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Could the California fiscal death spiral happen here?

Not so far, contends the State Treasurer. But our two-thirds requirement for raising spending cripples the ability to act quickly, giving credit markets the jitters.
James L. McIntire, Washington's State Treasurer

James L. McIntire, Washington's State Treasurer

Last month, in an analysis that read like an autopsy, The New York Times offered a grim prognosis: The California Dream “is, for now, delayed.” Given the severity of California’s downward spiral and its government’s limited ability to adapt to the new revenue environment, that delay could easily prove deadly. As the paper noted, California has cut core services — the public priorities that once distinguished it among all other states — deeper than it has at any other time in modern history.

Some of these budget problems may sound familiar, especially after the deep spending cuts needed to fix Washington’s $9 billion budget shortfall. But our state has been able to shield itself from the profound financial tangle California finds itself in today. For example, at the same time the state of California was issuing IOU's to creditors for basic services, investors were buying Washington's bonds for schools, roads, and ferries at the lowest interest rates in 30 years.

But the intent of this column is neither to boast about Washington nor disparage the Golden State. I’m also not debating the relative merits of tax increases and spending cuts — both of which could be seen as creating additional downward pressure on the economy. The contrast between California and Washington offers a “teachable moment” in governance and financial management. The lesson: States cannot allow their struggle to balance declining revenues and increased demands for services to destroy their financial credibility.

What sets Washington apart from California in terms of credit market confidence has been our ability to make tough decisions in a timely fashion. Washington must retain this capacity. Maintaining a strong credit rating is among my top priorities, for it means real savings for taxpayers. If we had to pay California’s rates when we issued more than $750 million in bonds last month, taxpayers would have been on the hook for an added $118 million in interest payments.

So, how can we maintain our advantage in the credit market?

California is the only state to require a two-thirds majority of the Legislature to adopt either a budget or tax increases. That’s a big part of the California problem. Washington voters have passed similar initiatives that require a two-thirds majority of the Legislature to approve a tax increase (or a simple majority vote of the Legislature combined with a referendum to the voters).

Many view these supermajority requirements as a way to encourage decision makers to put aside their differences and come together for the greater good. I disagree. These requirements actually create a system that hands over decision making to a small subset of the minority, the additional one-sixth of the votes necessary to achieve a supermajority. Empowering this small group makes it easy for individual lawmakers to withhold their votes until they get what they want. Those willing to vote against their colleagues in their own party can exact a high price through their disproportionate influence on the political process. The result is often more pork, more voter frustration, and a stifled decision making process.

When a small number of decision makers can frustrate and dilute the will of the majority they can effectively act with little accountability. They have no responsibility to set the agenda, but can block any action aimed at reaching a timely resolution in fiscal circumstances like we face now. The majority party can also use the two-thirds vote requirement to abdicate responsibility, claiming that they lack the votes to make real decisions.

This pattern is one of the reasons credit rating agencies tend to see voter initiatives as having the potential to cripple financial decision making. Unlike California, Washington’s Constitution cannot be altered by voter-initiative, but our initiatives can impose statutory limitations like two-thirds majority requirements that are difficult to change when economic conditions demand timely and sure action. I don’t believe this is what either California or Washington voters wanted when they endorsed these two-thirds requirements.


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Comments:

Posted Tue, Aug 11, 7:28 a.m. Inappropriate

Mr. McIntire proves once again how is unqualified for his current position.
As a legislator you allowed state pension funds to be raided to support current spending, now we owe our state employees billions and you have no way to make up the short fall except higher taxes. Your assertion Mr. McIntire, that we would be far better off without any checks and balances on increasing taxes is absurd. You and Your party Mr. McIntire are totally responsible for the current financial problems in Washington. Your own staff was warning of pending deficits and the need to curb spending in 2007, but you ignored it. Instead you advocated for a State Income Tax to try and mask the underlying problems and continued to spend beyond sustainable levels. You are not capable of making the hard decisions in state government necessary to address our current fiscal downturn.

Cameron

Posted Tue, Aug 11, 10:31 a.m. Inappropriate

It's an interesting viewpoint -- and I'm not going to say that there is anything incorrect about anything McIntire has to say, because there isn't. But I wonder about the emphasis of the argument. Whenever a tax revolt is proposed in this state, you begin seeing arguments that Washington is headed down the same road as California -- a couple of those pieces have already appeared here, on this site. But the comparison is not entirely fair. There are dramatic differences between Washington and California law.

If Washington was the same as California, why hasn't the disaster occurred in this state? Voters here have been revolting for years.

McIntire touches on the reasons. The first is that California voters have the right to amend their constitution without involvement by the Legislature -- Washington voters do not. The second is that the state of California requires a supermajority to pass a budget -- Washington does not.

These might sound like technical points, but they are critically important. The first point is the reason that California's well-known tax revolts have distorted the state's tax code beyond any reasonable person's understanding. Tax revolts in California -- Proposition 13, for example -- take the form of constitutional amendments. Those are extremely difficult for a legislature to alter, and the California legislature hasn't bothered. So when a tax-revolt initiative passes in that state, it adds new convolutions to an already convoluted system. But in Washington, lawmakers have the right to rewrite tax-revolt initiatives with a simple majority vote two years after the initiative is passed. And they do it often.

The second point -- about the supermajority requirement for a budget -- is a quirk of California law that exists only in three states, and it requires a level of cooperation among California lawmakers that is unneccessary and pretty well unthinkable in this state or anywhere else.

So it's natural that California would get into trouble.

In Washington the legislature has considerably more power than in California. And it's worth pointing out that if an emergency arises, Washington lawmakers can respond quickly -- they can pass tax increases or alter initiatives immediately after passage by taking supermajority votes. Those votes are difficult, of course, but they can be taken if there is a clear consensus that something has to be done. And if there's not a clear consensus -- well, maybe that tells us something.

It's interesting to read here that Washington's less-onerous supermajority requirement -- which applies to tax increases, not passage of a budget -- creates jitters in the financial markets. Sounds to me like the credit market needs to be educated about the differences between California and Washington law.

Erik Smith
Olympia, Wash.

ErikSmith

Posted Wed, Aug 12, 7:58 a.m. Inappropriate

Erik Smith's comments were excellent. I doubt that credit markets are jittery because tax increases are becoming more difficult in Washington state. They become truly jittery when they believe a state or municipality is financially mismanaged---as in running huge deficits or
increasing public spending recklessly, as has been the case here.

I am no fan of Tim Eyman's. But it is amusing to see Washington politicians use him as a scapegoat whenever they get into a financial/budget squeeze. Repealing even a small percentage of "tax expenditures"---that is, special loopholes and subsidies offered to Boeing, Microsoft, and many other companies and sectors---would erase all the red ink in the state budget immediately. Easier to blame Eyman than to exert spending/budget discipline or reduce special favors to those with political power.

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