Open Government

WPC's Center for Government Reform's mission is to partner with stakeholders and citizens to work toward a government focused on its core functions while improving its transparency, accountability, performance, and effectiveness for taxpayers.

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In Our View: Privatize Services

January 3, 2010 in In the News
The Columbian (Vancouver)
Source: 
The Columbian (Vancouver)
Date: 
Sunday, January 3, 2010

Lawmakers Cannot Count on Sin Taxes for Budget Relief

January 2, 2010 in Publications

Washington lawmakers are again facing a multi-billion dollar deficit, due to their decision to sharply increase spending in recent years and slower revenues resulting from a weakened economy. 

How Government Officials Increase Home Prices

January 1, 2010 in Publications

Policymakers should remove regulatory barriers that increase the cost of building a home and drive up the cost of living in our state.

In answer to a question about the high cost of living in Washington, Governor Christine Gregoire told a TVW interviewer that “the cost of building a home is not determined by the state.” The Governor was responding to an aerospace industry study that shows Washington is at a severe competitive disadvantage compared to other states because of our higher cost of living.

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.

CAFR 1

CAFR 2

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. 

FTE

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.

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:

Waiver

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.

State Auditor releases update on performance audit recommendations

December 22, 2009 in Blog

State Auditor Brian Sonntag this morning issued a report highlighting the status of performance audit recommendations made to date. According to the report:

"From February 2007 through June 30, 2009, performance audits identified nearly $3.6 billion in cost savings, unnecessary expenditures and economic benefits.

Some recommendations have a financial impact, such as past costs that were questionable or avoidable, those with future cost savings and recommendations with future revenue opportunities. The figure below is focused on recommendations with future revenue opportunities or future cost savings that can be realized when the recommendations are implemented.

We made 214 recommendations with future cost savings or revenue opportunities; 67 percent of those recommendations have been fully or part!
ially implemented or are in progress, as shown below.

Most state agencies do not track the cost of their products and services or any realized cost savings from performance audits. They are, however, encouraged to track the cost of participating in performance audits.

We followed up with the following governments to obtain their estimates of the net cost savings they were able to achieve by implementing our recommendations."

Audit
Click this link to see the full report.