Governor Gary Locke’s Remarks
Association of Washington Business 2002 Policy Summit
September 26, 2002

Good morning.

It’s great to be here.

To say that these are tough economic times is an understatement.

But it’s true.

To say that things are tough all over may be a cliché, but that’s true too.

In the aftermath of the national recession, exacerbated by the 9-11 attacks, 45 states have experienced major deficits.

All 45 anticipate continued deficits in 2003.

The total expected state shortfalls across the country is $58 billion for the next one year.

California alone accounts for $24 billion of this shortfall.

State governments are doing what they have to do to try to get through the recession.

Spending cuts.

Draining reserves.

Sixteen states, including Washington, have securitized a portion of tobacco settlement funds.

Wisconsin securitized all tobacco settlement funds in 2001.

We’ve seen some radical steps taken to cope with tough times.

Twenty-three states cut K-12 education funding in either their 2002 or 2003 budgets.

Sixteen states raised taxes by more than one percent over their 2001 collections.

Thirteen states boosted motor vehicle fees. We did neither.

What about Washington’s future?

With our Chief Economist, Dr. Chang Mook Sohn’s recent downward revision of state revenues over the next two years, we face a potential shortfall of $2 billion.

That shortfall can be explained in large part by the following:

· $525 million increase in Medical Assistance costs for low income children and nursing home costs

· $288 million increase for K-12 enrollments and inflation

· $150 million increase for vendor COLAs---foster parents, nursing homes and non-profits providing care for children and seniors

· $208 million increase for teacher COLAs required by citizen’s initiative

As you can see, the increases are primarily related to health care and education.

The increases are mainly areas which most citizens are reluctant to cut.

We aren’t willing to deny the sick, or our kids, or our seniors the kind of care they need.

We aren’t willing to compromise our future by refusing to provide the education our kids need.

That makes the deficit more problematic.

The situation is not hopeless, however, or even unprecedented.

We’ve been here before.

Our unemployment rate has been fluctuating a little above 7%.

But during the 1971 recession, it rose to 10.4%.

During the recession of the early ‘80s, it was 12%.

I served on a panel recently with former Governors Evans, Spellman and Gardner.

We talked about the fact that the state has been through tough times before.

And we’ve always emerged from tough times.

We will this time too.

Facing this deficit, what are our choices?

Historically, our state has taken a “Casablanca” approach—we round up the usual suspects.

We’ve typically used some combination of four things: we cut spending, we increase revenue through new taxes or user fees, we use reserves, and we use budget “gimmicks.”

We need to seize this opportunity to do things differently.

We need to change the rules of the game.

So we’re taking a new approach.

Instead of the usual cost-based budget, we’re planning an outcome-based budget.

Asking what results our citizens really want and need.

As we develop a baseline budget for the next biennium, we are focusing on getting those results with the resources we have.

The focus is on getting results.

We are scrutinizing all functions of our government.

We are taking an enterprise-wide approach, eliminating overlap and consolidating similar activities.

We are going to reshape and, if necessary, reorganize state government — so that the money goes to the services that matter most to our citizens without regard to the different accounts: general fund or dedicated fund.

We have directed agencies to prioritize their activities at three different levels – high, medium and lower priority.

We told them to include in the “lower priority column” activities that account for at least one-third of their budgets. All our valuable services, but we must prioritize.

This situation is serious.

And we have dedicated, intelligent leaders—the best and the brightest—from all across state government working to find solutions.

We have also asked respected business leaders to assist, advise and provide us with their perspective through this process. [These business leaders include Dick Davis].

We’re looking beyond the borders of individual agencies.

We’re not asking what’s best for a particular department.

We’re asking “what matters most” to the people of our state.

For example, we’re taking a hard look at the cost of mistrust.

Some say a disproportionate amount of government spending is to control the actions of citizens, businesses and other organizations.

Such spending is based on the belief that most of us, if given the opportunity, will lie, cheat and steal.

This level of mistrust is expensive.

Most citizens and businesses want to do - and indeed do the right thing!

There are less expensive and more effective ways to win compliance with state regulations and laws.

We need to explore those “other ways” to win compliance.

“Voluntary compliance”—not the kind of compliance that requires a police officer on every corner.

We should win the cooperation of citizens and businesses.

I’d like to take a little survey.

I’d like a show of hands to these three questions:

How many of you pay your federal income taxes?

How many of you recycle?

How many of you obey the speed limit? Most of the time?

We need to study these examples of compliance.

They vary as to the degree to which compliance is voluntary—as with recycling—and the degree to which it is enforced—as with speed limits.

All involve desired outcomes.

We must creatively examine how desired outcomes are achieved—for all of the services we provide.

I’ve offered a very brief summary of the philosophy we’re trying to apply to the present budget crisis.

Make no mistake: there will be substantial changes—and substantial cuts—as we close the deficit and balance the budget.

While we work through our budget challenges, we must not lose our focus on long-term economic growth.

What are we doing to improve the business climate and develop our economy? Because a stronger economy will ultimately provide the revenues for education and medical care for seniors and low-income children.

Last summer I created the Washington Competitiveness Council.

That was before the recession was accelerated by the tragic events of September 11th.

Last December, the Council issued some very significant recommendations.

We have acted on virtually all of the key recommendations by passing legislation or by administrative order.

Our state has made substantial progress in making us more competitive.

The Washington Competitiveness Council told us we needed to clarify confusing tax issues.

We’re making good progress in this area—progress that is important in attracting and keeping businesses to our state.

Businesses were confused by the way investment income was treated under the B&O tax.

I signed HB 2641 into law this year.

This bill achieves certainty about the application and coverage of the tax.

It provides predictability for tax planning.

And it removes a disincentive to investment companies.

I also worked with the Competitiveness Council and AWB last year to draft a municipal B&O tax reform bill.

It passed the House but not the Senate.

This bill would have eliminated taxation of the same business activity by multiple cities.

We were almost successful.

I plan on pursuing a bill again next year.

We need this reform. I am confident it will pass this year.

We’ve been reexamining the manufacturing machinery and equipment (MM&E) sales tax exemption at the recommendation of the Competitiveness Council.

The re-examination will result in our interpretive expansion of the exemption.

Let me repeat today what I’ve said many times before:

I do not favor repeal of the MM&E exemption.

There is no effort within my administration or the Department of Revenue to repeal this exemption.

This is a necessary exemption to help us be more competitive with other states.

I will oppose any effort to eliminate it.

I also worked with the Legislature to pass legislation improving the fairness in the unemployment insurance system.

This change would save thousands of Washington businesses millions of dollars.

I am disappointed by this week’s State Supreme Court decision not to rule on the constitutionality of the ballot measure which seeks to repeal this needed change in fairness.

A second factor of competitiveness is the environmental regulatory and permitting system.

The Competitiveness Council recommended that these procedures be streamlined and shortened while maintaining high environmental standards.

The Department of Ecology has done a great job of following through on that guidance.

The changes they’ve made are getting results.

Let me give you some examples.

Later today I will be at a groundbreaking event in Auburn—the site of a new Safeway distribution center.

Safeway wanted to purchase the land from Boeing but faced an important constraint.

Safeway needed certainty that the requisite permits would be granted by a certain date—mid-September 2002.

Otherwise, the option to purchase the land would not be exercised.

But the regulatory requirements were complex.

There were approvals and permits needed both for the Boeing demolition and cleanup, and for Safeway’s construction.

We worked with all parties.

Open communication from the start.

It worked, and worked well.

The parties met in late May this year.

Ecology laid out the objective – not subjective – requirements for the various permits.

The permits were issued by mid-July—issued in record time— meeting the mid-September deadline easily.

A major economic asset now in our region because we were able to move quickly and effectively. (200 new jobs)

In July we also issued a water-quality certification and permits to the Port of Seattle to rebuild the deteriorating Pier 90.

That was just one month after the application was filed.

The pier was needed to serve as an interim docking facility for Princess Cruise Line and Holland America.

The Port was able to begin construction this summer as needed.

That will mean jobs with the cruise ship lines, and more tourism dollars for the state.

Everyone wins.

In our most recent fiscal year, Ecology processed three times as many requests to change water rights as the year before.

Other improvements include an online Permit Assistance Program—and across state government we’re making government more accessible with an array of online options.

Ecology has also instituted a “one stop” permitting system that helps “tie in” all agencies involved in a request.

These success stories show we’ve streamlined and shortened regulatory processes.

Some of our previous critics are recognizing our progress—business leaders like Judy Runstad and Alan Mulally, co-chairs of the Competitiveness Council.

The red tape is being cut.

Processing times are being dramatically reduced.

Agency after agency, we’re saving time, money, energy and aggravation by streamlining regulatory processes.

Another area of progress is human capital and innovation.

We must continue to work for the best schools possible.

Test scores are rising but we need to provide more stable funding for our colleges and universities.

We have some of the most capable, talented and educated workers in the country.

Our workforce of 2.9 million is experienced and well educated.

Our universities produce top-notch graduates and enjoy international reputations for research in science, medicine, engineering, agriculture and biotechnology. But we need to ensure more of the same in the future.

A fourth and final factor of competitiveness I’d like to talk about is physical infrastructure, namely our state transportation system.

Our state has grown, but the transportation system hasn’t kept pace.

In the past twenty years, our population has grown 43%.

Vehicle miles traveled on Washington highways and streets have increased 88%.

The burden on our state’s transportation system has increased—dramatically.

Yet after you adjust for inflation, we actually have fewer state dollars per year for transportation now than we did twenty years ago!

We lose $2 billion every year due to congestion.

Two billion dollars every year, in wasted time, in wasted fuel, in shippers’ delays.

The congestion interferes with travel over our roads, with freight mobility between sea and rail ports and distribution centers, and with access to our airports.

These losses increase costs for growers, for manufacturers, for merchants, and, ultimately, for us—the consumers.

Washington businesses struggle to remain competitive under such a burden.

Some businesses relocate elsewhere—and some new businesses are reluctant to locate here.

And there is another critical issue—our quality of life.

We all know what it feels like to be on a freeway that has turned into a parking lot.

Losing precious time staring vacantly into the brake-lights of the car ahead.

Time we’d much rather spend with our families.

Time we need to do our jobs well.

Time we could be using to enjoy life.

This human loss is not a reasonable price to pay for growth.

There are also too many unsafe roads.

That is not a reasonable price to pay for growth either.

This problem will not go away—it will only get worse.

The economic impacts will only get worse.

The solutions will only get more expensive.

And if we don’t solve the problem, we will be leaving our children a shameful legacy.

A legacy of immobility, a legacy of lost economic opportunities, a legacy that compromises the quality of life.

We have the opportunity to revitalize and improve our transportation system in November.

Referendum 51 focuses on key chokepoints and safety concerns.

The project list is detailed and extensive. R-51 will complete HOV lanes and expand park and ride lots, passenger-only ferry service and transit.

And R-51 will provide accountability.

Quarterly audits to make sure projects are completed on time and on budget.

Referendum 51 is not a hard choice.

It’s the only choice.

If we successfully meet the challenge of improving our transportation system, our economy will benefit in many ways.

One immediate benefit is jobs.

Thousands of new construction jobs.

If central Puget Sound authorizes regional improvements there will be more than 20,000 new jobs.

That’s 20,000 family wage jobs sustained for several years. Those workers and their families will shop at stores, eat at restaurants, buy equipment, and remodel homes. That benefits businesses and communities in every part of our state.

In both the near and long-term, transportation improvements mean jobs.

That’s something we all care about – something our state needs!

Meeting the transportation challenge will mean a brighter future for our state—it will mean jobs, safer roads, and more quality time with our families.

These are tough times.

I am confident that we will meet our challenges. Because we’ve done it before.

We will meet our budget challenges.

We will continue on a competitive course of economic development.

We are a strong, resilient state.

I love our state, and I believe our future is bright.

I believe that with business and government working together for our state’s economic development, our odds for success are very high.

Thank you for all that you do in keeping our economy vital, and for making Washington a great state to live, work and raise a family.

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