On Monday, the Corvallis Gazette Times carried an article entitled “Oregon lawmakers brace for weak tax forecast.” The article went on to note:
“Oregon lawmakers are bracing for bad news this week, with predictions that lower-than-expected revenues could sap budget reserves set aside this year and lead to more budget-cutting next year.
“The quarterly economic forecast is due out Thursday.
“The forecast for state revenue is expected to be below projections, legislative budget leaders told the Salem Statesman Journal. That could wipe out what’s left of a $310 million reserve lawmakers created in June.
“The reserve, created by withholding a percentage of agency budgets, was already down $200 million after the quarterly forecast in August showed projections running below estimates.”
Wow, what a surprise.
I have repeatedly criticized the state’s revenue forecasting methodology as inaccurate and harmful. It defies logic and creates an impetus to adopt budgets far in excess of what the state can afford. Here’s the problem.
The revenue forecasting methodology assumes that revenues will increase at a presumed rate over the budgetary cycle. That assumption remains through each forecasting update despite the fact that revenues are either flat or declining. The effect of the methodology is to simply apply the same assumed rate of increase to a new lower base. Here is an example:
Assume the budget forecast is made on the assumption that revenues will increase by 1.5% each quarter. Revenues for the first quarter are $2 Billion. Under such a formula the second quarter would produce revenues of $2.03 Billion, the third quarter would be $2.065 Billion and the fourth quarter would be $2.09 Billion. The revenue forecast for the year would then be set at $8.181 Billion and $16.865 Billion for the year.
But now, let’s assume that the second quarter revenues were actually $1.9 Billion. Under the current methodology the state would simply recalibrate the base at $1.9 Billion and assume the same 1.5% revenue increases for the remaining quarters. That would produce a forecast of $15.9 Billion. If the following third quarter was actually another $1.9 Billion, the methodology would again recalibrate and assume the same 1.5% revenue increase for the remaining quarters and produce a forecast of $15.7 Billion. Now let us assume that the revenues remain flat for the remainder of the biennium at $1.9 Billion per quarter. The total revenues produced would be $15.3 Billion.
The remarkable thing is that while revenues remain flat and the budget is falling nearly $1.5 Billion short, the forecast model continues to assume that revenues will increase in each succeeding quarter. And that begs the questions as to why legislators, having been informed of a severe economic downturn, having seen revenues flat and/or declining for succeeding quarters, seeing nothing on the horizon that suggests an economic revitalization, continue to adopt or alter budgets on the assumption that revenues will increase each succeeding quarter?
It’s anybody’s guess as to the real reason, but it is painfully obvious as to the result. By accepting a methodology that project revenue increases, it allows the legislature to avoid the tougher choices inherent in smaller budgets. If you can set your budget based on an assumption that there will be $16.8 Billion you can avoid the hard decisions attendant to a realistic budget that would produce only $15.3 Billion. And if you are the governor, it allows you to agree to $35 Million more in salary increases for the public employee unions than is in the budget.
The worst part of all of this is that the governor and the legislature are going to impose the revenue decline on the helpless – the aged, the infirmed, and public safety. The Gazette Times noted:
“The newest revenue estimate could put pressure on human services and corrections.
“Although a 5 percent cut in in-home service hours will take effect at the beginning of 2012, lawmakers chose not to make deep cuts in nursing-home, community-based and in-home care in the first year of the two-year budget cycle.
“But when the second year of the budget starts July 1, they face the prospect of a 19 percent drop in payments to nursing homes, 16 percent to community-based care, and 14 percent to in-home care.”
The Gazette Times continued:
“Lawmakers this year left it to the Department of Corrections to make $28 Million in unspecified cuts in its two-year, $1.3 Billion budget in addition to the money the Legislature held back for reserves.”
Look, this is not that complicated. Oregon already has one of the highest income tax rates in the United States. Despite that, the amount of revenue that those taxes produce cannot fund government at current levels. There are simply too many public employees. They are paid too much in comparison to their private sector equivalents. And they receive benefits (healthcare and pension) far in excess of their private sector equivalents. If you are not prepared to deal with this reality, you will continue to engage in niggardly treatment of those most in need of government services while allowing the bloat to continue and grow in the cost of government.
Here are some concrete steps that can be taken to rein in the cost of government:
- Eliminate the provisions of the “Little Davis-Bacon Act” that requires bidders for state contracts to pay union scale wages even though there are an abundant number of contractors, workers and suppliers who can provide services and materials cheaper.
- Eliminate the provisions in the public employee union contracts that prohibit the state from realizing the savings attendant to outsourcing work if that work had ever been performed by a public employee union member. Gov. Kulongoski negotiated that with his pals in the public employee unions shortly after his re-election.
- Stop paying the employees’ six percent contribution to PERS.
- Review and modify the educational requirements for a whole variety of administrative and ministerial positions. The public employee unions – negotiating with both Govs. Kitzhaber and Kulongoski – increased the educational requirements (now requiring a college degree) in job descriptions for a wide variety of clerical positions. The increased educational requirement is used as justification for an inflated wage. The clerical workers already holding such jobs are “grandfathered” in – they aren’t required to obtain the required college degree. The fact that they continue on doing the work without the requisite college degree is proof positive that the requirement is unnecessary.
- Eliminate the requirement imposed by the Oregon Public Utilities Commission that a percentage of electrical power acquired (five percent currently and rapidly moving up to twenty-five percent) emanate from “renewable” energy sources – that is wind and solar – which is significantly more expensive. The State of Oregon, as a utility customer, is forced to pay these substantially higher rates for its massive energy consumption. The State of Oregon would be far better served if it were required to obtain energy at the cheapest rate available.
- Eliminate the massive subsidies currently paid to “renewable” energy producers. None of these producers (solar or wind generators) can produce energy at a competitive price and require government intervention in the form of direct subsidies and government mandates for use in order to remain in business. The costs to taxpayers and state government are staggering.
And finally, last but not least, reduce the recurring cost of funding PERS by undertaking a wholesale shift from a “defined benefit” program to a “defined contribution” plan. Whatever benefits have been earned to date by public employees are theirs for the keeping but benefits accruing in the future would be subject to the changes. (That is what private sector employees are guaranteed under ERISA.) And please don’t lecture me with the baloney that Oregon’s Supreme Court has already decided that you cannot this. That was a decision made by justices who were themselves beneficiaries of PERS and who should have recused themselves as having a conflict of interest. It is also a decision that is based on their interpretation of the United States Constitution – a decision that would not stand if then-Attorney General Kulongoski – another PERS recipient – had appealed it. If the issue were ever presented again to a court without bias and/or appealed to the United State Supreme Court, that phony limitation would disappear.
But this is Oregon and the public employees unions are in firm control. Not a single one of these recommendations is likely to see the light of day.