives that match those available in the private sector -- programs that increase morale, reward high performance and help reduce the cost of running state government.  Budget constraints, fractured, short-term planning and strict civil service laws form a barrier to incentive programs that can improve worker performance and boost flagging morale.

Baltimore County, Maryland was struggling with these problems.  As part of the solution the county government implemented an innovative program called Gainsharing.[16]

The Gainsharing program encourages frontline employees to recommend and implement projects that reduce cost and improve customer service.  When a good idea reduces costs, 50 percent of the savings are distributed to the employees who implemented the proposal and the other fifty percent is returned to the general fund.  In one example, employees in the Dietary Division of the Bureau of Corrections found ways to streamline and improve the meal preparation system, saving the County more than $150,000.  As a result, the thirteen employees that designed and carried out the changes received one-time checks for more than $5,000 each.[17]

While this program may not be feasible for all government agencies, those that effectively implement the program can achieve significant cost savings, improve service and reward workers for creative thinking.

B. Implement Technology Improvements and Efficiencies

Washington is rightly cited as having one of the most technologically advanced state governments in the nation.  Internet access to government information is superb and many state government functions, like permitting, document publishing and bidding for services has moved online.[18]  This is an area where the state has shown considerable initiative, and more can be done.

Automating some functions that are now performed by state employees can reduce the cost of state services.  Examples from across the United States and Canada show how this can be accomplished.  Following are two examples that would work in Washington state.

In Florida, the Department of Business and Professional Regulation (DBPR) – the equivalent of Washington’s Department of Licensing – created a new online method to process business licenses, answer general questions and improve overall customer service.[19]  The new system combined 74 antiquated systems that previously handled almost 200 different license categories.  By eliminating unnecessary data entry and phone conversations while increasing system accessibility, Florida’s DBPR reduced costs and improved customer service to businesses and taxpayers.

In Ontario, the provincial government embarked on a business transformation project designed to automate and streamline the Ministry of Community and Social Services, which serves a similar role to Washington’s Department of Social and Health Services (DSHS).  By automating many of the services provided to the public and integrating data in most internal applications the Ministry gained savings of more than $350 million (Canadian) and expects to realize more than $200 million of savings each year into the future.[20]

C. Adopt Activity-Based Costing

To create this year’s budget proposal, Governor Locke used a new Priorities of Government (POG) budgeting process that relies on consolidating detailed agency activity information and prioritizing each different activity based on pre-established criteria.[21]  To establish the most effective use of scarce public resources, it is important for program managers and budget planners to have the most accurate and timely cost data for each agency activity.

Agency managers are consistently faced with difficult decisions about the best way to administer state services.  Often managers simply do not have access to the information they need to make important decisions – such as whether to provide a service in-house or through a contractor, or whether the cost of a service outweighs the benefits. 

Lawmakers can improve the performance of state agencies by implementing Activity-Based Costing (ABC).[22]  ABC is a method of cost analysis designed to describe all the cost elements of a certain activity, not just the major factors like labor, fringe benefits, supplies and depreciation.  In the private sector ABC is used to account for every hour of work and each piece of equipment involved in a project, including capital, facility and overhead costs for an organization, allowing managers to make informed decisions about the use of scarce resources.

Through the experience of a 1998 pilot program, Texas Comptroller of Public Accounts Carole Keeton Rylander found that, in a government setting, Activity Based Costing can:

Help agencies identify ineffective and wasteful activities.

Reveal the cost of individual services.

Encourage changes that improve efficiency.

Prompt reviews of organization procedures when costs appear to be out of line.

Provide reliable data for making comparisons with the private sector.

Help to establish reasonable rates for paying private-sector contractors.

Activity-Based Costing is not a novel, untested concept.  It has proven effective in cities and states across the nation.  In 1992, Indianapolis Mayor Steven Goldsmith implemented activity based costing in agencies throughout the city.  Using the new analysis tool city workers reduced the cost of plowing snow from $117 per mile to $38 per mile and cut the cost of sealing cracks along the highway from $1,200 per lane-mile to $737 per lane-mile.[23]

In another example, ABC helped the Iowa Department of Transportation generate $200,000 in new revenue in 1996 and reduced the time needed to paint stripes on state highways.  By developing a comprehensive cost analysis of three major activities -- center line and no-passing marks, edge-line markings and curb, island and miscellaneous markings -- the Department reduced unproductive down-time and began performing work for other governments during the time they saved.[24]

With similar planning and organization, and a new focus on Activity-Based Costing, state agencies throughout Washington can achieve similar efficiencies in the way they provide public service.  In recent years voters have repeatedly displayed their lack of trust in the way government spends their money.  New programs that clearly show how state government can do more with less will give voters the confidence to approve funding for the legitimate infrastructure and service needs of the state.

D. Use Performance-Based Contracting

Performance-based contracting (PBC) is a simple, well-defined concept.  Unfortunately, it is often met by political opposition from special interest groups that fear the loss of state control over private contractors’ methods and processes.  Some state contracts, like the one for lottery advertising, are already managed using PBC.  This section explains why PBC should be used in contract management throughout state government.

In performance-based contracting, a contract firm is evaluated not by process, but by results, or its performance.  For example, the work of a landscaping company hired to care for the grass at highway rest stops can be judged on the condition of the grass, not on how often it is cut.  The state can still maintain general safeguards to ensure the contractor complies with environmental and workplace regulations.  Naturally, many contracts are much more complicated than cutting grass, but the overall concept is the same.  Contract compliance is measured by results, not process.

This method of contracting has proven successful in other states.  In Oklahoma, the Department of Rehabilitative Services contracts for drug treatment based on patient outcomes.  Patients are treated as individuals, and medical contractors are compensated as improving patients reach certain milestones.  In Tennessee, the Metropolitan Nashville and Davidson County government uses performance-based contracts to manage consultants who help the government achieve cost savings.  Consultants are evaluated on actual improvements in government efficiency, not on the number of hours they bill, resulting in successful reforms that will trim $10 million off the upcoming budget.[25]

These are just a few examples that illustrate the effectiveness of performance-based contracting.  Freeing private firms to develop innovative ways to meet public needs allows state policymakers to reduce the cost of government while improving service to the taxpayers.

E. Sell Non-Essential Real Estate Holdings

State policymakers can learn important lessons from the private sector about how to reduce costs and improve performance.  One example is the sale of non-core real estate assets.[26]

During economic downturns, private companies often reduce their real estate holdings to generate new revenue and trim operating costs.  Zymogenetics, a Seattle-based biotechnology company, earlier this year sold its headquarters building, the old City Light Steam Plant on Lake Union, then leased it back for a term of 15 years.  The move allowed the company to get out of a business – real estate – that is not its core competency and at the same time raise $52 million cash.  Through a simple leaseback arrangement Zymogenetics made money, saved itself the headache of owning and managing a large corporate campus, and retained use of the building for its own needs.[27]

Safeco Insurance Company provides another example of how private firms shed costs that do not fit what they do best.  During the 1990’s Safeco expanded into new markets and attempted to sell products about which it had little experience or knowledge.  After suffering three years of poor financial performance, the company in January 2001 sold off non-core businesses and returned to a focus on personal and small business insurance and investment products.[28]  Safeco’s successful transition provides an important example of how state government can move ahead with its own reform efforts.[29]

F. Allow the State Auditor to Conduct Performance Audits

Performance audits are a proven way to save taxpayer money.  In Colorado, performance audits completed in June 2000 identified over $12 million in savings from easily adopted policies, and $41 million in additional near-term efficiency improvements.  In Florida, an audit of the budget system helped the legislature and the governor enact changes that will significantly improve efficiency.  In Texas, performance audits over an eight-year period identified total savings of $8.1 billion.[30]

In Washington the Joint Legislative Audit and Review Committee (JLARC) conducts a limited number of performance audits.  The quality of JLARC research is excellent, however it only audits specific programs as directed by the legislature, which significantly restricts its effectiveness.  Audit assignments also face conflicts of interest because committee staff must scrutinize 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 independent State Auditor to conduct three performance audits of state agencies.  Governor Locke approved the funding, but vetoed the provision authorizing the actual program, even though it had passed the House and Senate by wide margins.[31]  During the 2002 session, the Governor finally approved the three audits, but only one was to be conducted by the State Auditor: a review of the state’s claims and benefits systems, comprising industrial insurance, food stamps and other programs.[32]  The Governor’s Office of Financial Management was directed to perform the other two audits.[33]

Three tightly limited audits are clearly not enough.  The State Auditor has the capability to conduct performance audits with a broad view of state government and the interactions among agencies.  The Auditor should be allowed to conduct comprehensive performance audits to identify waste and overlapping regulations, and to help restore the public’s trust in state government.

G. Eliminate Prevailing Wage Regulations That Drive Up Government Costs

1. Ending Prevailing Wage Rules Would Allow More Highway Construction

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."[34]

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 for the largest city in the region.[35]  The effect of this interpretation is to reverse the meaning of “prevailing wage.”  Normally open market forces determine the prevailing price of labor, not a pre-determined, government-fixed price.  By interfering in the natural movements of the market the government artificially drives up its own costs.

Federally funded highway construction will continue to be governed by the national Davis-Bacon Act, 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 that have a lower wage base than the high-priced Puget Sound corridor, allowing the state to provide more and better roads with limited funding.

2. Ending Prevailing Wage Rules Would Allow More School Construction

As with highways, prevailing wage rules needlessly drive up the cost of school construction.  During the 2001-03 biennium the legislature appropriated $408 million to match local spending on school construction.[36]  National studies show that prevailing wage regulations add up to 20% to the cost of building a new school.[37]  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 align the state’s labor costs with real-world prices, ones that reflect the actual cost of putting up a comparable building in the private sector.

New schools are sorely needed, as are trained teachers, new computers and other educational equipment.  Ten states have already provided greater flexibility to their education systems by repealing their prevailing wage laws.[38]  Washington should join them.  Eliminating the inflated cost of prevailing wage statutes would make more efficient use of tax dollars and advance important educational goals.[39]

IV.  Ending the Government Monopoly on Public Sector Jobs Through Competition

Current law makes it illegal for the state to open most government work to competition, in effect creating a monopoly on public sector jobs.[40]  Competitive bidding is a powerful planning tool that would give state managers greater flexibility in working within tight budgets.  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 continue to provide a given public service, the very possibility of competition drives down costs and encourages excellence.

Examples from other state and local governments show typical savings of ten to twenty-five percent.[41]  In 1998, an independent audit estimated the Washington State Department of Transportation could improve service levels and save at least ten percent, or more than $25 million, by competitively bidding highway maintenance.[42]  This would be particularly timely, considering the recent defeat of Referendum 51.  Voters have signaled they do not believe their tax dollars are being spent wisely and efficiently.  Many existing state services would experience similar benefits by introducing competition.

A. Allow State Agencies to Immediately Open Public Services to Competition

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.  The collective bargaining bill passed by the legislature in 2002 repeals the ban beginning July 1, 2005.  While this is a welcome policy change, it is unlikely to have any real impact.  The new law makes contracting out subject to collective bargaining with public-sector unions beginning July 1, 2004, virtually assuring that in practice agency managers will not be able to open public work to competition.

Immediately repealing the ban on contracting out would allow agency managers to select the most efficient and effective method for delivering services to Washington residents.[43]  Delaying implementation of this new authority until 2005 will only permit the continued waste of taxpayer money and will further serve to undermine public trust.  The ban could be lifted immediately by moving the effective date of the new law to early 2003.

B. Examples of State Services that Would Benefit from Competition

Many state programs would directly benefit from open competition.  Following is a list of ten programs that are particularly suited to competitive contracting.[44]

1. Highway Maintenance

2001-03 Budget: $261 million, 1310 FTEs

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 road repair, 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.[45]

2. Operation of the State Motor Pool and Mail Services

2001-03 Budget: $27.9 million, 99 FTEs

The Department of General Administration operates an extensive fleet of cars, buses and vans for use by state agencies and personnel.  Basic maintenance of these vehicles, such as oil changes, tune-ups and other repairs, require a full assortment of public-sector staff.  Many private companies have similar fleets of cars, but the cars are leased from experienced and competitive management companies.[46]

San Mateo, California; Coral Springs, Florida; and Indianapolis, Indiana have all opened their auto fleet services for competitive bidding and all have benefited from significant savings.  In Indianapolis a government employee group won the motor pool bid and increased productivity by 22 percent, while saving taxpayers $4.6 million.[47]

To improve service the Department should also consider competitive contracting for its internal mail delivery system.  The Consolidated Mail Service is a full-service mail delivery and routing agent that performs many of the same functions as the numerous private mail and delivery companies operating throughout Washington.

3. Passenger Ferry Service

2001-03 Budget: $6.3 million (number of FTE’s is unreported)[48]

Washington State Ferries provide 27 million passenger trips each year.  More than one million of those trips are on passenger-only ferries, where fare-box revenue covers less than 20 percent of operating costs.  State Ferries director Mike Thorne recently announced plans to begin eliminating the state’s passenger ferries on June 15, 2003.[49]  The move is designed to reduce the overall taxpayer subsidy of the state ferry system from 31 percent to 10 percent.

Mr. Thorne expresses hope that King and Kitsap County officials may decide to pay for passenger service.  This is unlikely, considering the limited financial resources of most local governments.  Fortunately there is another way to maintain the state’s passenger-only ferry service.  The state should lift the ban on private operation of ferries in Puget Sound waters.  Currently, operating a private ferry service within ten miles of any existing route, an area that in effect covers all of Puget Sound, is against the law.[50]

Private companies have expressed interest in serving the routes that state ferries do not currently serve and would gladly, if allowed, offer service on many of the current routes operated by Washington State Ferries.  One recently proposed route, from Kingston to Seattle, won temporary approval from the state only because the State Ferry Workers Union decided not to oppose the license.[51]  Repealing the ban would open the way for new ideas, new investment and more efficient operations, at no risk to the public.  If the state can no longer carry passengers across the Sound, it should at least step aside and let private companies offer the service.

4. Park Operations and Maintenance

2001-03 Budget: $76 million, 548 FTEs

The State Parks and Recreation Commission operates 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 which regularly threatens to close state parks.

In Canada, many provinces have successfully contracted out park operations to the private sector.[52]  Here in Washington, private contractors are bidding to operate two state parks -- Crow Butte State Park near Walla Walla and Lake Cushman State Park in Mason County -- both of which have been closed by the Parks Commission.  Instead of mothballing the parks, the private operators propose to maintain public access for a small operating fee.[53]

5. Public Printer, Printing and Binding Services

2001-03 Budget: $83 million, 155 FTEs

The Department of Printing operates as a state-sanctioned monopoly and provides services 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.  Competitive contracting would provide greater convenience, faster service (there is no “stand-in-line” mentality when companies compete for work) and more technologically advanced capabilities.

The federal government is leading the way in contracting out printing services.  The Office of Management and Budget decided recently to open the publication of next year’s budget to competition, instead of routinely assigning the job to the official Government Printing Office (GPO).  In response, GPO officials cut their price 23%, from $505,000 to $387,000, and won the bid.  When faced with the real possibility of losing the work altogether, this normally unimaginative bureaucracy suddenly found a way to do it for less.  The Bush Administration estimates adopting the same policy government-wide could save taxpayers $50 to $70 million a year in printing costs.[54]

6. Department of Corrections Health Care Services

2001-03 Budget: $133 million, 565 FTEs

The Department of Corrections employs hundreds of doctors, nurses, dentists, psychologists and other health professionals to meet the health care needs of the state correctional population.  By contracting with private sector Health Management Organizations, hospitals, clinics and doctors the department can save cost and improve the quality of inmate care.  Many other states already employ private contractors to help reduce cost and improve flexibility and performance.  Across the nation 34 states have some privatized health care for inmates while 24 state inmate health care systems are run completely by private contractors.[55]

7. Prison Construction and Management

2001-03 Budget: $528 million, 5044 FTEs (Custody-related costs only)

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.[56]

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

8. Department of Natural Resources Trust Land Management

2001-03 Budget: $113 million, 650 FTEs

The Department of Natural Resources is constitutionally responsible for managing state trust lands for designated public beneficiaries.  These include public schools, universities, counties, prisons and charitable organizations.  To reduce cost and improve the return on public investments, the Department should competitively contract for forest management services.

Highly qualified forest management firms are effective stewards of hundreds of thousands of acres of private forestland throughout Washington state.  Contracting with these experienced private organizations to manage public lands under state supervision can improve management techniques, reduce the cost of state lands for state taxpayers and trim the state workforce.

9. State Workers’ Compensation Insurance

2001-03 Budget: $145 million, 1262 FTEs

Washington is one of only five states that do not allow businesses to buy workers’ compensation insurance in the private market.[57]  The Department of Labor and Industries recently announced it would boost the cost of industrial insurance by 29 percent.  Earlier recommendations by the Department called for an immediate 40.5 percent increase.  Instead, the increase will be phased in over a number of years, starting with the initial 29 percent hike.[58] 

Not surprisingly, prices rise when customers are required by law to buy a product from a single source.  Ending the state monopoly on workers’ compensation coverage and allowing companies to choose among private insurers would reduce the state’s administrative costs while reducing the cost of insurance to employers.

In Oregon more than 200 insurance companies offer workers’ compensation plans tailored to the specific needs of businesses and employees.  To protect the interests of workers, an appointed Ombudsman for Injured Workers helps employees, employers and insurance companies quickly and effectively resolve disputes.[59]  In Idaho 270 private companies offer insurance coverage in the workers’ compensation market.[60]  In Washington vigorous market competition would ease the heavy burden on businesses and would improve the quality of coverage for workers.

10. Public University Maintenance and Landscaping Services

At public universities large staffs of public employees are responsible for the preservation and maintenance of campus facilities.  University physical plant services include power and heating operations, school utilities, building maintenance, grounds maintenance and custodial services.  At the University of Washington alone, the cost of plant operations and maintenance has increased 60 percent over the past 10 years, rising from $39 million a year in 1992 to $63 million in 2002.[61]  Experienced private firms could competitively bid to provide these services, reducing the cost of education for taxpayers and students.  Some of the program budgets for public institutions across the state are listed below:

University of Washington Plant Operations

2001-03 Budget: $151 million, 945 FTEs

Eastern Washington University Plant Operations

2001-03 Budget: $18 million, 129 FTEs

Central Washington University Plant Operations

2001-03 Budget: $17.6 million, 118 FTEs

Western Washington University Plant Operations

2001-03 Budget: $21.6 million, 147 FTEs

The list above is just a sample of the services that would be improved through competition.  Many other opportunities for competitive contracting exist throughout state government.  Some further programs lawmakers should consider for competition are listed in the Appendix. 

V. Opportunities for Privatization of State Services

Many services provided by state government are already provided by the private sector or are redundant with existing local or federal programs.  The list below provides examples of state programs that policymakers should consider for privatization or elimination.

1. Liquor Sales and Distribution

2001-03 Budget: $108 million (appropriated), 673 FTEs

The Liquor Control Board operates 157 state liquor stores and is responsible for distributing and selling all distilled spirits sold in Washington.  Privatizing the sale and distribution of liquor would create a system that is more efficient than the public agency that currently controls the market.  Private sector innovation would lead to better service and wider choice for consumers.  The state could then do a better job of policing alcohol sales and protecting public health because it would be trying to sell a product at the same time.

By privatizing the sale and distribution of liquor, the state would no longer shoulder the financial risk and responsibility of purchasing, storing, distributing and selling liquor to Washington residents.  For example, the Liquor Control Board has admitted that construction of its new 160,000 square foot warehouse was months behind schedule and more than $5.5 million over budget.[62]

Taxes on liquor sales would continue to be collected, but taxpayers would no longer be required to support a sprawling distribution and sales network.[63]  In return, tax revenue once used to pay for large storage warehouses, delivery trucks, storefronts, long-term capital expenses and future state employee retirement benefits could be redirected toward increased enforcement and balancing the state budget.

Privatizing the sales and distribution of liquor would generate new revenue.  First, existing private stores that begin selling liquor would pay Business and Operating tax on those sales.  Second, where private operators assume ownership of formerly state-owned liquor store, the new owners would begin paying property and business taxes on a business that is currently tax exempt. 

2. Office of Archeology and Historic Prevention (OAHP)

2001-03 Budget: $2.2 million (½ state & ½ federal), 13 FTEs

The OAHP uses state and federal tax dollars to advocate for the preservation of the state’s “irreplaceable historic and cultural resources.”  This advocacy role is already provided by numerous private organizations that promote historic preservation along with the Governor’s Advisory Council on Historic Preservation, the National Register of Historic Places and the Washington Heritage Register.

3. Manufactured Housing Installer Training and Certification

2001-03 Budget: $222,403, 1 FTEs

State law requires that every installation of a manufactured home must have a certified installer on site at all times during installation.  Imposing additional training and certification requirements on manufactured home installers increases the cost to potential homeowners and imposes unnecessary government regulations on homebuilders and installers.

4. Small Business Resources - Minority and Women’s Business Development

2001-03 Budget:  $198,912, 1.5 FTEs

The office, a division of the Office of Women and Minority Business Enterprises, provides trade, technical and business assistance to women and minority businesses.  This program is not consistent with the intentions of Initiative 200.  Reducing the tax and regulatory barriers for small businesses and improving the business climate to benefit all businesses would better serve women and minority business owners.

5. Department of Agriculture Organic Food Certification

2001-03 Budget: $1.2 million, 8.9 FTEs

The program, funded by fees paid by the organic food industry, inspects and labels organic food consistent with state organic food standards.  This function is not a vital government service and could easily by provided by a private industry association.

For more examples of state services that could be considered for competitive contracting or full privatization, see the Appendix.

VI. Enhancing Economic Competitiveness

As mentioned earlier, Washington’s economy is suffering from a prolonged downturn, and shows few signs of immediate recovery.  The downturn is likely to continue well into 2003 and possibly until 2004.  The result is a reduction in the growth of state tax revenue and an increase in demand on public social services.

It is important for state policymakers to take note of the impact the economy has on state coffers.  During periods of economic growth, tax revenue grows and real tax rates can be reduced, while maintaining a sufficient revenue stream -- the funding needs of state government are easier to meet while the burden on state taxpayers can be lowered.  A lower tax burden contributes to the overall prosperity of society.  With economic growth, revenue can go up even as tax rates are decreased.

For this reason, it is important for the Governor and legislators to consider policy changes that will improve the state’s business climate.  Following are a few simple reforms that policymakers can implement which would help improve the state economy, and begin generating the revenue that can return the state to sound fiscal health.

A. Reduce Unemployment Insurance Rates

Washington’s unemployment tax burden has gone from seventh highest in the nation in 1999 to second highest in 2001, behind only Alaska.[64]  In December 2002, the state Employment Security Department announced yet another increase in the insurance rates paid by businesses, raising rates by an average 14 percent per year.[65]  While the tax rate is not higher than most states, businesses in Washington must pay that rate on the first $28,500 of salary.[66]  Businesses in most other states only pay unemployment taxes on the first $7,000 to $10,000 of salary.  Washington’s maximum weekly unemployment benefit is also very high, ranking second in the nation behind only Massachusetts.[67]  The high payroll levy is a direct tax on employment, and represents a serious drain on business resources and competitiveness.

Unemployment benefits provide important support for people who lose their job through no fault of their own.  It is important for the state to administer the system in a way that protects workers, but does not encourage higher unemployment.  The system should provide a minimum safety net, but not operate as an employment perk.  Lowering the tax rate on businesses would allow employers to maintain higher employment levels during difficult times, thereby reducing the need for state-paid benefits.

B. Adopt a Temporary Minimum Wage Freeze and a New Training Wage

Washington’s unemployment rate, which reached 7.2 percent in September, is almost the highest in the nation.[68]  Unemployment has not been this high since the recession of the early 1990s.  In some counties, like Skamania and Cowlitz, unemployment rates are approaching 10%.  In Klickitat County nearly 14% of people who want to work cannot find a job.[69]  In the Puget Sound region, long the economic engine of the state, more than 6% of the workforce is jobless.

Washington’s high mandatory minimum wage is a significant contributor to joblessness because it prices many workers out of the labor market.  The state minimum wage now increases automatically every January 1st, regardless of the condition of the economy.  The amount of yearly increase is pegged to Seattle’s cost of living, the highest in the state.  This January the minimum wage was increased to $7.01 per hour.[70]  It is a basic tenet of economics that when the price of something goes up (labor), the demand for it goes down (fewer jobs).  The high minimum wage is a government-imposed price control, and when artificial controls increase the cost of creating jobs, the economy naturally produces fewer of them.

To help reduce the harmful impact of the high minimum wage on the economy, policymakers can consider a number of helpful options.  First, the legislature should allow business owners to offer a training wage to new employees to let workers gain valuable experience and to stimulate job growth.  Second, the state should hold the minimum wage constant for two years to allow employers to recover from the economic downturn while providing increased incentive for job creation.  Other job-creating recommendations include: adjusting the minimum wage for the different costs of living across the state, allowing areas with a lower cost of living to have a lower minimum wage, and exempting some labor-sensitive businesses like agriculture, retail and restaurants, which are most likely to lay workers off when costs rise.

C. Streamline Permitting by Adopting an Integrated Permitting System (IPS)

Today’s permitting process is virtually impossible for the average citizen to navigate unaided.  The system is disjointed, uncoordinated and complicated by the overlapping jurisdictions of multiple local, state and federal agencies.  The problem is particularly acute with environmental permitting for transportation projects, but can also impact qualification for state contracts, major capital projects and agricultural certification programs, among others.

Permitting decisions are typically based on individual agency administrative needs, not the project’s final objective.  Instead of working toward results, state agencies issue permits based on process.  Consequently, the original purpose of the permitting system often gets lost in needless, mind-numbing paperwork, resulting in differing project definitions to satisfy different agencies needs, and a staggeringly inconsistent administrative record.[71]

With sensible reform, the state could reduce the cost and complexity of its permitting process and improve the business climate in Washington.  One proposal is the Integrated Permitting System (IPS).[72]  The system combines the requirements of different agencies into one centrally managed document for each project.  If a Department of Ecology permit is required, the information needed is included in the IPS Document.  Similarly, if a Department of Natural Resources lease is required, the information to support lease issuance is also found in the completed IPS Support Document.

By consolidating the permit management system into one comprehensive document, a new focus would be placed on the completion of projects, and would boost economic growth by speeding government paperwork.  Relying on one central document will help eliminate conflicting requirements and break the bureaucratic gridlock that typically results from the uncoordinated actions of different agencies.

D. Rescind the Governor’s New Ergonomics Rule

In 1998 the Department of Labor and Industries announced plans to develop new workplace rules designed to restrict certain stressful or repetitive job related actions.[73]  The new regulation, modeled on a flawed federal standard, which Congress rejected, is the most restrictive in the nation.  The rules create a “Job Strain Index” and requires employers to map work areas and precisely measure “reaches, heights, seating, surfaces, load size, shape, weight and packaging.”[74]  Employers will have to count, for example, how many times employees lift ten pounds, or how often they bend their necks forty-five degrees.  For violations employers can be charged up to $70,000 per infraction beginning July 1, 2004.[75]

Small businesses, without the resources to re-design offices and worksites, report they are particularly affected by the new rules.  Still, state regulators insist on pushing through the restrictions regardless of the harm to businesses and the state economy, and despite continued uncertainty about whether the new law will really improve workplace safety.

One small landscaper says he and his wife cannot see a way to comply with the new restrictions and believe they will be forced to close their doors.[76]  Virtually every business owner in a labor-intensive industry expresses similar concerns, fearing the new regulations will require them to increase workforce expenses or retool their operations at some unknown cost deemed “feasible” by the Department of Labor and Industries.  Most business owners say they cannot estimate the impact on their business because they do not have the time or expertise to read and understand the state’s book-length ergonomics rule.[77]

E. Implement Comprehensive Tax Reform

Washington businesses shoulder the majority of the state’s tax burden.  High tax rates and the complexity of local, state and federal tax laws stifle economic growth and development, limiting the ability of local businesses to recover from a prolonged economic downturn.  For many business owners, simply understanding which taxes are owed is a nearly full time job, leaving little time to concentrate on customer service, product development and job creation.

To illustrate one aspect of the problem, the federal tax code comprises 2,840 pages, while the administrative regulations accompanying the law consist of 8,920 pages.[78]  Extensive local and state taxes are then added to the federal burden.  The state alone collects nearly 30 different types of taxes, ranging from the widely-known sales, property and B&O tax to the less well-known refuse collection tax and brokered natural gas tax.[79]  When combined, the state’s tax structure is a complex, burdensome system that stifles economic growth and erects high barriers to entry for small businesses and minorities.

State policymakers should consider reforming the system to make it more user-friendly and less burdensome for small and minority businesses.  Two general recommendations include, reducing tax complexity by eliminating special interest exemptions and multiple, fluctuating tax rates, and lowering overall tax rates to stimulate growth and development.  By limiting tax exemptions and reducing complexity, the state can lower rates for all taxpayers, regardless of industry, occupation or special interest.

VII. Other Recommendations

A. Create a 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.

B. Eliminate State Funding for the Presidential Primary

In 1992 Washington state began holding a presidential primary.  The intention was to replace the traditional methods Republicans and Democrats had used to select delegates for their national conventions.  Since that time, three primaries have been held under the new system -- 1992, 1996 and 2000 -- drawing limited turnout each year.[80]

The Washington state Presidential primary has not fulfilled the purpose for which it was created.  The United States Constitution recognizes, and the courts have confirmed, the First Amendment right of political groups to select delegates based on their own rules and procedures.  It should therefore be the obligation of each of the political parties to pay for their chosen selection process.

In 2000 the state of Washington spent $5.2 million to hold the Presidential Preference Primary in all 39 counties.[81]  The impact of the primary was extremely limited.  The Republican Party only chose to use the primary for selecting about one third of its 37 Washington state delegates to the national convention, and the Democrats chose not to select any of its delegates using the primary system.  Instead, each party selected its delegates through party caucuses and state conventions.

The people of Washington derive little benefit from the Presidential Preference Primary.  If the primary were eliminated it would not be missed, and Washington’s state government would save more than $5 million this biennium, money that could be used elsewhere.

C. Create a Market for Vanity License Plates

Like many states, Washington offers drivers the opportunity to order Vanity Plates, or license plates with a specific combination of numbers and letters chosen by the license owner and approved by the Department of Transportation.  Drivers are charged an initial fee of $44.50 to order a vanity plate, and a yearly renewal fee of $30.[82]  Currently there are more than 81,000 vanity license plates issued to drivers in Washington state, generating almost $2.5 million in revenue.[83]

The current system ignores an obvious market opportunity by awarding vanity plates to drivers on a first-come, first-served basis.  By implementing an online auction system for popular combinations of numbers and letters the state could receive a market price for the combinations that are in highest demand (examples include GO DAWGS, WSU1, ATTNY, EYE DOC and many others).

The system would be simple.  The state could begin by setting the minimum bid at the current vanity plate fee of $44.50.  This would ensure revenues are at least equal to current levels.  The most popular combinations will attract many bidders because they can be quite valuable, both individually and for businesses.  The internet auction could be open for two weeks, with the winner getting the rights to the plate for two years.  After that time the plate would go to auction again.  The fee for non-vanity plates would remain unchanged.  By creating a new market for vanity license plates, the state can ensure a fair market price while also increasing revenue.

D. Reduce State Government Support and Administrative Costs

State spending on support and administrative costs has skyrocketed over the past five years.  According to a 2002 report prepared by Senator Dino Rossi, new Chairman of the Senate Ways and Means Committee, spending on non-essential furnishings and equipment has increased at over three times the rate of inflation over the past five years.[84]  Similarly, spending on in-state travel has jumped by five times the rate of inflation and out-of-state travel expenditures have increased more than eight times the inflation rate.

By applying budget cuts of 17 to 55 percent to administrative costs the state could bolster the general fund by more than $42 million.  Some of the cuts could include a 33 percent cut in spending on staff retreats, conferences and in-state travel, a 55 percent reduction in out-of-state travel, and a 17 percent reduction in consulting contracts.  Applying general reductions to the administrative costs of government is a good way to eliminate costly programs that provide little benefit to Washington taxpayers, and would encourage agency managers to make the wisest use of scarce taxpayer dollars.

E. Increase Share of Health Benefits Paid by High-Ranking State Employees

Another reasonable proposal presented by Senator Rossi is a plan to increase the share of health benefits paid by high-ranking state employees.[85]  Under his plan, the salary level of the employee would determine the percentage of health insurance premiums they would pay.

Currently all state employees pay an equal amount for their state health care premiums.  Senator Rossi’s plan would shift the burden on increased health care costs onto those employees who can best afford it.  General fund savings from the plan are estimated at $35.9 million in 2003, reducing taxpayers’ burden of supporting the growing state workforce and increases in health care costs.

F. Adopt a Constitutionally Protected Emergency Reserve Fund

During good economic times, it is tempting for state policymakers to increase spending at the same rate as increases in state tax revenue.  As a result, when the economy weakens, as it has over the past three years, state government cannot maintain the high expenditure levels enjoyed during more prosperous times.  As an alternative to spending increases and as a protection against future budget shortfalls, policymakers should consider implementing a constitutionally protected emergency reserve fund, as recommended by the Washington State Tax Structure Study Committee.[86]

Establishing a tightly controlled reserve fund, protected by constitutional safeguards and a well-understood spending trigger, will help protect state services against unforeseen revenue downturns.  An important component of the emergency reserve fund is a mechanism for protecting the fund from the normal appropriations process.  As with any source of funding, there will be significant pressure for legislators to appropriate money from the fund, rather than cutting spending on popular programs.

For an emergency fund to be effective, it must be protected from use until the state actually has a fiscal emergency.  To accomplish this a number of mechanisms can be used.  One alternative is to require a supermajority of 60 to 70 percent of the legislature to authorize use of the fund.  This is a common tool used in many states, but it often proves difficult to maintain, as observed here in Washington when legislators temporarily lifted the requirement of a 60 percent majority vote to spend emergency funds.  Ironically, the vote to lift the restriction was approved by a simple majority.

Another alternative is to set a trigger that allows the legislature to appropriate money from the fund when certain economic indicators are met.  For instance, the trigger could be set to allow appropriations out of the fund when state tax revenue drops more than 10 percent from the previous biennium.  Regardless of the mechanism, it is important for the fund to be constitutionally protected, which will help to maintain continuity and stability, ensuring emergency reserves will only be used in a true emergency.

VIII.  Conclusion

Resolving the current budget deficit requires a new approach to government and strong, clear leadership from state policymakers.  Innovative efforts to control the growth in government costs, combined with policy changes that help revive and maintain economic growth, can resolve the existing budget deficit and ensure that future economic downturns do not force our state into yet another crisis.  The recommendations in this paper can help address short-term budget problems while improving long-term stability of state services.

These budget reforms will also help state government become more efficient, provide higher-quality services to the public and limit the high tax burden shouldered by citizens and businesses.  If adopted, these reforms will build public trust by demonstrating state government’s ability to live within its means and enact innovative reforms that improve the quality and lower the cost of state services.

Appendix

Additional Opportunities for Competitive Contracting & Privatization

Many opportunities for competitive contracting exist throughout state government.  An earlier section of this paper outlines ten of those options in more detail.  This section presents a number of other opportunities policymakers can consider in order to provide the best stewardship of taxpayer money.  Experience from other states shows typical cost savings of 10 to 25 percent when agency managers introduce open competition for government work.

* Information in this section is from “State of Washington Activity Summary by Agency,” Office of Financial Management, Olympia, Washington, available at www.ofm.wa.gov/activity/contents.htm.  Because the 2003-05 budget has not been enacted by the Legislature, detailed agency budgets for the upcoming biennium are not yet available.  Data for the DSHS Information Services Division is from, “DSHS 2002 Supplemental Budget - Reduction Proposal,” Department of Social and Health Services, Olympia, Washington, December 2001.

About the Author

Eric Montague is a policy analyst for Washington Policy Center.  He is the author of other studies including, “The Small Business Climate in Washington State,” “Ideas for Balancing the State Budget Without Raising Taxes,” and, “An Overview of Referendum 51.”  He has also writes on topics such as growth management, tax reform and the environment, and serves as a research fellow for the Kinship Conservation Institute.  Eric holds a degree in Political Science from Pacific Lutheran University in Tacoma, Washington.  Before joining the Policy Center he was a procurement contract analyst for Intel Corporation and for Boeing Commercial Airplane Group.

Jason Chambers and Maria Vassilieva provided valuable assistance to this project as part of their work with Washington Policy Center’s internship program.  Both are students at the University of Washington.  Their contribution is greatly appreciated.