Gov. Gregoire to Whitney: We're Already in Crisis Mode

Governor Gregoire

CNBC asked Governor Gregoire to respond to analyst Meredith Whitney's comparison of states to banks, pre-financial crisis. Here's what Whitney said in late September:

The similarities between the states and the banks are extreme to the extent that states have been spending dramatically and are leveraged dramatically. Municipal debt has doubled since 2000, spending has grown way faster than revenues.

Whitney said what reminded her most strongly of the banks' situation was the absence of "reliable data on state spending and debt."

Governor Gregoire chose to play off the phrasing, saying that, "We're in crisis mode. We the states are not in pre-crisis at all." That's no doubt true, but it evades Whitney's point that state spending and debt now represent a separate economic danger from the banks' credit meltdown, and that transparency is hard to come by. In fairness, Washington's credit rating is quite good, but with the caveats that a) if credit ratings were infallible, we wouldn't be in the crisis we're in, and b) things can change very quickly.

Gregoire noted that Washington has trade to rely on; unusually, we don't have a trade deficit with China. And state economists see mainly good news in that relationship for the future. Yet the state has to figure out how to avoid a $3 billion deficit over the next two years, and cuts have approached the bone. CNBC says:

In August, Gregoire announced plans for four- to- seven percent budget cuts across the board, as well as a phase-in of $51 million in cuts to state welfare aid. The cuts will disqualify nearly 2,500 families from child-care subsidies in October, and an additional 5,500 families from cash welfare benefits in February.

In a related article on Huffington Post, CNBC's Nicole Lapin adds a little more to the story, saying economist Nouriel Roubini shared with her his unease about the prospect of municipal debt default, estimating that municipal debt is about 20 percent of GDP. "He added that unfunded liabilities of state and local public employee pension funds are as high as $3 trillion--or another 20 percent of GDP."

We may be at the "bottom," as Governor Gregoire's advisers say, but it's not at all clear that it's a sustainable bottom--that is, if tax revenues have reset and incremental growth is the best we have to look forward to, debt could still drag city, county, and state governments down. (In related news, Fitch just downgraded a number of Tacoma bonds because they were backed by "volatile revenue sources" like sales taxes and parking fees.)

In Washington, the unemployment rate refuses to budge from nine percent for the past four months; and ten of our 39 counties are in double digits, topping out at 12.2 percent in Clark County. Last month alone we lost 3,200 jobs, and this is noteworthy because while the private sector added 1,000 jobs, government lost 4,200.

Budget austerity was behind the July 2008 to September 2009 decline of 2,769 employees on the state's payroll, to a total of 65,290. And layoffs have continued since then. With government accounting for about 18.5 percent (2008) of non-farm employment in the state, it's clear that continuing budget cuts will have an outsized effect on state unemployment. Year-over-year, it's the third hardest-hit sector, after construction and finance.

Seattle is currently making headlines because of a "foreclosure epidemic." Realty Trac's heat map shows Skagit, Snohomish, King, and Pierce counties especially hard hit. KING 5 explains that, "Analysts point to the unemployment rate as a big reason for all the foreclosure activity." This begets a vicious circle, in that unemployment leads to foreclosures, which depress home values and thus property tax revenues, which leads to more budget cuts and unemployment.

As NPR reports, falling property tax revenues also put cities in default on debt payments, which leads to what Meredith Whitney is trying to call attention to, a tragedy of the municipal debt commons. All of this makes election day--as the state's voters weigh a high-earner's income tax or tax increase only by super-majority--more high stakes than usual.