Is Kulongoski Up to the Tasks Ahead?

There is a recession coming and one must ask whether Gov. Ted Kulongoski’s administration is up to the task of managing the state during the looming economic downturn?

Not according to the Pew Center on the States, a part of the prestigious Pew Research Center. Only nine states fared worse than Oregon in a study of government management practices. Only eight states fared worse in money management and infrastructure.

The importance of good stewardship is never more than during a crisis. And there is little question that Oregon is about to enter another economic crisis. While one cannot say that we are in a recession until there are two consecutive quarters of a declining Gross Domestic Product (GDP); it simply means that you have to be in an economic downturn for six months before it is “officially” declared a recession.
No less a sage than Warren Buffet, chairman of Berkshire Hathaway and the “sage of Omaha,” noted in a recent interview with CNBC that while the country has not met the technical definition it most certainly is in an “essential recession.” Buffet notes that between the billions of home equity lost by consumers due to the housing industry collapse and the decline in retail sales by his own companies, “. . . by any common sense definition, we are in a recession.”

Add to that the recent reports from the U.S. Department of Commerce that showed that for the last quarter of 2007, the Gross Domestic Product grew at an anemic 0.6 per cent (compared to 4.9 for the preceding quarter). The GDP measures the value of all goods and services produced in the country. It cannot measure the lost equity value of homes not on the market and thus the impact on most consumers for whom their largest single asset is their home.

Even Oregon’s own tax revenue forecast (although currently being ignored by Kulongoski and his colleagues in the legislature) points toward another fiscal crisis for the state. The most recent tax revenue forecast by the Legislative Revenue Office (LRO) indicated that there would be $180 million less in tax revenues than projected for the biennium. Oregon’s most recent experience with the economic downturn of 2001 teaches us that this first forecast of declining tax revenues is like an iceberg — we only see about ten percent of the eventual problem.

For those with short memories, during the 2001 recession, the legislature was forced to meet in five special sessions to try to deal with the declining tax revenues (a forecast that got progressively worse each time that it was made). During that time Republicans held a majority in both houses but, because of a couple of pro-tax, big spenders in their ranks, were unable to deliver the necessary budget cuts to match the declining revenues. Even if they had, Gov. Kitzhaber had threatened a veto, preferring instead massive tax increases in a period of declining economic activity. The net result was that Oregonians were forced to reject two significant tax increases at the polls in less than eight months. In doing so, the governor and legislature were forced to implement across the board decreases — the least responsible method of fiscal management available.

Nothing has changed in state government since the 2001 recession for the better. In fact, if anything, things have gotten worse. And the problem with studies such as the Pew study is that it cannot look behind the scenes to understand the politics that are most likely to influence decision making in this administration.

Prior to the last recession Oregon had experienced a sustained period of robust economic growth fueled primarily by the growth in manufacturing jobs associated with the high tech industry. It had become accustomed to robust growth in tax revenues and thus routinely adopted double-digit growth budgets that exceeded inflation, population growth and even total personal income growth. That undisciplined growth in spending led to the crisis experienced by the last administration.

But as Oregon enters this recession, it finds that it has barely staggered out of the last recession with only a brief two years of any economic growth. Oregon’s unemployment rate continues to outpace the national average. Manufacturing jobs are on the decline and the only real growth in employment is found in the service industry (cooks, waiters, maids, gardeners, etc.) and the government.

And worse yet, the management team gathered by Kulongoski for his second term appears to not only be incapable of understanding sound management practices but even the fundamentals of what drives an economy. One might even describe that management team as the antithesis of good management during an economic crisis. The top three spots in the Kulongoski administration are held by former union officials. Eighty percent of state general fund budget is dedicated to the payment of salaries and benefits for public employees. Effective management of an economic downturn will require a reduction in expenditures that, by definition, means a reduction in employment. Oregonians have already seen Kulongoski’s penchant for raising taxes in good economic times (over $800 million in the last session). It would be hard to imagine that Kulongoski will have either the advice or the stomach to implement expenditure reductions (employee reductions) given his dependency on the public employee unions.

Yes, the Pew Center on the States put Oregon in the bottom third of the states for sound management practices, but given the politics of the Kulongoski administration it may deserve to be much lower.