Jmercier

The State Auditor's Office released a performance audit of the Port of Seattle today. It isn't pretty.

• Port construction management lacks cost controls and accountability.
• The Port circumvents competition requirements in violation of its own policies and sometimes in violation of state law.
• Port policies and Port management’s interpretations of its policies result in a lack of transparency and thwart Commission oversight of construction management activities.
• Port construction management records are incomplete and disorganized.
• The Port fails to enforce basic contract requirements, resulting in delays, extra costs, and an inability to defend against claims.
• Port construction management is vulnerable to fraud, waste and abuse.

According to the report "auditors identified $97.2 million in unnecessary costs. The Port has the potential to avoid similar costs in the future if it institutes every audit recommendation."

Among the other conclusions of the audit:

• The Port lacks sufficient policies and procedures to safeguard public assets from misuse, abuse and fraud. In cases in which controls are in place, they are not always followed.
• The Port Commission has largely delegated decision making responsibilities for construction projects to Port management and employees. In some cases, vendors control projects and make decisions that should be made by the Port.
• Port executive management has withheld information from and sometimes has misinformed the Commission about the terms and progress of construction projects.

Auditors found these conditions are caused by:

"The Port Commission’s adoption of Resolution 3181, delegating some of its decision-making authority to Port administration, including some oversight of construction management. The former Chief Executive Officer’s broad interpretation of the resolution effectively distanced the Commission from information and oversight authority of capital projects. The audit found no record of the Commission reassessing or questioning whether it was meeting its responsibilities to oversee construction projects.

• Port management does not segregate the duties of procurement and contractor oversight. Port employees routinely award contracts and then oversee the contractors they selected. This creates a conflict of interest because those who work with the contractors may develop working relationships that prevent them from awarding and overseeing contracts with a higher degree !
of objectivity and diligence.

• Port commissioners have largely ceded the authority to award and manage contracts to low- and mid-level project managers.

• According to an e-mail to the contracted auditors, the Port maintains it “is not subject to any specific legislative framework governing its procurement practices other than those which govern public works design and construction contracts.”

• The Port does not enforce standard construction contract provisions, leading to significant cost and schedule overruns.

These conditions leave the Port’s construction management vulnerable to fraud, waste and abuse. For example, Port management authorized a Third Runway contract that cost $32.7 million more than the Port engineer’s original estimate. The contract violated state law, and details of the arrangement were concealed from the Commission.

In addition, a consulting agreement awarded in 1998 increased without competition from $10 million to more than $120 million and is being used to augment Port staffing, unnecessarily costing taxpayers $60.5 million."

I wonder if anyone at the Port will be getting a golden parachute as a result of this audit?

According to a report issued today by Pew Center on the States, Washington is one of 20 states that are funding pensions at less than 80% of the required payout amount. When it comes to funding other retirement benefits such as retiree healthcare, the report says Washington has set aside ZERO percent of the estimated $3.8 billion "bill coming due."

"Washington is one of several states that fell behind in funding its pension plans during the last several years—a recent trend that could cause trouble if it persists. It was one of 20 states at the end of 2006 with less than 80% of the funds necessary to cover its long-term pension obligations—the level most experts consider healthy. Early in the decade, the !
pension system seemed to be doing well, and the state lowered its annual contributions. Then the stock market plummeted. In recent years, Washington raised its required contribution levels significantly, but the state has postponed making most of the payments.

In fact, in the aggregate, Washington hasn’t paid more than 30% of the payments required by its own actuaries since 2002. The state offers relatively modest non-pension benefits, but it would still take a major jump in the state’s payments—from $68 million spent on current retirees in 2006 to $314 million identified by actuaries as the annual required contribution—to move toward full funding."

Pew recommends the following strategies for states facing this problem:

• PLUG THE LEAKS
• EVALUATE THE FISCAL IMPACT OF BENEFIT CHANGES
• CONSIDER HYBRID PLANS
• REQUIRE FASTER, MORE ACCURATE FINANCIAL REPORTING
• IMPROVE PENSION OVERSIGHT

The report concludes:

"The strategies discussed in this section can help states reduce government pension costs and improve current pension management and future decision-making. However, these strategies will not eliminate the fundamental issue—that some states have liabilities they have not adequately funded. For the states that have fallen behind, there is no easy fix.

Achieving an improved position requires the political will and discipline necessary to begin funding their pension plans at actuarially adequate levels. Even states that are currently in a good position in terms of pension funding should heed the lessons in this report to help avoid the poor decision-making that led to the problems other states now face. When states delay action, the problem grows exponentially and the costs of a solution grow right along with it."

Here is Stateline.org's article on the Pew report: Price tag for retiree benefits: $2.73 trillion

Updated (9:15 a.m. 12/21/07)
The state is taking issue with Pew's report. Yesterday the Office of State Actuary issued this response:

"A report recently published by the Pew Charitable Trusts includes information about the funded status of state retirement systems. The results of the report have been highlighted in national publications such as Pensions & Investments Daily, Governing.com, and PR Newswire. Pew identified the funded status for Washington’s plans as 79%.

The total funded status for all of Washington’s retirement plans is currently 100% (2006 Actuarial Valuation Report Click here to access the report online and go to the Funded Status page). In prior years the total funded status was 99% (2005), 105% (2004), 107% (2003), 118% (2002) and 126% (2001).

Why the difference? Pew’s report included only Washington’s closed plans (PERS 1, TRS 1, LEOFF 1, Judges, and JRS) and used numbers from 2005, rather than the most current numbers. It did not include Washington’s open plans. The open plans cover more members and currently have the following funded status: 121% (PERS 2 and 3), 133% (TRS 2 and 3), 125% (SERS 2 and 3), 99% (PSERS), 116% (LEOFF Plan 2), and 114% (WSP).

The 100% funded status for Washington's plans represents the aggregation of all state retirement system liabilities compared to all retirement system assets. Only two of the state's large retirement plans - PERS 1 and TRS 1 - have unfunded liabilities. In 1989, the Legislature enacted a policy that requires bringing those plans to fully funded status by the year 2024. See Washington's 2006 Actuarial Valuation Report for more detailed information regarding the funded status of each plan."

It's not often the federal government does something worthy of praise but today's news that the free searchable budget transparency website for federal grants and contracts is now live is the exception. According to the Reason Foundation:

Today, the Office of Management & Budget and Congressional sponsors will announce the EARLY launch of usaspending.org, the federal website that will track and allow average citizens to review government spending in regards to federal grants and contracts above $25,000.

Earlier this year I teamed up with the Reason Foundation to write a FoxNews.com op-ed on this important reform.

Many states have also created free searchable websites to help the public find details about how and where their tax dollars are being spent. In a policy note released last week, we discussed how Washington State should also enact this type of budget transparency reform.

Let's hope our elected officials take note of today's action by the feds and make this reform a priority when the legislative session starts in January.

Do taxes matter when it comes to where Americans choose to live and work? According to two new studies the answer is an emphatic yes!

The American Legislative Exchange Council released a study last week authored by noted economists Arthur Laffer and Stephen Moore. The two economists wrote about the findings of their study, Rich States, Poor States in today's Wall Street Journal:

Over the past decade, the 10 states with the highest taxes and spending, and the most intrusive regulations, have half the population and job growth, and one-third slower growth in incomes, than the 10 most economically free states. In 2006 alone 1,500 people each day moved to the states with the highest economic competitiveness from the states with the lowest competitiveness.

Of all the policy variables we examined, two stand out as perhaps the most important in attracting jobs and capital. The first is the income tax rate. States with the highest income tax rates -- California and New York, for example -- are significantly outperformed by the nine states with no income tax, such as Texas and Florida. As a study from the Atlanta Federal Reserve Board put it: "Relative marginal tax rates have a statistically significant negative relationship with relative state growth."

The other factor for attracting jobs and capital is right-to-work laws. States that permit workers to be compelled to join unions have much lower rates of employment growth than states that don't. Many companies say they will not even consider locating a factory in a state that does not have a right-to-work law.

How did Washington fare on the study's economic competitiveness index? The state ranked in the bottom half of the nation coming in at 31, with poor scores for sales tax burden (49), tax burden other than sales and income taxes (44), recent tax increases (40), debt service as % of revenue (43) and state minimum wage (50).

Another study released today by the Washington Research Council finds that tax burdens dictate where employers locate:

Taxes matter when businesses decide where to locate. This is particularly true for decisions about where to locate within a metro area, where the competing locations all have access to the same pool of labor (Mark,McGuire and Papke 2000; Wasylenko 1997).

Seattle faces strong competition from nearby suburban cities for jobs. In recent years, the majority of jobs created in King County have landed outside of the city. Recent success in redeveloping the city as a place to live and consume should not blind policy makers to the fundamental importance of enhancing the city’s attractiveness as a place to work.

Business taxes are higher in Seattle than in the suburban cities east of Lake Washington. These cities are growing jobs faster than Seattle. As we’ve said: Taxes matter.

They sure do. Just ask Michigan Governor Jennifer Granholm how much they matter:

Gov. Jennifer Granholm, stung by outrage from the business community over a now-repealed tax on services and some discontent with a state income tax increase, says she won't resort to tax increases to cover any future shortfalls.

"The most important thing I learned is I'm not ever going to raise taxes again. It's too hard. It's too impossible," Granholm said.

"Especially in light of our economy and what we've been through, I just don't think that there's anybody who's interested in proceeding down that path again. And I'm first at the head of that line," she added.

At some point most citizens wonder, “Just how, when and where does government spend our tax dollars?  What do our elected representatives want to accomplish when they spend public money, and what results are actually achieved?”

Considering Washington lawmakers will spend about $71 billion over the next two years, these are basic questions to which any taxpayer should be able to get answers quickly and conveniently.  This is especially true since modern technology makes accessing large amounts of information easier than ever.  Unfortunately, the opportunity to learn these answers is currently limited and difficult to achieve.

The current lack of spending transparency is not the result of some deep Machiavellian conspiracy to hide budget information from the public.  Instead it is simply a failure of elected officials to keep up with the times by providing taxpayers with a free, easy-to-use website where people can find these details.

In a policy note released today, we look at how budget transparency reform can become a reality in Washington.

The issue of spending transparency was also the topic of a speech I delivered earlier this year in Chicago.

With internet search engine companies willing to help make this reform a reality, the only thing standing in the way is if our elected officials fail to make budget transparency a priority.

The state Expenditure Limit Committee (ELC) met today to adopt the spending limit for the 2009-11 budget. This was the first meeting of the ELC since the state Supreme Court ruled on the I-601 case and whether or not the legislature violated the law in 2005.

Prior to a change in 2005 by lawmakers, the spending limit was allowed to increase based on a three-year rolling average of increases in population and inflation (fiscal growth factor). That calculation was changed for the current budget to the ten-year average growth in state personal income. It was argued at the time that this change would allow the budget to grow at a much faster rate than under the limit original adopted by the voters in 1993 with I-601. Based on today's committee action, this fear has been realized.

Under the new spending limit the budget is allowed to grow to $32.9 billion in 2007-09 and $36.4 billion in 2009-11. This translates to a possible 11 percent increase in spending. Prior average increases under I-601 were 9 percent (including the large budget increases since 2005).

One positive development from today's ELC meeting, the committee adopted a proposal offered by OFM director Victor Moore to stop doubling counting appropriations from the general fund to related accounts for the current budget (meaning the money can't be counted as spent twice to artificially increase the limit). This has the effect of reducing the increased spending limit by $128 million for the 2007-09 budget. This issue was also addressed for future budgets by the recent passage of I-960.

I-601 had been working well controlling state spending increases before the legislature's changes in 2005. Lawmakers should consider returning to the original fiscal growth factor adopted by the voters to help mitigate the increased tax burden associated with a fast growing budget.

Updated (1:40 pm): Rep. Gary Alexander (the lone no vote at today's ELC meeting) released the following statement:

“Today’s decision by the Expenditure Limit Committee is disappointing. I voted ‘no’ because the state should not be manipulating its appropriations process in order to avoid the voter-approved spending limits of I-601. The majority party has, first, made hundreds of millions in appropriations to other accounts for fiscal year 2007 and counted them as expenditures when they’ve not actually been spent, and claimed that this allows them to keep the spending limits higher. Second, they’ve shifted hundreds of millions of dollars in spending for services historically funded from the general fund to an account not covered by the limit, without lowering the limit for the shift as required by law. This is not what voters intended when they!
passed I-601, it does not restore integrity to our budget process, and it is not in the best interest of our state financially.” 

With the focus of this week's special session being relief from property tax increases, it is odd to hear the governor already talking about the possibility of future tax increases. According to The Olympian:

Gregoire later told a gathering of service clubs Monday — including Olympia Rotary — that she thinks voters did not merely reject taxes on Election Day.

The governor noted that voters approved all four measures the Legislature put on the Nov. 6 ballot — including the “rainy day” savings account for government and lower vote requirements for passing school levies.

Voters will support taxes if they are confident about what the money is going for, Gregoire said. She hearkened back to the phased-in gas tax package of 9 ½ cents that lawmakers approved in 2005; it survived a citizen initiative to repeal it.

“I have not lost confidence that if we’re in tune with the public, they’ll invest,” Gregoire said of future tax increases for education or transportation.

It is very unlikely that any tax increase proposals will be considered in 2008 until after the election but the governor's comments telegraph a willingness to increase taxes.

One ballot measure the voters approved the governor didn't mention, I-960, makes it probable the voters will have the final say on any tax increases via a referendum since 2/3 legislative support is unlikely.