From the Director: 2004 Legislative Session: Fiscal Uncertainty/Politics Impact the Session
By Stan Finkelstein, AWC Executive Director
On Thursday, March 11th, the 2004 session of the Legislature adjourned "sine die."

In many respects it was a session that floundered substantially and will be noted for only modest accomplishments.

The short, 60 day session saw the passage of legislation fine-tuning the state’s biennial budget, authorizing the funding for charter schools, addressing the need to replace the state’s invalidated open primary, and saw enactment of a number of modest and "hero" bills. The session failed to meaningfully address such major issues as tort reform, local government fiscal relief, and modifications to the regional transportation investment district statutes.

For most legislators it was a "hold harmless" session, overshadowed by the upcoming November election. Given the split in control between the Senate and the House, it was an outcome that many had predicted even before legislators had arrived in Olympia.

The 2004 session was not intended to address state fiscal needs, other than approval of a supplemental budget. The state did have a small addition to its revenue forecast, arising primarily from increased real estate excise tax collections. The state budget also benefited from reduced enrollment/caseload forecasts.

Many legislators still recognize that the state’s fiscal health is precarious at best, and there was little enthusiasm for establishing multi-year financial obligations. To that extent, there was strong reluctance to respond to local government, education, and other demands for additional funding in light of anticipated shortfalls in the future. Efforts by the Association to enhance funding for those cities most adversely impacted by the elimination of the motor vehicle excise tax were not positively received during the 2004 session.

In the minds of many legislative observers, the single greatest failure of the session was in the area of tort reform. Throughout the session, the medical community mounted a full-court press alleging that inordinate increases in medical malpractice insurance rates were driving medical providers out of state, or into retirement. They unsuccessfully argued that "caps" on non-economic damages were the only way to assure that runaway medical costs would be contained and that there would be an adequate supply of medical practitioners to address the state’s needs. The Trial Lawyer’s Association strongly opposed the medical association’s proposals and all other significant tort reform legislation.

With respect to general tort reform legislation, the Association joined the chorus in urging passage of legislation modifying the doctrine of joint and several liability, codification of the common law relating to the "public duty doctrine," and reduction in tort judgment interest rates. The latter measure was approved. Clearly while the Senate was in strong support of an omnibus approach to tort reform, that sentiment was not shared by the House.

The call for significant tort reform will continue, and the Association anticipates being in support of legislation that strikes a fairer balance between the legitimate rights of plaintiffs and those of defendants.

In the transportation arena, there were two primary issues that consumed substantial attention during the 2004 session. First, there was the need to approve a supplemental budget that would both accommodate the shortfall arising from passage of Initiative 776, and fund certain expenditures mandated by law. Secondly, there was a session long attempt to enact legislation modifying the authority and governance of regional transportation investment districts (RTID’s).

The latter issue was divisive throughout the session, and failed to gain approval. The Legislature did, in the closing hours, approve a supplemental transportation budget that was signed into law by the Governor. Throughout the session, AWC lobbyists were told that 2005 would be the year that local government transportation funding needs would be addressed. We are guardedly optimistic that this will materialize in 2005.

On reflection, the 2004 session was not one during which much legislative attention was directed towards local governments. While a number of good "minor" city bills were approved, there were also many harmful ones that city lobbyists spent untold hours derailing. Fortunately, few of the adverse bills were approved.

The Tri-Association Package

A key element of the Association’s legislative strategy for the past several years has been that of developing a joint "package" with the leadership of the Washington State Association of Counties (WSAC) and the Washington Association of County Officials (WACO). This year’s Tri-Association package picked up where the 2003 joint effort had left off. The key elements of the 2004 approach were:

• Opposition to legislation that is harmful to cities and counties
• State funding to assure that every city and county can provide basic services
• Enhancement of flexibility in the use of existing revenue sources
• Enactment of legislation that would increase the efficiencies with which cities and counties operate

The Tri-Association package recognized the state’s precarious financial condition, and focused on removal of those statutory restrictions that impede the efficient use of existing resources. It was an aggressive package and one that encountered substantial opposition from those special interests that did not wish to see their "sacred cows" offered on the alter of efficiency. However, it is likely that those same issues will be before the Legislature next year, and we anticipate increased success as legislators become more aware of local government’s financial needs.

Sales Tax Streamlining

Without question, the most contentious issue within the city "family" this past session was that of the proposal to adopt the "sourcing" rules contained in the proposed streamlined sales tax model statute. This effort is an outgrowth of the recognition that it is unlikely that Congress will authorize state and local sales taxation of remote commerce without nationwide uniform sales tax definitions and apportionment rules.

For the State of Washington, the sticking point has been apportionment of sales taxes when a commodity is shipped from a location within one jurisdiction to a destination outside of that jurisdiction. Under current state apportionment rules, the jurisdiction from whence the commodity is shipped receives the sales tax, unless installation is required. Under the proposed "sourcing" rules the recipient jurisdiction would receive the sales tax.

In response to concerns raised by a number of cities, legislation was enacted in 2003 directing the Department of Revenue to initiate a study of the fiscal impacts on individual cities, counties, and special purpose districts of the proposed "sourcing" rules.

The study estimated that if the sourcing rules were immediately implemented, and before any benefit from taxation of remote commerce occurred, 97 cities would lose $25.3 million annually, 184 cities would gain $14.2 million annually, and 24 counties would gain $12.7 million. Cities that were estimated to lose were those with extensive warehousing and commercial activities, and those that would gain are those with more limited levels of commercial and business activity.

Throughout the session AWC lobbyists worked to craft an acceptable compromise. The opponents of the "sourcing" change argued that the enactment should have an effective date "concurrent" with the adoption of federal legislation authorizing taxation of remote commerce, and that there should be full mitigation for any lost sales tax revenue. Supporters, including a number of legislators, sought more immediate implementation and only partial mitigation. In the end agreement could not be reached and the legislation "died".

This issue was a priority in the 2004 session for the Governor and the Department of Revenue. Given the importance of the state being able to tax remote commerce, it is anticipated that the "destination-based sourcing" issue will be before the Legislature in 2005. AWC will convene a group of cities in an effort to devise an acceptable mitigation program prior to the next session.

Cities’ Fiscal Wellbeing

The declining fiscal wellbeing of many of the state’s cities and towns is an ongoing AWC legislative concern. Many cities are experiencing substantial difficulty in maintaining basic services, let alone addressing the discretionary service expectations of their citizenry. The loss of sales tax equalization, the impact of the 1% property tax growth limitation, the effect of the current economic recession, and the need to accommodate rising health care and other costs have all contributed to the waning fiscal capacity of most of the state’s cities and towns.

While many legislators acknowledge the plight of their cities, they are unwilling to commit to a solution. The reality is that for many, local governments are a lower priority than that of additional funding for education or responding to the increasing demand for services to the needy.

It is my belief that if we are going to convince the Legislature that many of our cities are facing dire circumstances, we will need to "make our case." Making our case to the Legislature will require a comprehensive evaluation of the fiscal conditions of our cities, both in terms of funding for ongoing services as well as their ability to finance critical capital needs.

It is the intent of the Association to undertake such an evaluation and prepare a "state of the cities" report by October 2004. Such a report will be the cornerstone of an anticipated legislative strategy designed to convince the next Governor and Legislature of the vital need for fiscal relief for the state’s 281 cities and towns.

In Closing

The 2004 session was both difficult and rewarding. Increasingly, the Association has succeeded in making legislators aware of the concerns and problems of the state’s cities and towns. While we’ve not succeeded in this difficult financial environment at securing additional state financial assistance, the Association’s lobbyists and members have been able to effectively derail most harmful legislation.

As I’ve acknowledged in the past, the unsung heroes of our legislative efforts are the hundreds of city officials who regularly communicate with their legislators regarding the impact of pending legislation. It has been those "messages from home" that often makes the difference between success and failure.

As we look towards the future, and the potential of further harmful initiative attacks on local government revenue sources, the challenges facing city officials will become even more daunting. Legislators need to be reminded that there needs to be a state/local partnership to maintain the quality of services necessary for a growing economy and a high quality of life.