Governor Gregoire's budget proposal returns state to living within its means--finally

Governor Gregoire's budget proposal returns state to living within its means--finally

Posted by Amber Gunn - December 15, 2010
Governor Gregoire made it clear that the budget she proposed today does not reflect her values. Nonetheless, there are many elements that working taxpayers will value.

For one thing, this is the first time since Governor Gregoire has been in office that she has proposed a budget that will not outspend forecasted revenue. The latest forecast for the 2011-13 budget is $32.6 billion. Proposed expenditures are $32.1 billion. In other words, for the first time in years, the state is living within its means.

State leaders have consistently passed budgets without enough money to pay for them. Even in 2007, when state revenues were near their peak, lawmakers still passed a budget that outspent forecasted revenue by more than $1 billion. The extra spending was paid for by raiding dedicated accounts and other accounting gimmicks.

The practice of using one-time funds to pay for ongoing expenses contributed mightily to the state’s precarious fiscal position today. Cutting back after all those spending binges we couldn’t afford probably feels a bit like waking up with a nasty hangover.

So kudos to Governor Gregoire for doing the hard thing—the right thing.

Here is a summary of some of her proposed budget changes.


State employees

· 3% salary reduction for 90% of state employees through unpaid furloughs; employees making less than $30k are exempt; STEP increases, call back pay and assignment pay are preserved

· Healthcare moves from 88/12 to 85/15 split

Pensions

· PERS 2 members will pay 4.59% as opposed to 3.9%

· Replace automatic annual pension payment increases with discretionary ones (these were an extra benefit granted by the legislature in 1995)

· Discontinue early retirement incentives

· Close the retire/rehire loophole (allows employees to collect a pension and a salary at the same time)

· Cap the state’s contribution to higher education pensions at 6%

Education

· Eliminate early learning for 3-year-olds

· Eliminate K-4 class size reduction

· Suspend Initiative 728 (class size initiative)

· Suspend Initiative 732 (STEP increases for teachers)

· Suspend planned expansion of all-day kindergarten

· Suspend annual bonuses for National Board Certified teachers

· Higher education reductions (mostly offset by higher tuition)

Health

· Eliminate Basic Health

· Eliminate Disability Lifeline (formerly General Assistance—Unemployableàa monthly cash payment to individuals with “temporary” disabilities)

· Eliminate Children’s Health Program (covers children without government documents)

· Eliminate state food stamp program (covers individuals without government documents)

· Eliminate family planning grants

Public Safety

· Close McNeil Island Corrections Center

· Deport all non-citizen drug and property offenders

General Government

· Cut General Fund money to state parks, implement more aggressive “user pay” policy

· Cut General Fund money to State Tourism Office

· Eliminate Washington State Arts Commission

· Consolidate Department of General Administration, State Printer and portions of departments of Personnel, Information services and Office of Financial Management

· Consolidate the Human Rights Commission, Office of Women’s and Minority Business Enterprises, Commission on Asian Pacific American Affairs, Commission on Hispanic Affairs and Commission on African American Affairs

· Consolidate 11 natural resource agencies into five

· Eliminate 36 boards and commissions

· Charge all state audits to the dedicated performance audit account

· 12 state buildings offered for sale

· Cancel 2012 presidential primary

To keep things changes in perspective, it’s important to note that general fund spending will still increase from $30.5 to $32.1 billion. This begs the question: Why are such drastic changes to state government being made when state spending is still increasing fairly significantly?

The answer lies on page 13 of a recent Senate Ways & Means presentation on the state budget. A very large chunk of increased costs is due to catch-up on I-728 and I-732, which were suspended for the current budget. Pension increases also amounted to more than half a billion, thanks to increased benefits we couldn’t afford and decreased contributions in past biennia. But the clincher is the replacement of one-time federal stimulus funds, which amounts to $2.3 billion worth of bona fide snake oil. Does anyone still think the federal government did states any favors with its temporary handouts and high maintenance of effort requirements?

Just as important as what her proposed budget did, is what it didn't. Page 2 of her budget document states: "We must not only cut, we must restructure, modernize, prioritize, and position our state as a 21st century government." Yet the governor does not restructure, modernize or prioritize K-12 basic education, higher education, DSHS or transportation. She made some cuts, but no fundamental changes in the way we fund them to achieve better outcomes.

Still, some progress is better than none. The return to core functions of government is long overdue. It has been almost seven years since anyone besides a few of us even mentioned the concept. Crises have a way of bringing priorities into focus.

There is more that could be done, but ultimately the governor’s proposed changes—by scaling back the rate of government growth—would benefit families and businesses all over the state. Remember, government gets its money from us. When government spends less, we can spend more of our own money. And that’s good for Washington.

Stop the government spending or this could be us in 2030

Beijing, China 2030

Bernanke testimony to House Budget

WASHINGTON (Reuters) – The following are highlights from a House of Representatives Budget Committee hearing on Wednesday with Federal Reserve Chairman Ben Bernanke testifying. For text of prepared testimony, click on

FROM Q&A WITH LAWMAKERS

BERNANKE ON TIMING OF REDUCING GOV'T SPENDING

"In terms of the time frame, right now, I don't think is the time, this very moment is not the time, to radically reduce our spending, or raise our taxes, because the economy is still in recovery mode and needs that support. However, the risk of course of ongoing deficits is the potential loss of confidence in markets and the way to reassure the markets is by creating a plausible plan for a medium-term stability in the fiscal situation. Obviously you can't run deficits (of) 10 percent of GDP forever."

BERNANKE ON U.S. DOLLAR'S ROLE AS RESERVE CURRENCY

"The dollar is still the dominant reserve currency and U.S. Treasuries obviously are very attractive as you can see from the increase in their prices during the recent turmoil.

"So the U.S. dollar has been a safe-haven currency where investors have gone when they've been concerned about other currencies and other economies."

BERNANKE ON COMMERCIAL REAL ESTATE

"We are concerned about it, it clearly is a very weak point in the economy. For many banks, including small and medium-sized banks, it is a problem. We have done a number of things. The Federal Reserve, working with the Treasury, has developed programs to try to restart the commercial mortgage-backed securities markets. Beyond that we have issued guidance to banks on commercial real estate and we're trying to work with them to restructure commercial real estate loans and to find ways to manage in terms of loans, so we're doing the best we can with banks and with the markets. There seems to be, I would say, a few glimmers of hope in this area, some stabilization of prices in some markets, for example, but it does remain a serious concern and we're watching it very carefully."

BERNANKE ON FISCAL BREATHING ROOM

"Countries have different amounts of fiscal capacity if you will. Countries like Greece, which are clearly being shut out from the market because of their debt and deficit ratios, need immediate and sharp changes in their position. The United States, as I said in my remarks, is favored in that we are a safe-haven currency. We are a large, diversified economy and we have a long record of paying our debts, paying our interest. So we have a little more breathing space -- but potentially. But I don't know exactly how much (space) we have, and I'm going to try to say -- I don't disagree with you -- you said we need a program for returning our trajectory of fiscal policy to a sustainable path."

BERNANKE ON BANKERS' PAY PACKAGES

"We will be pushing the banks to move as quickly as possible to restructure their compensation packages so that they will not be engendering excessive risk-taking. So we will be doing that very quickly.

"We hope to have a public report about this near the end of the year, early next year, but I want to assure you that the actions we will be taking will not wait for the report. We will be immediately working with the banks, and we have been working with banks already, to get them to modify their compensation practices."

"The structure of the compensation packages needs to change so that there's not an incentive to take excessive risks. Packages where the trader gets all the upside and none of the downside, that's the kind of thing we're trying to get rid of."

BERNANKE ON GOLD PRICE

"Gold is out there doing something different from the rest of the commodity group. I don't fully understand the movements in the gold price, but I do think that there's a great deal of uncertainty and anxiety in financial markets right now. Some people believe that holding gold will be a hedge against the fact that they view many other investments as being risky and hard to predict at this point."

BERNANKE ON EUROPEAN ACTIONS

"I am encouraged by the response of the Europeans ... I think the markets remain uncertain about whether these measures will be successful and that's why you're still seeing a lot volatility in the markets. What I can assure you of is that the European leadership is fully committed to addressing this problem, preserving the euro zone and preserving the European Union and they are working, I think, very aggressively right now to try to establish some effective solutions."

BERNANKE ON RECOVERY, DOUBLE DIP RISK

"It appears to us that the recovery has made an important transition from being supported primarily by inventory dynamics and by fiscal policy toward recovery being led now more by private final demand, including consumer spending. That is encouraging in terms of the sustainability.

"Our current most likely outlook is that the economy will continue to recover at a moderate pace... A double dip never can be entirely ruled out, of course, but right now our expectation is the economy will continue to grow at around a 3 to 4 percent pace this year."

FROM BERNANKE'S PREPARED TESTIMONY

ON GROWTH, INFLATION OUTLOOK

"The recovery in economic activity that began in the second half of last year has continued at a moderate pace so far this year. Moreover, the economy--supported by stimulative monetary policy and the concerted efforts of policymakers to stabilize the financial system--appears to be on track to continue to expand through this year and next. The latest economic projections of Federal Reserve Governors and Reserve Bank presidents, which were made near the end of April, anticipate that real gross domestic product (GDP) will grow in the neighborhood of 3-1/2 percent over the course of 2010 as a whole and at a somewhat faster pace next year. This pace of growth, were it to be realized, would probably be associated with only a slow reduction in the unemployment rate over time. In this environment, inflation is likely to remain subdued.

"Although the support to economic growth from fiscal policy is likely to diminish in the coming year, the incoming data suggest that gains in private final demand will sustain the recovery in economic activity."

ON CONSTRAINTS TO GROWTH

"Significant restraints on the pace of the recovery remain. In the housing market, sales and construction have been temporarily boosted lately by the homebuyer tax credit. But looking through these temporary movements, underlying housing activity appears to have firmed only a little since mid-2009, with activity being weighed down, in part, by a large inventory of distressed or vacant existing houses and by the difficulties of many builders in obtaining credit. Spending on nonresidential buildings also is being held back by high vacancy rates, low property prices, and strained credit conditions. Meanwhile, pressures on state and local budgets, though tempered somewhat by ongoing federal support, have led these governments to make further cuts in employment and construction spending."

ON EFFECTS OF EUROPEAN DEBT CRISIS

"The actions taken by European leaders represent a firm commitment to resolve the prevailing stresses and restore market confidence and stability. If markets continue to stabilize, then the effects of the crisis on economic growth in the United States seem likely to be modest. Although the recent fall in equity prices and weaker economic prospects in Europe will leave some imprint on the U.S. economy, offsetting factors include declines in interest rates on Treasury bonds and home mortgages as well as lower prices for oil and some other globally traded commodities. The Federal Reserve will remain highly attentive to developments abroad and to their potential effects on the U.S. economy."

Financial Reform U.S.

What About Fan and
Fred Reform?

Congress remains missing in action on two key
causes of the financial crisis.

By ROBERT
G. WILMERS

Congress may be making progress
crafting new regulations for the financial-services industry, but it has
yet to begin reforming two institutions that played a key role in the
2008 credit crisis—Fannie Mae and Freddie Mac.

We cannot reform these government-sponsored enterprises unless we
fully confront the extent to which their outrageous behavior and
reckless business practices have affected the entire commercial banking
sector and the U.S. economy as a whole.

At the end of 2009, their total debt outstanding—either held directly
on their balance sheets or as guarantees on mortgage securities they'd
sold to investors—was $8.1 trillion. That compares to $7.8 trillion in
total marketable debt outstanding for the entire U.S. government. The
debt has the implicit guarantee of the federal government but is not
reflected on the national balance sheet.

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Associated Press

The public has focused more on
taxpayer bailouts of banks, auto makers and insurance companies. But the
scale of the rescue required in September 2008 when Fannie and Freddie
were forced into conservatorship—their version of bankruptcy—was
staggering. To date, the federal government has been forced to pump $126
billion into Fannie and Freddie. That's far more than AIG, which
absorbed $70 billion of government largess, and General Motors and
Chrysler, which shared $77 billion. Banks received $205 billion, of
which $136 billion has been repaid.

Fannie and Freddie continue to operate deeply in the red, with no end
in sight. The Congressional Budget Office estimated that if their
operating costs and subsidies were included in our accounting of the
overall federal deficit—as properly they should be—the 2009 deficit
would be greater by $291 billion.

Worst of all are the tracts of foreclosed homes left behind by
households lured into inappropriate mortgages by the lax credit
standards made possible by Fannie Mae and Freddie Mac and their promise
to purchase and securitize millions of subprime mortgages.

All this happened in the name of the "American Dream" of home
ownership. But there's no evidence Fannie and Freddie helped much, if at
all, to make this dream come true. Despite all their initiatives since
the early 1970s, shortly after they were incorporated as private
corporations protected by government charters, the percentage of
American households owning homes has increased by merely four percentage
points to 67%.

In contrast, between 1991 and 2008, home ownership in Italy and the
Netherlands increased by 12 percentage points. It increased by nine
points in Portugal and Greece. At least 14 other developed countries
have home ownership rates higher than in the U.S. They include Hungary,
Iceland, Ireland, Poland and Spain.

Canada doesn't have the equivalent of Fannie and Freddie. Nor does it
permit the deduction of mortgage interest from an individual's taxes.
Nevertheless, its home ownership rate is 68%. Canadian banks have
weathered the financial crisis particularly well and required no
government bailouts.

This mediocre U.S. home ownership record developed despite the fact
that Fannie and Freddie were allowed to operate as a tax-advantaged
duopoly, supposedly to allow them to lower the cost of mortgage finance.
But a great deal of their taxpayer subsidy did not actually help make
housing less expensive for home buyers.

According to a 2004 Congressional Budget Office study, the two GSEs
enjoyed $23 billion in subsidies in 2003—primarily in the form of lower
borrowing costs and exemption from state and local taxation. But they
passed on only $13 billion to home buyers. Nevertheless, one former
Fannie Mae CEO, Franklin Raines, received $91 million in compensation
from 1998 through 2003. In 2006, the top five Fannie Mae executives
shared $34 million in compensation, while their counterparts at Freddie
Mac shared $35 million. In 2009, even after the financial crash and as
these two GSEs fell deeper into the red, the top five executives at
Fannie Mae received $19 million in compensation and the CEO earned $6
million.

This is not private enterprise—it's crony capitalism, in which public
subsidies are turned into private riches. From 2001 through 2006,
Fannie and Freddie spent $123 million to lobby Congress—the
second-highest lobbying total (after the U.S. Chamber of Commerce) in
the country. That lobbying was complemented by sizable direct political
contributions to members of Congress.

Changing this terrible situation will not be easy. The mortgage
market has come to be structured around Fannie and Freddie and powerful
interests are allied with the status quo. I recall a personal
conversation with a member of Congress who, despite saying he understood
my concerns about the two GSEs, admitted he would never push for
significant change because "they've done so much for me, my colleagues
and my staff."

Nonetheless, Congress must get to work on the reform of Fannie Mae
and Freddie Mac. A healthy housing market, a healthy financial system
and even the bond rating of the federal government depend on it.

Mr. Wilmers is chairman and CEO of M&T Bank Corporation, an
independent commercial bank holding company. This op-ed was adapted from
his speech at the company's annual shareholders meeting last month.