Month: January 2002

A Half-Axed Budget

Last issue I listed some of the issues that the Seattle City Council and the King County Council will be tackling this year. Now it’s time to look at the State Legislature in Olympia.

This is an election year, so the session will be short, but the list of bills long. The Democrats have a 50-48 majority in the House and a 25-24 majority in the Senate, so they could push through the bills they want to pass. But they’ve been working hard at bipartisanship–at least in the Senate. The House, on the other hand, is deeply divided, particularly over the budget.

The Budget. There’s a $1.25 billion hole in the state budget primarily because of the economic recession and Tim Eyman’s I-747, which limited property tax increases to 1% per year (less than the inflation rate). The state can’t run a deficit; it’s required to balance the budget, and that means either increased taxes or deep spending cuts. Democrats prefer the former, while Republicans prefer the latter–with a few interesting exceptions.

Some Democrats and social service advocates have pointed out that if the legislature eliminates some of the 445 tax breaks the state has generously doled out to businesses over the years, the $1.25 billion hole would disappear. The State Department of Revenue says that tax breaks cost the state $8 billion out of the current two-year budget, with new tax breaks for businesses enacted since 1994 stripping away $3.3 billion in revenues.

Some of those tax credits and “incentives” include: an exemption on sales tax for airplanes (Boeing); a sales tax exemption on new equipment purchases by manufacturers; a leasehold tax exemption for the Seahawks’ new football stadium; fuel tax exemptions for loggers, land developers, boat owners, and commercial airlines; and a number of tax breaks for the high-tech industry, including a research-and-development tax credit. Two separate studies by the Department of Revenue show that these tax breaks have little to do with businesses creating new jobs. They’re just pork-barrel, and business lobbyists are gearing up to fight against their repeal. Call your legislator.

As a typical Republican-in-Democrats’-clothing, Gov. Gary Locke has proposed cutting social services to balance the budget. That includes cutting the following: $70 million in payments to nursing homes, $2.6 million in assisted living care, $1 million in HIV/AIDS prevention and care services, $2.1 million from the Early Childhood Education Assistance Program, $470,220 from the Head Start Program, $1.9 million from emergency shelter assistance programs, $120,000 from five youth shelters, $656,000 from the Emergency Food Assistance Program, $263,000 from the Farmer’s Market Nutrition Program for low-income women and children, $423,000 from the Women Infants and Children’s health and nutrition program, $750,000 from the Juvenile Violence Prevention Grant, and $4.6 million from the drastically underfunded Regional Support Networks that service the mentally ill.

If that’s not bad enough, Locke would eliminate the following: the State Library, the State Film Office, $7 million in wage increases for long-term caregivers, the Alternative Response Services program for youth, the Public Health Nurse Program, the Continuum of Care Program for at-risk families, Family Reconciliation Services, the federally-mandated Medical Interpreter Services program (which serves 10,000 people each week in King County alone), the Community Health & Safety Networks (which prevent youth violence, teen pregnancy, and child abuse), the TASC program (which reduces drug abuse), and most drastically, state Social Security Income payments to disabled folks on federal disability.

And Locke wants to eliminate 835 jobs and place a hiring freeze on desperately needed case managers for the developmentally disabled. In addition, Locke’s budget ignores a $36 million shortfall in funds to provide child care and other services for people moving off welfare and into the workforce.

Locke’s budget proposal actually makes Republicans look compassionate.

Much ink and time has been wasted arguing about how to raise revenue without angering voters. It seems everyone has forgotten how to add two and two together to make four. Obviously, if the legislature hadn’t given such enormous tax breaks to businesses while simultaneously jacking up real estate taxes, sales taxes, and fees, voters wouldn’t have passed I-695 and I-747.

Now, I’m sick of pundits arguing about whether a flat $30 vehicle license fee is more progressive than a fee based on the value of the vehicle. This is not the issue. If we want a progressive tax–one based on a person’s ability to pay–then we have to have a state income tax. Don’t hold your breath.

Transportation. This is the do-or-die issue of the year. But the legislature is caught between a rock and hard place. To pass a bill, they have to raise taxes to pay for it, but if they raise taxes, voters might punish them at the polls. But in December Gov. Locke stunned the Democrats by proposing virtually the same bill that failed in the legislature last year: a $8 billion package funded by a nine cent gas tax phased in over three years.

So far, the legislature has assiduously avoided the transportation funding package and has concentrated instead on smaller “efficiency” bills, including a Republican push to allow outside contractors and non-union labor to work on road projects and a bill to allow the Puget Sound region to raise taxes locally to be spent on projects in the region. But even these issues are contentious: labor and most Democrats won’t go for the outside contractors, and Republicans from rural districts are worried that the Puget Sound region will hog all the transportation money to itself.

The legislature has 60 days to resolve these conflicts and hammer out a transportation plan. If they don’t, Gov. Locke will drag them back to Olympia for a special session, during which they can’t raise funds for their election campaigns.

Anti-Terror Law. States all over the country are crafting their own, redundant laws in the wake of September 11 to keep up with the federal government’s trashing of the Bill of Rights. Under Gov. Locke’s proposed anti-terror law, nonviolent protesters could be charged as “terrorists” (first- or second-degree!). In addition, the law would restrict access to public records, making it harder to get information on government expenditures. It’s unnecessary and deeply anti-democratic. Call your legislator.

Other issues. The legislature may consider bills on the following issues: lowering sentences for nonviolent drug offenders, changing sentencing guidelines, lowering the cost of prescription drugs, preventing harassment and bullying in schools, providing funds for low-income housing, allowing collective bargaining at four-year colleges (go UW grad students!), and incentives to develop renewable energy resources.

Business interests have their own agenda in Olympia: overturn or delay the new ergonomics rules, hamstring the Department of Ecology, cut unemployment taxes, gut environmental regulations (including the new shoreline rules), “reform” business and occupation taxes, move the burden of paying for health care coverage onto employees, impose a hiring freeze for state employees, and privatize state services.

Olympia is not Washington DC. There are paid lobbyists in Olympia, but ordinary folks can still get access to their state legislators. Call them, write them, and visit them. Otherwise, they’ll think Tim Eyman speaks for you.

Resources: To contact Gov. Locke visit http://www.governor.wa.gov or call 360-902-4111. To find your legislative representative, visit http://www.leg.wa.gov and click on “Find Out Who Represents You” or call the Legislative Hotline at 1-800-562-6000 (TDD 1-800-635-9993). The governor’s proposed budget is at http://www.ofm.wa.gov. For info on bills and the legislative schedule, go to http://www.leg.wa.gov and click on “Legislative Info” or call the Legislative Information Center at 360-786-7573.

Eat The Economy!

Economic Stimulus: Dead on Arrival

After September 11, when it became obvious that the country had entered a recession, President Bush proposed his economic stimulus plan and asked Congress to vote on it immediately. But in late December, the Senate adjourned without passing an economic recovery bill. Why did they reject Bush’s plan and the Republican alternative passed in the House?

Because the Democrats in the Senate know a few things about the economy that George W. Bush and the Republicans don’t. First of all, it will take consumer spending to boost the economy. Businesses have over-spent, are mired in debt, and have too much inventory on their hands. Someone has to buy up that excess inventory to get the economic engine going again.

But it’s impossible to buy lots of stuff when you’ve just lost your job. In 2001, companies announced plans to lay off 2 million workers. In just the first 10 days of this year, every day brought the announcement of more layoffs: Ford 35,000; Burlington Industries 4,000; Merrill Lynch 9,000; FleetBoston 700; US Postal Service 15,000; GM 5,000; Providian 800; Motorola 48,400 (one-third of its total workforce); AT&T 5,000; and on and on.

That’s why Senate Democrats are demanding that some of the economic stimulus bill be used for worker retraining programs and to extend unemployment benefits.

The Republicans counter that, by providing tax cuts to corporations and the wealthiest Americans, businesses and rich folks will be inclined to invest more in the economy, expand or open new businesses, and create jobs for the unemployed.

There’s only one problem with this scenario: most corporations are in heavily in debt. Any tax break they receive from the government–particularly if it runs up a government budget deficit–will do more harm than good. Here’s why:

Government deficits drive up long-term interest rates. When the government has to borrow money, it competes with corporations for a limited pool of investors willing to buy debt instruments. So the price goes up. When long-term interest rates rise, the cost to pay interest on long-term corporate debts also goes up. These increased “debt-servicing” costs eat into corporate cash flows, making it harder for them to pay current expenses (i.e., advertising, rent, and, yes, wages). Any savings from tax credits is minor in comparison and may not even be realized until the companies reach their next fiscal year-end.

How heavily in debt are US corporations? It’s hard to tell. For one thing, as the Enron debacle has shown, companies are now adept at disguising exactly how much they are in debt. It’s not likely that many other companies have taken Enron’s lead and set separate partnerships to remove debt entirely from their balance sheets (while still having to pay the interest to service that debt), but there are other tricks in common practice that the SEC and the Financial Accounting Standards Board are examining closely.

A little practice called “suspense accounting” recently fell under the eye of federal regulators. It refers to a single line item on a corporations balance sheet that represents something known as “goodwill.” Goodwill is the amount paid to buy a company that is more than the company’s market value. Why pay a premium to buy another company? Mostly to pay off the shareholders so they don’t block the merger deal; it’s their special cut–their profit on the deal. But Goodwill also represents your gamble that the company you just bought will eventually be worth as much and, hopefully, more than you paid for it.

What happens when that hope doesn’t pan out–when the company you bought a year or two or three years ago underperforms and your “goodwill” asset loses its value? In the past you could write off the expense slowly over time, even as long as 40 years, in some cases. Some corporations found a loophole in the law that allowed them to keep the overvalued goodwill on their balance sheets, untouched, for years, in the hope that they could write it off in a really profitable year, when the huge charge would go unnoticed.

Starting this year, however, the Financial Accounting Standards Board has issued a rule that requires corporations to write off overvalued goodwill immediately. The number of companies taking huge charges will skyrocket. Some companies with enormous goodwill on their books include: Qwest Communications $30.8 billion, WorldCom $50.8 billion, AT&T $24.8 billion, Conseco $3.73 billion, Aetna $6.6 billion, NTL Inc. $11.4 billion, and Crown Cork & Seal $3.77 billion. AOL Time Warner just announced a $60 billion write-down related to goodwill, and both JDS Uniphase and Nortel recently announced write downs of goodwill in the tens of billions of dollars. In nearly all cases, the write-down greatly exceeds the corporation’s total net worth.

Typically, when companies take such write-downs, their stock prices fall. A huge write-down is a clue that the management team doesn’t know what it’s doing or has overextended, and so investors shy away. When the stock price fall, the market value of the company falls and, suddenly, a manageable amount of debt looks enormous. The company’s credit rating suffers, and we have another Enron on our hands.

In addition, companies are continuing to borrow, instead of pay off their debts. According to the Federal Reserve, companies have run up a record $4.9 trillion worth of debt as of September 30, 2001. This statistic doesn’t include financial companies (banks, brokerages, etc.) and farms, which operate on enormous debt loads. This $4.9 trillion figure represents a 6.6% increase over the previous year. In the past two-year period, corporate debt has increased 15%, while corporate assets to back up those debts have only increased 7%. And that’s before companies were required to write-down their overvalued goodwill. This year, as companies write down their devalued assets, that spread will increase dramatically.

In fact, corporate debt has risen a whopping 84% since 1994. Some of that money was used to buy factories, equipment, trucks, and telecommunications equipment. But a lot of the money borrowed in the past 12 months has been used by companies to buy back stock to boost their stock prices. Remember this when you read that “at least the stock market is recovering.”

Democratic Senators are well aware that tax breaks and a new federal budget deficit will only exacerbate the problem, and they’ve been getting an earful from their corporate constituents. Bush & Co., however, are so fixated on looting the Treasury that they can’t–or won’t–see the danger signs. Bush has said that an economic stimulus package will be his top priority this year.

The fight should be spectacular.

Under the Knife

Politicians are gearing up for the new legislative season, and they’ll be deliberating on a lot of critical issues. Most of the attention has been on the state’s transportation plan or President Bush’s economic stimulus bill. But nobody’s really paying attention to the two legislative bodies that effect us most directly: the city council and the county council. Here’s a look at what they’ll be handling this year.

On the city level, the Seattle City Council will be adjusting to a new mayor, who has already tried to exert his control over the council. Nickels is on record saying that he thinks the council has usurped too much power from the mayor’s office. Of course, the council balanced its budget this year by cutting funds to the mayor’s office to make up for Schell’s propensity to hire the most expensive staff he could find. On the other hand, Nickels recently sent out a controversial memo to the various city departments about the procedure for doling out information to council members (much to the council members’ chagrin). With hothead Peter Steinbrueck as council president this year, we could have a real firestorm ahead.

The issues:

The budget: the city’s reliance on business & occupation taxes and sales taxes makes it vulnerable during a recession. The city council’s current budget preserves most social services while cutting funds for city administration and the police department. If the recession continues or deepens, however, the budget will need further cuts.

Transportation: former Mayor Schell filled potholes, supported light rail, and gave Flexcar a helping hand, but did little else on this issue. Nickels has spoken in support of both light rail and a monorail system. He wants to lobby the state legislature in Olympia for funds to build the monorail, in addition to putting a funding package before voters. Other major transportation issues include: expanding water-taxi service, re-synchronizing traffic lights, and replacing the Alaskan Way Viaduct, which will cost an arm and a leg … and another arm … and several toes on the remaining foot…

Police: The Schell-Kerlikowski team, aided by city council member Jim Compton (who heads the council’s public safety committee), has taken only the tiniest steps to improve police accountability and has let the police union dictate the terms. Racial profiling is still a non-issue for the council, but a big issue for constituents. In the meantime, the Mardi Gras riots, the Nov. 30 fiasco, and the recent rash of police shootings are revealing a department with a serious problem. Nickels’ response: to keep a police radio at home and ask to be awakened if “violence erupts.”

Other major issues: funding for the construction of the new city hall building, repealing the hated civility ordinances, equitably doling out funds for affordable housing, forcing developers and non-profits to stick to their quotas for building low-income housing units, clamping down on slumlords, providing the promised funds for a downtown day center for the homeless, revamping the city’s permitting process for demonstrations and large social events, electing city council members by district instead of at-large (Nickels supports this, but council members don’t), removing culverts from salmon creeks, and daylighting Thornton Creek where it runs under the Northgate Mall’s south parking lot.

It’s a big list. Hopefully, Nickels’ early attempts to exert his dominance won’t mean that the council will spend most of its time fighting him instead of getting real work done.

The city port authority (a governing body all its own, without much public oversight or accountability) will have its own set of issues: security at SeaTac, the stalled construction of a third runway at SeaTac, protests over expanding Seattle’s docking facilities for cruise ships and pleasure boats at the expense of commercial fishermen, and protests over giveaways of money and assets to major corporations (see ETS! Vol. 6, No. 10, 1/2/02).

At the county level, the King County Council has changed from a predominantly Republican-controlled body to a slim 7-6 majority of Democrats. Cynthia Sullivan (D-Seattle) is the new chairperson. Larry Phillips (D-Seattle), who wrote last year’s budget, has replaced Republican Rob McKenna as the chairperson of the budget committee, and Democrat Dwight Pelz has taken over Maggie Fimia’s job as chair of the transportation committee. This, by the way, is a real coup for County Executive Ron Sims, who has been maneuvering behind the scenes to push light rail critics McKenna and Fimia out of major positions on regional and council transportation committees. But it bodes ill for oversight of Sound Transit’s finances.

The issues:

Budget: the county is in a worse funding crisis than the city, with a $40 million shortfall this year and another $40 million that will need to be cut in 2003. The cuts will be deep and wide; Sullivan has proposed closing all King County parks, laying off county employees, and eliminating some social services. But this would account for only half of this year’s shortfall. Sullivan is also looking at cuts in the justice system (i.e., cops and courts, but also programs that help at-risk youth).

Transportation: three items will be trouble spots this year–Tim Eyman’s assualt on light rail and Metro bus funding, the money to expand I-405, and the tug-of-war over how to efficiently use the downtown bus tunnel (light rail or buses?). And this year the council will review Metro Transit’s six-year plan. In addition, the state legislature may pass a bill allowing the Puget Sound region to form its own transportation authority to levy taxes to fund big, regional projects; the county will probably take the lead on setting this up.

Other major issues: building a desperately-needed sewage treatment plant, cutting funds for cops and jails, early release of inmates held for non-violent drug offenses, and reining in developers who have violated the Growth Management Act (don’t expect this to happen any time soon, with Republican Jane Hague as the new chair of the growth management committee). This year Sims and the council will have to negotiate new union contracts with county employees; in the wake of budget cuts, layoffs, and salary cuts, this could lead to a strike by county employees.

Now, for folks who think the county doesn’t do much for them and they wouldn’t miss a few cuts here and there, here’s a list of some of the services that receive funding from the county: Community Colleges, The Tenants’ Union, The Crisis Clinic of King County, King County Housing & Community Development Program, HomeSight, a number of youth shelters (including Aloha House, Denny Place, The Shelter in south Seattle, Youth Haven in Bellevue, and Teen Hope in Shoreline), Early Head Start, dozens of youth career and development programs, the King County Work Training Program, the Dislocated Worker Program, a number of Veterans’ programs, various child care subsidy programs, the County Health Department (everything from school immunizations to dozens of HIV/AIDS programs, from food safety and restaurant inspection programs to inspection of water quality), dozens of alcohol and substance abuse programs, homeless services, 1st time homebuyer programs, 24-hour hotlines (for domestic violence, sexual assault, alcohol & drug abuse, and food safety), housing repair programs for low and fixed income people and the landlords that serve them, and programs that support the disabled and elderly.

For more information or to contact the mayor, county executive, or various city and county council members, visit the Seattle City Government website at http://www.ci.seattle.wa.us or the King County government homepage at http://www.metrokc.gov. The City Council’s general message line is 206-684-8888, the mayor’s office is 206-684-4000, and the county executive’s office is 206-296-4040.

mayor’s office is 206-684-4000, and the county executive’s office is 206-296-4040.

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