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States Are in 'Crisis Mode:' Washington Governor

The governor of Washington State thinks famed banking analyst Meredith Whitney is wrong.

Responding to Whitney’s comment in late September that states resemble banks just before the financial crisis, Governor Christine Gregoire, a Democrat, said, “We’re in crisis mode. We the states are not in pre-crisis at all.”

Puget Sound
Source:Paul Edmondson | Photodisc | Getty Images
Puget Sound

The state of Washington is quickly running out of money. Reserves have dwindled to $72 million, an amount needed to last through the remaining eight months of the state’s budget cycle. If the state experiences further tax revenue losses, the reserve cushion could disappear.

“We’re struggling, there’s no question about it,” Gregoire told CNBC in a recent interview.

Washington has long depended on its numerous ports, including Puget Sound, as the backbone of its economy. With a recent dip in national consumer sentiment, down to its lowest point since July, according to a Thomson Reuters/University of Michigan report, consumers aren’t buying—and Washington is in trouble.

“We’re in tough economic times,” said Gregoire. She noted that one in three jobs in Washington are directly or indirectly related to trade.

In September, Gregoire went on a trade mission to China and Vietnam, along with 80 state officials and business leaders, hoping to bolster trade with those countries. She said the delegation returned with about $10 million in the pockets of Washington businesses, as well as promising potential for future deals.

America's Top States for Business - A CNBC Special Report
America's Top States for Business - A CNBC Special Report

“We believe candidly that trade is probably the biggest ticket out of the recession for the people of Washington state,” said Gregoire. She added that, unlike the nation as a whole, Washington does not have a trade deficit with China. Rather, China is one of the state’s leading trade partners for goods including software, electronics, and agricultural products.

“A lot of people said, ‘Is this the right time to go on a trade mission?’” said Gregoire, responding to the heightened sense of fiscal urgency felt by some state officials. “And my response is, ‘This is the exact right time. You can’t sit in your office and hope that things will get better. You have to get up, go out and sell your state.”

According to Gregoire, Washington was one of the last states to be affected by failures on Wall Street due to its foundation in trade. Exports to China have grown at an average rate of 19 percent per year since 2000, increasing even during the global economic slowdown.

“But it hit us, and hit us hard,” Gregoire said of the recession. She said that she expects the state to run a significant deficit over its next two-year budget and could face a shortfall of nearly $3 billion. “It has hurt our community banks which are the lifeblood of our small businesses,” she added.

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.

“We are right now cutting essential services to people that we have always provided historically, but we’re without options. We don’t have any more choices,” she said.

At 8.9 percent, the unemployment rate in Washington is slightly lower than the national average of 9.6 percent, but “is still incredibly high for us,” said Gregoire. She said that unemployment has remained unchanged for months, a source of frustration for the state’s workforce and government officials alike.

“We want to see an uptick,” she said, citing state and local layoffs for negating some modest job gains in the private sector. Washington picked up an estimated 1,000 private-sector jobs in September, but overall payrolls were down 3,200 due to the loss of an estimated 4,200 government jobs.

Washington is home to some of the country’s largest and best-known companies, including Microsoft, Nordstrom,and Starbucks. And Boeing has a major presence in the state, despite moving its headquarters to Illinois several nearly a decade ago. Gregoire hopes the state’s tradition of innovation will help put its economy back on track.

“We have a reputation internationally for being high innovation, high quality—whether it’s wine or potatoes or cherries or software or coffee, like Starbucks,” she said. She added that the international brand recognition of many Washington state companies eases the promotion of trade abroad. “You don’t have to go and describe [our] state. When you say you’re from Washington state, they know who we are and what we stand for.”

Wages, Taxes, and Technology

Washington placed fifth overall for technology and innovation in CNBC’s Top States for Business rankings this year. The state also placed fifth for access to capital. But where the overall cost of doing business is concerned, Washington fell to a distant 33rd, mostly because of steep taxes on some businesses.

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“Those who represent the jobs of tomorrow for us are given real tax breaks,” said Gregoire of corporate taxes in her state. She said Washington targets the aerospace, green technology, high technology, and health care industries for tax exemptions.

Personnel costs in Washington also tend to be higher, she said, due to the high level of education of new hires, especially in the technology industry.

“They don’t stay here, they don’t come here, to get paid small wages,” she said of Washington’s workforce, adding that many industries find they need to offer higher wages in order to attract and retain these skilled workers. “But as a result, we have a reputation of being one of the finest quality producing states in the nation.”

Despite its recent corporate restructuring, as well as its presence on nearly every street corner, Starbucks hasn’t been enough to save Seattle, whose declining economy is another source of anxiety for Washington state officials. As of August, the Seattle City Council expected a $67 million budget shortfall for next year—$11 million worse than previously forecast.

Asked if any of the states, including her own, will require a federal bailout, Gregoire said that Congress might have to consider it as a possibility.

“We don’t have the ability to borrow, we can’t run a deficit so we’re managing our way through this national recession,” she said. As a result, Washington and other struggling states are hurting the national economy, she said, by consuming valuable dollars in order to remain afloat.

“Over the next few years, without some help, the states are going to hurt the national recovery,” she predicted.

Gregoire remained optimistic in response to the question of whether the worst is yet to come for Washington. “All of my council of economic advisors tell me we’ve hit bottom,” she said, suggesting that the state’s economic condition should improve in the coming months.

As for the possibility of the states failing all together, Gregoire said, “We’re not going to fail. That’s not in our vocabulary. I don’t know a governor who would say we’re going to fail.”

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Preparedness and tapping into emerging trade markets are what Gregoire believes will edge Washington out of the recession and prevent the state from going the same way as some of the country’s major banks.

“The banks unfortunately didn’t see it coming and failed,” she said. “We see what’s required of us and we’re stepping up to it. We’re going to be competitive internationally—we know that’s what’s at stake.”

Look for Nicole Lapin's interview with Governor Gregoire on Thursday, October 28 in her "States of Pain" report on "Worldwide Exchange," 5-6am ET on CNBC.

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