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Could the California fiscal death spiral happen here?

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.

California may have become ungovernable. Let’s make sure Washington doesn’t follow suit.

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