Business Columns & Blogs

Raise your drink to state’s financial state but watch out for the hangover

Washington Gov. Jay Inslee, center, shakes hands after he signed a new two-year state operating budget Friday, June 30, 2017, at the Capitol in Olympia. The budget was approved by the Legislature earlier in the day, just in time to avert a partial government shutdown.
Washington Gov. Jay Inslee, center, shakes hands after he signed a new two-year state operating budget Friday, June 30, 2017, at the Capitol in Olympia. The budget was approved by the Legislature earlier in the day, just in time to avert a partial government shutdown. The Associated Press

Puerto Rico is bankrupt. Illinois is headed that way. Multiple states are unable to pass budgets, or have growing pension obligations threatening their balance sheets, or both.

By contrast, Washington is an island of placidity.

Yes, the Legislature did recently, to borrow a newspapering term, push a deadline by waiting until the last possible day of the fiscal year, in its third special session, to pass a budget and avert a state-government shutdown.

But the debates and differences that led to the delay were over how to carve up growing revenues in a way to satisfy various constituencies, not to mention the authority that has decided to assume executive and legislative powers when it comes to state spending – Washington’s Supreme Court.

This wasn’t an argument over which piece of the ever-dwindling supply of furniture to throw in the fireplace to keep the house warm for a few more hours. The state was able to throw more money into education and a few other programs without having to resort to lots of tax increases (a disappointment to fans of income and carbon taxes, but they’ll be back).

Messy as it was, you don’t have to go far to see much worse — Oregon, for example.

Washington’s comparative fiscal happiness is the product of a roaring economy in the central Puget Sound region and good-enough performance elsewhere. As we charge into the second half of 2017 and, as is customary, take stock of our economic condition, it’s worth considering how long both conditions – strong economic performance and budgetary surpluses to play with – will continue.

The ratings agency Standard & Poors has assigned a AA+ grade to the state’s general-obligation and motor-vehicle fuel-tax bonds. AA is considered investment grade, reflecting a “very strong capacity to meet financial obligations.”

S&P likes “Washington’s relatively well-educated workforce and good income indicators and good recent economic growth relative to the nation,” according to a report issued in December.

Other positive factors:

▪ “Sales tax-based revenue structure, which has demonstrated less sensitivity to economic cycles than income tax-reliant states …

▪ “Good internal access to sources of liquidity in the treasury and treasurer trust funds.

▪ “Strong financial policies and practices, including statutory provisions requiring that the state’s biennial budget and projected subsequent two fiscal years’ spending plans be balanced, which is key given growing expenditure pressures.

▪ “Moderately high per capita debt burden but relatively low unfunded pension and other postemployment benefit liability.”

The raters did express some concern about the “high cost of housing, especially in key economic centers that could impede long-term growth prospects,” and that “significant upward pressure on spending originating in legal- and voter-approved mandates will remain a soft point in the state’s credit profile.”

Economic factors, including “a sharp falloff in the housing market or sustained weak demand for key state exports, fueled in part by a strong U.S. dollar, changes in trade policy, or slower-than-expected growth from China,” would put pressure on the state’s finances and ratings.

Regardless of whether S&P updates its report to incorporate the latest state budget, not a lot has changed since that last edition to change the reading on Washington’s economy.

Tech and aerospace are doing well enough (employment cuts in the latter notwithstanding), and there’s enough going on in other segments (retailing notwithstanding) to continue the state’s overall performance, in the short run at least.

Here’s the question: How short is that short run? Here’s another: How well is the state positioned for when the short run doesn’t look so good?

We can conjecture all day about scenarios in which those two sustaining sectors take some time off. We don’t know when or how or how long or how bad, but unless the laws of the business cycle, technological obsolescence and creative destruction have been repealed, we know it’ll happen some day.

Someone paid to think about such questions is State Treasurer Duane Davidson, who in an interview with a Yakima radio station recently (according to a posting on his office’s website) had some interesting cautions about not getting too comfortable with present conditions.

Davidson said he wants legislators to constrict growth of the state’s $20 billion debt, according to the posting, warning that the $2 billion in annual debt service could get a lot bigger if interest rates continue to increase.

He was specifically discussing state government, but could have been warning about the impact of all the debt and spending (and the taxes to support it) public entities are piling on – hello, Sound Transit – and what happens if the economy stumbles.

Compared to other states, Washington’s current economic and fiscal conditions are veritable parties. But parties never last, and if you weren’t paying attention to your behavior during the festivities, hoo boy, the hangover that follows.

Bill Virgin is editor and publisher of Washington Manufacturing Alert and Pacific Northwest Rail News. He can be reached at bill.virgin@yahoo.com.

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