Washington Policy Blog

Spokesman-Review: Reform Workers' Comp in 2010

January 6, 2010 in Blog

The Spokesman-Review out of Spokane today editorializes about one aspect of workers' comp reform that businesses both large and small have been asking for years: the ability to agree to a settlement option with injured employees who have experienced injuries so bad that they require permanent disability benefits. 

The editorial board opines:

"Those workers would have the choice of either taking a full payment up front or collecting monthly payments the rest of their lives. The proposal includes safeguards to assure that an injured worker is fully informed about the advantages and disadvantages, usually with advice from a lawyer or a settlement officer at the Board of Industrial Insurance Appeals. The board’s appro!
val is required for any settlement, and the worker has a month to change his or her mind."

Opposition to this move often comes from labor groups concerned that workers might lose out on benefits. But no one pushing this option is actually asking for benefits to be lowered. This move would help clear up an administration problem for, in particular, small businesses, by closing the books on a claim earlier, while still giving the appropriate benefits to the injured worker. 

Again, the paper says,

"The settlement option doesn’t save the system money by shortchanging workers; it does so by avoiding years of administrative overhead expenses incurred to manage lifelong cases.

This reasonable reform won’t fix all the problems with Washington’s industrial insurance system, but it’s an important part of the solution."

Agreed. Look for more suggestions on fixing the state's workers' comp system in the upcoming small
 business post-conference report, to be released later this month. 

The average car owner pays about $272 in state transportation taxes and fees

January 6, 2010 in Blog

Yesterday at the Joint Transportation Committee, consultants hired by the state reported on their recommendations to boost transportation revenue. In their analysis, the consultants estimated how much people pay in state taxes and fees by vehicle type. For example, the owner of a mid-size passenger sedan pays $272 per year in state transportation taxes and fees. Here are some others:

Vehicle Type             2009 Dollars
Compact Car               $197
Mid-Size Sedan           $272
Light Truck (SUV)        $437
Hybrid                       !
60; $151
Electric Car                 $77
Motorcycle                  $138
Freight (medium)         $1,694
Freight (heavy)            $2,865

Some interesting observations. Notice has much less the owner of electric car pays. Its about 82% less than the owner of an SUV. Also notice the disparity between passenger cars and freight trucks. Granted, freight trucks pay more because of their greater impact on the road system, but in some cases a heavy freight truck owner is paying over 1,300% more than then owner of a passenger car.

The report also shows how vehicle owners would pay less over time because of the projected increases in fuel efficiency. By 2025, vehicle owners would pay about 10% less !
than they do today.

The consultants went further to sho!
w that most of the state taxes and fees are not tied to inflation. So, according to the report, the purchasing power of these taxes and fees would fall about 45 percent. That fall in purchasing power translates to lost revenue and the revenue forecast for 2009-25 shows a loss of about $1.6 billion.

On top of all of this, the state faces over $33 billion in unmet and unfunded transportation needs.

All of this means significant increases in how much we pay in transportation taxes and fees is inevitable. Interestingly, Sen. Haugen, chair of the JTC said during the meeting that these increases would not happen this session but sometime in the future (about 33 minutes into the!
TVW coverage of the hearing).


Audit hammers state's Workers' Comp system

January 5, 2010 in Blog

The state's auditor is required by law to conduct annual audits of the financial statements and actuarial assessments of the Workers' Compensation Fund. The latest audit shows that the Workers' Comp funds may be heading towards insolvency within as little as two years.

The workers' compensation system is made up of three components: the Medical Aid Fund, which pays for medical care for claimant; the Accident Fund, which pays non-medical claim costs such as wage replacement benefits, most vocational rehab, and disability and survivor benefits; and the Pension Reserve Fund, which pays benefits to all permanently disable pensioners. Both employers and employees pay L&I premiums.

It is no surprise that the contingency reserves for the Workers' Comp trust fund dipped substantially during the time in question (July 1, 2008 through June 30, 2009) gi!
ven what happened with the stock market and the economy in general, as the audit points out.

But one of the worries that we, and other business owners and groups have been saying in response to L&I's announcement of a 7.6% rate increase for 2010, is that it is not enough. No, businesses don't want an even higher increase in workers' comp taxes. The point is that the system is so broken, that the 7.6% increase during the worst recession in 70 years is not enough to make the system whole; which means that the tactic of raising taxes year after year in this area should be rethought. It's time for different measures. 

The audit says that there is 

"A 74.4 percent chance of insolvency in the Accident Fund within two years, 81.4 percent within three years and 89.5 percent within five years. A 3.9 percent probability o!
f insolvency in the Medical Aid Fund in two years, 12.9 percen!
t within three years and 26.5 percent within five years."

So, what if the Department wanted to raise rates in order to shore up the funds' possible insolvency? 

"The Actuarial firm calculated a range of break-even rate level changes...the firm's "best" estimate is that a 33 percent rate increase would be necessary for the Accident Fund to break even. The Department estimates that a 23.3 percent rate increase would be necessary for the Accident Fund to break even. The Actuarial firm believes the Department's estimate is outside a range of reasonable estimates." [emphasis added]

"For the Medical Aid Fund, the firm's "best" estimate is that a 24.5 percent rate increase would be necessary to break even. The Department estimates that a 21.5 percent rate increase would be necessary for the Medical Aid Fund to break even. The firm belie!
ves the Department's estimate is within range of reasonable estimates."

In other words, the Department (L&I) underestimated how much rates would have to go up in order to stave off insolvency in the Accident Fund.  But for 2010, the L&I approved 7.6% rate increase reflects in part a 4.5 percent rate increase in the Accident Fund and 8.4 percent increase in the Medical Aid Fund.

The business community has been sounding the bell about an unsustainable workers' comp system for awhile now, and that cost containment measures are needed in order to lower costs to the system. The Department recognized that raising workers' comp taxes by the 20-30% needed to shore up the funds would have resulted in an unrealistic burden on employers and employees. But let's hope the Department and policymakers also recognize that simply putting off higher workers' comp taxes until the economy improves is not the solution -- cutting co!
sts is. 

Income tax bills introduced

January 4, 2010 in Blog

No session would be complete without the obligatory income tax proposal. Senators Rosa Franklin (D-29) and Joe McDermott (D-34) have introduced SB 6250 and SJR 8219 to fulfill this annual session prerequisite. Here is the intent section for SB 6250:

"It is the intent of the legislature in adopting this title to provide the necessary revenues for the support of vital state services on a more stable and equitable basis."

It will be interesting to hear how this income tax proposal will be able to fulfill this intent and succeed where other income taxes have failed. I'm sure other income !
tax states such as California will be eager to learn how to make income tax revenue recession proof. 

Schools turned into jobs program by federal stimulus money

December 31, 2009 in Blog

Chester Finn and Frederick Hess in the Education Gadfly point out that of the nearly $100 million in federal stimulus dollars which have gone to education, $68 billion was spent in 2009 to protect jobs, jobs, jobs.  Here is an excerpt from their commentary:

On the Stimulus

What has all that extra money actually bought? The main answer, trumpeted by the Obama Administration in a new 250-page document, is jobs, jobs, jobs….It's a fact that employment was an explicit purpose of stimulus funding—Congress said as much—and with today's jobless rate over ten percent only a churl would deny the humanitarian value as well as the political appeal of this. That said, turning schools into a jobs program—while well-run public organizations and private firms use the economic crisis to purge weak performers, cherry-pick talent, and position themselves to be more productive going forward—is a dubious way to tone them up for the 21st century.

And a tone-up—even a makeover—is what they need….

Primary-secondary enrollments rose by about 10 percent since 1970 but the teacher rolls grew by 61 percent during the same period—an addition of some 1.4 million instructional personnel….Let's at least acknowledge that all these added employees have not boosted the performance of our schools and colleges. Seen in that light, today's recession, however painful for individuals who might lose their jobs, could have had a useful purgative effect on the education workforce as in other fields….Such close analysts as Stanford economist Eric Hanushek estimate that substantial gains in pupil achievement would follow from (permanently) ridding K-12 education of the weakest ten percent of today's teachers—even if that means adding a few pupils to the classrooms of those that remain….

The beneficiary teachers are surely grateful. Their unions are undeniably pleased. But this is not the audacious change that was promised—and that is needed.

As these experts point out, policymakers in Washington State need to figure out how to give school principals the tools they need to rid themselves of the weakest ten percent of today's teachers.  

Unfortunately, this does not appear to be on the horizon.  Instead, HB 2261, the big bill passed last session, lays out a roadmap for yet another centralized, uniform program for teacher evaluation driven by bureaucrats sitting in Olympia. This program will be tied to teacher compensation.  Not only will this program not improve teacher quality, it will be unfair to teachers. 

I feel sorry for the teachers who will be forced to put on a show once or twice a year for the roving band of teacher evaluators with clipboards checking off multiple measures of effective teaching practices, and then have their pay based on the judgment of this roving band.   

I were a teacher, I would much rather be judged on my performance by my principal, who sees me every day, who knows my students, who understands how hard I work, and who knows the challenges I face.

Teachers deserve better, but their union has made it nearly impossible to remove weak teachers, so instead they will get roving bands of bureaucrats deciding how much pay they will or will not receive.

Five Best Environmental Moments of 2009

December 31, 2009 in Blog

The past year saw a strong move toward trendy environmentalism and away from policies that are likely to be environmentally sustainable in the long run. Nonetheless, there were a few glimmers of hope for thoughtful and honest approaches to environmental issues.

Here are the top five.

5. Seattle turns down the bag tax. Sometimes preventing a step backward is as good as taking a step forward. The issue is not that plastic bags don't have an environmental impact. The problem is that they are seized upon because they are politically easy targets. The Seattle Times published a graphic showing the environmental impact of the bags. Those impacts are extremely small, especially when compared to the cost of the ban. We calculated that you could receive the same benefits from reductions in CO2 emissions and water use for less than four percent of the cost of the ban. It is important to remember that waste of money is waste of resources, and spending $20 to get $1 of benefit wastes numerous opportunities to mak!
e positive environmental improvements. The vote shows that even in Seattle politicians can't simply be frivolous with money when it comes to the environment.

4. Getting the facts right. Often, it's not what you don't know but what you know that ain't so. In 2009, fortunately, there were a couple of instances where environmental misinformation was corrected. As we mentioned yesterday, the Seattle Weekly had attacked us as climate "deniers." While it is true that we don't support the most extreme claims of impact from climate change, we believe there is risk from CO2 emissions. When we pointed this out to the Weekly they, in a very gracious post, corrected the record. Additionally, the Office of the Superintendent of Public Instruction removed a video from its web page (posted a couple years ago) that made claims about green buildings which were inaccurate. Truth be told, they didn't do so quickly or willingly. They removed the video only after KING TV aired a story highlighting the false claims in the video and after the facilities director at the Spokane School District asked them!
to remove it. Those requests were made on March 25. Instead of removing the video they simply added a disclaimer saying that it "may not represent current conditions and knowledge of high-performance schools." When we asked for the video in a disclosure request we were denied. We repeated our request, noting that they could not deny it to us. We received the video and one week later it was removed from the page. These things didn't happen on their own, of course. We had to press. But I can cite many other cases where bad information was not removed despite evidence to the contrary, so we celebrate small victories.

3. British Columbia conservatives win re-election with environmental platform. Earlier this year, the conservative party (ironically named the "Liberal" party) in British Columbia won a rare third term in power and their environmental agenda played a role. Public opinion research shows that while large majorities say they are concerned about the environment, majorities believe environmentalists are too extreme. This offers conservatives with an intelligent and effective approach to the environment an opportunity. In BC the conservatives took advantage of that opportunity with their policy of a carbon price and tax rebates to citizens. The Toronto Globe and Mail even wrote:

The first week of the election campaign was a complete disaster for the NDP, dominated by news stories about environmental heavyweights like David Suzuki denouncing the NDP for selling its soul in a populist bid to exploit some short-term voter anger. The message from many of the province's most influential environmental groups couldn't have been clearer: If you care about the earth, vote Liberal.

As conservatives head into the elections of 2010 in the US, there is an opportunity to show that the right choice for the economy, jobs and the environment are policies that make use of the creativity and incentives of the free market.

2. Cap-and-trade dies in the legislature. This was a short-lived victory, but a good moment, nonetheless. Despite appeals in the media and in person from the Governor, the legislature turned down the costly and ineffective climate policies she offered. This was quickly undermined by the Governor's Executive Order on climate change, but it demonstrated that the legislature recognized that it could not ignore economic realities and the many problems of cap-and-trade. A step in the right direction, even if it was followed by a step in the opposite direction.

1. Elinor Ostrom wins the Nobel Prize in Economics. She isn't the first economist to address environmental issues to win the prize. Ronald Coase won the prize in 1991, in part for his application of the theory of transaction costs to economic externalities. But the first woman to win the prize in economics examined the wide range of solutions available to solve "the tragedy of the commons," where there appear to be no incentives to work for long-term environmental sustainability. In selecting her, the committee wrote:

Rules that are imposed from the outside or unilaterally dictated by powerful insiders have less legitimacy and are more likely to be violated. Likewise, monitoring and enforcement work better when conducted by insiders than by outsiders. These principles are in stark contrast to the common view that monitoring and sanctioning are the responsibility of the state and should be conducted by public employees.

It is a reality that we see frequently here in Washington state, where politicians pick and choose and impose environmental solutions (Jay Manning's comment in the climate change memo that the Governor's executive order would cause businesses to look for relief from the federal government is a case in point). Ostrom's work shows that alternatives that come from voluntary and market approaches can solve problems better than the standard, command-and-control approach favored by too many environmental activists and politicians. Her good work, and the recognition of it, earns the top spot in our list for the hope it creates for future environmental policy.

Best wishes to all of our readers and supporters for the new year and here's to hoping that 2010's list of good environmental moments is longer and more robust.

Washington's Five Worst Environmental Moments of 2009

December 30, 2009 in Blog

The past year was not a good one for promoting environmental sustainability in Washington state. The overriding theme of 2009 was the way politics displaced environmental honesty. Environmental policy offers benefits in two ways: benefits to the environment and political benefits to politicians associated with environmental policy. Sometimes, however, these two are at odds, especially when what is popular doesn't actually help the environment or what is good for the environment is difficult, costly or decidedly un-sexy. This year, popular trumped positive.

Along those lines, here are the top five worst environmental moments of 2009.

First, we have to give honorable mention to P-I cartoonist David Horsey. This doesn't really count as a "moment," but deserves attention because it is emblematic of the thinking that underlies so much bad environmental policy. On May 22, Horsey penned a cartoon showing the Earth goddess Gaia talking about a "dangerous infestation" that is destroying her. In the final frame she (and Horsey) renders judgment, saying "These humans have got to go." Overpopulation is a popular theme with environmentalists and they have claimed repeatedly that we've crossed the threshold time after time. Ironically, the problem they identify is always other people. I'm not sure how to describe this notion as anything other than "inhumane."

5. King County Eco-Consumer. Writing a twice-monthly column for the Seattle Times, the King County Eco-Consumer offers advice for those who want to buy and live environmentally. Frequently, however, his advice conforms not to the science or economics of sustainability but to well-worn political slogans. For instance, the eco-consumer told us that "the lower the food mileage we rack up, the better." This, however, is simply untrue. Food shipped many miles by train often has a lower carbon footprint than food shipped by truck. Shipping milk from Yakima is more efficient than shipping hay from Yakima to cows in King County, despite the fact that the actual milk travels a shorter distance. Following his advice would actually be counterproductive in many cases. For more about why the Eco-Consumer earned a spot on the list, read our piece King Coun!
ty EcoConsumer Advice: Bad for Consumers and the Environment

4. Dow Constantine chooses politics over the environment. When a political spokesman, in Nixonian tones, tells the media "We are being absolutely truthful," you can be sure the opposite is true. In his recent campaign for King County Executive, Constantine ran an ad attacking our position on climate change, calling us climate "deniers." Ironically, he continued to make the claim even after his source, the Seattle Weekly, retracted it. The Weekly, the Seattle P-I and the Seattle Times (twice, here and here) all criticized Constantine for the claim. Do!
w knew the claim was false because the campaign highlighted policies in the WPC's Policy Guide, but ignored our policy recommendation calling for creating a carbon price and tax cuts to encourage energy efficiency. His decision, however, was that the political benefit of lying was more important than the environmental benefit of honestly addressing our policy. Such a position commits Constantine to bad environmental policy because changing his position would mean acknowledging he was dishonest in the campaign. It is the best example of a bad trend where environmental politics trumps environmental sustainability.

3. The gap between "green jobs" rhetoric and reality. With the economy taking center stage politically, the promise of "green jobs" became a centerpiece of the rhetoric justifying new environmental taxes and regulations. The Governor has repeatedly claimed that Washington created more than 47,000 green jobs. As we noted earlier this year, however, those green jobs are not new in any real sense and have more to do with definitions than economic growth. It is obvious, as well, that many who promise green jobs don't even believe their own rhetoric. One version of the state's proposed cap-and-trade legislation required an economic analysis examining "How to address trade competition from countries and states that are not participating in an emissions reduction program." The legislation acknowledges that the regulati!
on will put us at an economic disadvantage compared to other states and nations. As we noted recently, the Governor's current Chief of Staff doesn't see that as a bad thing. The harm done to Washington's economy by the Governor's climate change Executive Order creates opportunities. Jay Manning wrote in his memo on the order that "An almost certain increase in the regulated community’s interest in getting a national program will be an important side benefit" of the Executive Order. Those businesses covered by the regulation will be hit so hard that they will look to the federal government for relief. Policymakers know they are playing games with the economy and jobs, but they hope that they can fool the public long enough to get what they want and that, somehow, jobs will materialize. It demonstrates that, despite their rhetoric, policymakers know !
their climate policies are likely to kill more jobs than they !

2. Maury Island Hypocrisy. As we noted last year, a dock on Maury Island has become a cause celebre for local environmentalists. Freshman Lands Commissioner Peter Goldmark quickly moved to satisfy donors on the island by moving to stop the construction of the dock, designed to ship gravel off the island. He moved quickly to pull the dock's permit when a judge ruled that the US Army Corps of Engineers had not followed the proper procedure when analyzing the dock. It was hailed as an environmental victory, despite the fact that the judge did not rule on the environmental impact, just the process. It is important to remember that the project had been given permits by the state Department of Ecology and King County as well. The reason this decision is on the list, however, is the contrast between the attention given to a small project with all its environmental permits and the most serious water quality problem on the island in Quartermaster Harbor, which!
lies in an aquatic reserve managed by Goldmark. As the Maury/Vashon Island Beachcomber noted in September, the cleanup of that part of the island is far behind schedule. They wrote that the County can't get any of the homeowners to cooperate in assessing the impact failing septic tanks are having on the Harbor. The Beachcomber wrote that "Despite several meetings, no homeowner has stepped forward to allow the county to take a look at his or her system, and none has agreed to work publicly with county officials to find a solution to a system that may be failing or inadequate." The gap between the actions of King County and Goldmark regarding the dock and the problems in Quartermaster Harbor is a dramatic example of how the value of environmental policy is more about political benefit than environmental benefit.

1. Governor Gregoire's Climate Executive Order. After pushing for a bill authorizing a range of environmental regulations and supporting Washington's participation in a cap-and-trade system, the Governor instead simply signed an executive order implementing those policies after the legislature turned them down. The Executive Order raised a number of red flags. First, there are questions about its legality since it attempts to usurp legislative authority. Second, it attempts to pick and choose future technologies that will best reduce carbon emissions. This is a strategy popular with politicians looking to receive credit for "leadership" on climate change, but it rarely delivers results (see biofuels and hydrogen cars for recent examples). Finally, it spends money to continue Washi!
ngton's role in the Western Climate Initiative's effort to create a regional cap-and-trade system. The Department of Ecology claimed it could simply shift the money from other projects to cover the costs. Strange that it is so easy to find available money at a time when we face a significant budget deficit. Worse, the WCI is likely to collapse because none of the key decisions about the structure of the WCI have been made and political changes in the participating states make it unlikely that the system will ever be launched. That sets aside the reality that cap-and-trade systems have failed to meet their targets due to the many political payouts that are invariably included in these systems. An Executive Order that has legal questions, embraces failed strategies and wastes money on a system that doesn't work, earns the Governor's Executive Order on climate change the top spot in this year's list of worst environmental moments of 2009.

It wasn't all bad this year (although the bad certainly outweighed the good). Tomorrow we highlight the top five good environmental moments of 2009.

The Foolhardy Nature of Predicting Green Innovation

December 30, 2009 in Blog

It is hard to find a politician talking about climate change these days who fails to highlight the technological solutions they are certain will save us from climate catastrophe. Their record in this area, however, is very bad. In just the last decade we have been told that biofuels, electric cars, hydrogen cars, carbon capture and storage and the like would all usher in a new, carbon-free era.

The Wall Street Journal has a great article today about the foolishness of trying to determine the path that technology will take.The author Gordon Crovitz notes that "The more we learn about how innovation happens, the less straight the lines of advance look." He lists his top ten worst technology predictions of all time. Among them:

"The Americans have need of the telephone, but we do not. We have plenty of messenger boys," Sir William Preece, chief engineer at the British Post Office, 1878.

"Who the hell wants to hear actors talk?" H.M. Warner, Warner Bros., 1927.

"I think there is a world market for maybe five computers," Thomas Watson, chairman of IBM, 1943.

"Television won't be able to hold on to any market it captures after the first six months. People will soon get tired of staring at a plywood box every night," Darryl Zanuck, 20th Century Fox, 1946.

We could create a similar list of predictions about environmental technologies (the 1977 Stanford Research Institute study predicted that solar energy "is likely to dominate the space-heating market for new construction as soon as the year 2000." It is less than 1 percent today.). This won't stop politicians from promising that they can predict the future and grant regulatory favor and government subsidies for their favored approaches. Before they continue down this road and repeat the mistakes of the past, they should read Crovitz's piece.

Can budget savings be found in changes to sick leave cash out?

December 30, 2009 in Blog

With Washington facing a short term $2.6 billion budget deficit, all savings opportunities should be on the table. One possibility is to change the practice of allowing state employees to carry forward and cash out unused sick and vacation leave.

According to the state's budget transparency website, Washington paid out $65.3 million in unused sick and vacation leave during the 2007-09 biennium. The state has already paid out $8.7 million since the 2009-11 budget started in July.

As illustrated by the Collective Bargaining Agreement (CBA) with the Washington Federation of State Employees, this is occurring in accordance with sections 12.6 to 12.8 of the CBA:

12.6 Carry Forward and Transfer
Employees will be allowed to carry forward, from year!
to year of service, any unused sick leave allowed under this provision, and will retain and carry forward any unused sick leave accumulated prior to the effective date of this Agreement. When an employee moves from one state agency to another, regardless of status, the employee’s accrued sick leave will be transferred to the new agency for the employee’s use.

12.7 Sick Leave Annual Cash Out
Each January, employees are eligible to receive cash on a one (1) hour for four (4) hours basis for ninety-six (96) hours or less of their accrued sick leave, if:

A. Their sick leave balance at the end of the previous calendar year exceeds four hundred and eighty (480) hours;

B. The converted sick leave hours do not reduce their previous calendar year sick leave balance below four hundred and eighty (480) hours; and

C. They notify their payroll office by January 31st that they wou!
ld like to convert their sick leave hours earned during the pr!
evious calendar year, minus any sick leave hours used during the previous year, to cash.

All converted hours will be deducted from the employee’s sick leave balance.

12.8 Sick Leave Separation Cash Out
At the time of retirement from state service or at death, an eligible employee or the employee’s estate will receive cash for his or her total sick leave balance on a one (1) hour for four (4) hours basis. For the purposes of this Section, retirement will not include “vested out of service” employees who leave funds on deposit with the retirement system.

The state's sick leave policy should be changed to a set number of days per year that can't be cashed out or carried forward. This is the benefit policy for employees at the Washington Policy Center as well as many other private employers.

Washington's annual financial report released

December 30, 2009 in Blog

The Office of Financial Management has released the state's 2009 Comprehensive Annual Financial Report (CAFR). Some of the details of note:

"Governmental activities resulted in a decrease in the state of Washington’s net assets of $2.2 billion. A number of factors contributed to the decrease:
  • Tax revenues decreased $893 million in Fiscal Year 2009 as compared to Fiscal Year 2008. While certain tax sources showed moderate increases, sales and use taxes reported a decrease of $1.0 billion. Sales and use taxes are the main tax revenue for governmental activities. Taxable sales have declined sharply due to reductions in consumer spending power as a result of job losses as well as weak consumer confidence. Real estate excise taxes also declined by $294 million reflecting the continued decline i!
    n real estate activity as home prices and housing permits continued to decline throughout Fiscal Year 2009.
  • Growth in expenses outpaced growth in revenues. The expenses for human services and education comprised 80.5 percent of the total expenses for governmental activities which is consistent with the 80 percent in Fiscal Year 2008. Human services expenses grew by $1.2 billion or 10 percent in Fiscal Year 2009 over Fiscal Year 2008 reflecting the increased number of citizens seeking assistance from state programs and services due to the economic recession. K-12 education also increased in Fiscal Year 2009 as compared to Fiscal Year 2008 due to increases in enrollment and construction grants to local school districts. Approximately 40 percent of the increased costs of human services and K-12 education were financed with federal fiscal stabilization funds.

Business-type activities decreased the state of Washington’s net assets by $932 million which included losses in both the workers’ compensation and unemployment compensation activities. Key factors contributing to the operating results of business-type activities are:

  • The operating loss in the workers’ compensation activity in Fiscal Year 2009 was $1.8 billion less than in Fiscal Year 2008. A number of factors contributed to the decreased operating loss including an increase in premium revenue of $260 million which resulted when the Fiscal Year 2008 rate holiday did not extend into Fiscal Year 2009 and a decrease in claims costs of $1.5 billion. The decrease in claims costs is attributable to lower projections of supplemental pension costs related to changes in the forecast of future wage inflation.
  • The unemployment compensation activity reported a Fiscal Year 2009 operating loss of $789 million, compared to $333 million operating income in Fiscal Year 2008. Washington’s unemployment insurance program is an experience-based system. Since Washington had relatively low unemployment until Fiscal Year 2009, unemployment premium revenue had been declining. Fiscal Year 2009 premium revenues were $146 million less than Fiscal Year 2008. While this decrease was more than offset by an increase in federal aid of $531 million, which included federal fiscal stabilization funding, costs for unemployment insurance benefits rose $1.6 billion. The increase in costs was the result of increases in the number of claims, the duration of claims and the benefit amounts. The annualized unemployment rate for the state was 7.3 percent in Fiscal Year 2009, up from 4.7 percent in Fiscal Year 2008, a 55 percent increase.
  • The higher education student services activity reported relatively proportional increases in both expenses and charges for services when compared to the prior year. Additionally, both liquor control and Washington’s lottery activities reported operating revenues and expenses consistent with the prior year."

These details are reflected in the tables below.



Schedule 17 of the CAFR shows that the largest employer in the state is government coming in at !
17.6% of total employment. The next largest is retail trade coming in at 10.8% of total employment. 

Below are details on the number of state government full-time equivalent employees. 


Clinging to life for tax purposes

December 30, 2009 in Blog

Harvard economist Greg Mankiw highlights a Wall Street Journal article from today in regards to the federal estate tax debate. To sum up, as part of the "Bush tax cuts" passed earlier this decade the federal estate tax was lowered from 55% down to 45% while the exemption level was slowly raised, from $1 million to $3.5 million today. If your estate totals less than $3.5 million, you don't pay the 45%. 

And then for calendar year 2010, the tax goes away. Completely. No tax. At all. (I'm re-emphasizing this because when was the last time you saw a tax disappear?)

But as part of the compromise to get the legislation through, even though the federal estate tax disappears in 2010, it comes back in 2011 with a vengeanc!
e. Unless Congress acts, the rate will go back up to 55% and the exemption level will drop back down to $1 million -- any estate valued over $1 million will be subjected to the tax.

The Wall Street Journal article points out the macabre situation in which some families are finding themselves. Individuals with terminal illnesses and families with ailing members are taking into account the date of January 1st. If their family member hangs survives until January 1st, 2010, the estate they leave behind will not be taxed. If not, the family could lose at least half the estate's value to taxes (and more when you throw in the fact that about half the states have state estate taxes, including Washington's, which tops out at 19%).

This is a very uncomfortable subject to discuss in the realm of public policy. Far be it from those families from wanting to look crass, but the article points out coherent but ill entrepreneurs who themselves are trying to hang on unti!
l 2010 because they don't want to die with the knowledge t!
hat half of what they spent their lives working towards went back to the government, which already taxed their earnings in the first place.

As Congress debates this issue early in 2010 after it returns from recess it should take these stories to heart. Another concern, to be expanded upon in a later blog post, is that one idea Congress is kicking around is to make the tax retroactive, so that estates of any well-off individual who dies between January 1st and whenever the new estate tax law kicks in (say early Spring) are still subject to the tax. This brings about a whole new set of concerns as retroactive taxation is not good public policy for a variety of reasons. 

The estate tax was created to prevent the rise of a permanent aristocracy in this country. In 2011, that sentiment will negatively impact thousands of American households; probably not the impact the original supporters of the estate tax had in mind. Nor did they have in mind the awful situat!
ion of dictating life and death decisions based upon tax policy.

States face at least $405 billion unfunded liability for retiree health benefits

December 29, 2009 in Blog

While states attempt to deal with their short term budget problems, elected officials must not lose sight of the long term obligations being placed on taxpayers. Highlighting this fact is this report from the U.S. Government Accountability Office (GAO) on state and local government retirement health benefits (OPEB - Other Post Employment Benefits):

"We found that the total reported unfunded liabilities for OPEB (which are primarily retiree health benefits) for state and select local governments exceed $530 billion. The $530 billion includes about $405 billion for states and about $129 billion for the 39 local governments we reviewed. We reported in 2008 that various studies available at that time estimated the total unfunded OPEB liability for the states and all local governments to be between $600 billion and $1.6 trillion, although the studies!
’ estimates were based on limited government data. It is not surprising that our total is on the low end of that range because we did not review data for all local governments, though we did review reported liability data for the largest local governments and all 50 states. Five-hundred and thirty billion dollars is still a large unfunded liability for governments. As variation between studies’ totals shows, totaling unfunded OPEB liabilities across states and local governments can be challenging."

To address this problem GAO noted:

"Some state and local governments have taken actions to address their liabilities associated with retiree health benefits by setting aside assets in order to prefund the liabilities and reducing these liabilities by changing the structure of retiree health benefits . . .

Another action some state and local governments have taken to address their retiree!
health liabilities has been to change the structure of the he!
alth benefits they offer retirees. While governments also make relatively routine changes to the health benefits they offer retirees (such as changing co-payments, deductibles, or covered benefits) that could affect their liability, we identified three key types of changes our selected governments have made to the structure of retiree health benefits: changing the type of retiree health benefit plan, changing the level of the government’s contribution toward retirees’ health insurance premiums, and changing the eligibility requirements employees need to meet to qualify for retiree health benefits."

According to the Office of State Actuary, Washington's unfunded OPEB liability as of 2008 was $7.9 billion (including K-12 and political subdivisions). OPEB benefits are separate from and provided in addition to pensions.

There's just no way this ends well...

December 29, 2009 in Blog

 In the arena of public policy, legislation that is often introduced using the reasoning of, "there ought to be a law..." is often a sure-fire way to highlight misguided policy. Combine the "there out to be a law" sentiment with government's penchant for involving itself in matters wholly outside its jurisdiction and you end up with issues like the Terry Schiavo case, et. al.

The latest version of this wayward thinking !
is happening in Indianapolis, where the previously undefeated Colts of the National Football League at 14-0, this past Sunday yanked their starters during the second half of a close game against the New York Jets. The Colt's coaching staff's thinking was more or less along the lines of "we have home field advantage wrapped up, let's use our starters for a bit and then rest them and minimize exposure to injury." Similar tactics are used in preseason games, and all major sports teams in every league do this from time to time. 

The second and third string Colts were unable to protect the lead and eventually fell to the Jets 29-15 in front of a sold-out home crowd. The fans were not pleased; and they have a right to be upset. No one is happy to pay good money only to see their beloved team lose. Most of us understand that it is simply part of the game. 

But now the Indianapolis City Council is involving itself into the mix. Why, you!
ask? Because fans and a few councilmen are so irate that the !
Colts pulled their starters from the game that a resolution is being drawn up to refund the ticket price to fans who purchased them for the game on Sunday. Seriously. 

There really is no justification for the resolution, just that fans and supporters are upset that the Colts played the strategic, long-term angle by saving their best players for the playoff run and therefore risked ending the team's 23 straight regular season win streak. Fans are so mad that they had to witness a loss that they want a full refund. Shouldn't they be happy their team is 14-1 and the number one seed going into the playoffs?

So Seattle fans have faith. If this resolution gains traction and withstands a court challenge (in actuality, neither will happen) then we can expect more than one game's worth of refunds for the NFL season that was 2009. 

Can stimulus strings be cut?

December 29, 2009 in Blog

Faced with closing a projected $2.6 billion budget deficit, lawmakers have been told that 70% of their budget options are off limits meaning reductions need to occur in only 30% of spending. Here is how Governor Gregoire describes this dilemma:

"Parts of our state’s budget, including basic education, debt service and pensions, are considered ‘protected’ because of constitutional mandates require these cost be paid. Other parts are considered protected, too, due to requirements imposed by the federal government when the state accepted funds under the American Recovery and Reinvestment Act, primarily in Medicaid and higher education."

A recent federal audit conducted by the Government Accountability Office (GAO), however, noted that states may seek a waiver from the "stimulus strings" for Education State!
Fiscal Stabilization Funds.

According to GAO:

"If states fail to meet the maintenance of effort requirements for K-12 education or IHEs [institutions of higher education], Education’s guidance directed states to certify that they will meet requirements for receiving a waiver—that is, that total state revenues used to support education would not decrease relative to total state revenues. Because the measure used to determine eligibility for a waiver from maintenance of effort requirements—state revenues used to support education—can be defined differently from the maintenance of effort measure—state support for education—states may have to track both measures to make sure they can meet their assurances. States that need a waiver are directed to submit a separate waiver application to Education . . .

Education official!
s told us that four states—Florida, New Jersey, Rhode Island!
, and South Carolina—have requested maintenance of effort waivers for fiscal year 2009. Florida has requested Education waive maintenance of effort requirements for elementary and secondary education, and New Jersey has requested Education waive maintenance of effort requirements for public IHEs. Education officials told us states will get final waiver approval in the form of a written letter of approval after the states submit final maintenance of effort amounts to Education. Education officials also told us they will work closely with states on a case–by-case basis to ensure that the information submitted complies with the waiver criteria under the Recovery Act."

The U.S. Department of Education has provided states with this waiver worksheet:


While most of the stimulus funds are off limits, it appears states can cut the stimulus strings for federal education funds by seeking a waiver.

I have an inquiry in to the Office of Financial Management to see if Washington plans to request a waiver. I'll post an update once I hear back.

Cigarette Taxes to Increase in 2010?

December 28, 2009 in Blog

As the legislature gears up for session in January and with the state facing a multi-billion dollar deficit (yet again), now is the time to pay close attention to trends the legislature may take. Perusing this pre-filed bill page can be useful.

One of the bills introduced today is House Bill 2493, an act "relating to the taxation of cigarettes and other tobacco products." Sponsored by Representative Cody, the bill, if passed, would raise cigarette taxes yet again. Currently, the state charges $2.025 per pack for cigarettes. 

Reading through the bill, it looks like the taxes would amount to $1 per pack more if the legislature and the governor sign off on the bill. That's about a 50% tax increa!
se for smokers. 

If the goal is to eradicate smoking, then the tax should be hiked even more. If the goal is to raise money for education programs, health care centers, water quality, and programs to stop youth violence, then a 50% increase in taxes will most likely move people towards purchasing tobacco from non-sanctioned sellers (aka the black market). The state says it already loses over $200 million in tax revenue per year to illegal sales of untaxed cigarettes. 

If policymakers are looking for a quick buck to help shore up the $2.6 billion budget deficit, this isn't the way. If, however, policymakers want more people to live up to what is sure to be their 2010 New Year's resolution, then raise the tax even more. My hope is that whatever our elected officials end up doing, they are honest about their motivations behind the tax hike.