Representative Dennis Richardson: Facts behind revenue drop

Oregon in Freefall–Revenue Drops $377.5 Million
By Representative Dennis Richardson

I am State Representative Dennis Richardson and I write this newsletter for Oregonians interested in what can be done to make Oregon a better place to live and work.

Today, the Oregon’s State Economist released the Quarterly Revenue Forecast that shows a reduction of $377.5 Million in expected revenue for the remaining ten months of this biennium. (Click Here.) This news was expected. It is the fifth straight reduction in revenue estimates for 2009-11, and demonstrates that Oregon continues in economic free-fall.

In fact, this is Oregon’s ninth negative revenue forecast in the past 27 months.

The following graph depicts only the five quarterly forecasts since the June 2009 close-of-session (COS).

History has a sobering way of repeating itself. In March, 2007 the legislature crafted a budget based on a woefully optimist revenue forecast. I wrote the following on March 27, 2007, “…When the euphoria over the increased funding for nearly every agency and program subsides, we fiscal conservatives are left with the nagging question, ‘How will such increases be sustained in the future?’ Even when you allow for the 1% allocated to the new Rainy Day Fund, a net spending increase of more than 18% above the current biennial budget is breath-taking. I can only sit here and shake my head. After all, the voters have spoken; the liberals are in charge; and, who am I to rain on their parade. It’s like the Roaring Twenties…Happy Days are here again.” Those days of high spending and heavy borrowing are over. The sobering days of the dark decade that followed the Roaring Twenties are now upon us.

Two changes made since the Great Depression have avoided much of the trauma experienced during the 1930’s.

1. The unemployed have income—more than two years of unemployment benefits averaging more than $300 per week have avoided the long lines at soup kitchens and have kept millions of American families in their homes; and,

2. The financial panic and runs on banks by terror-stricken depositors has been avoided– the Federal Reserve has a strategy of announcing the insolvency of banks (103 so far this year) late on Friday afternoons, announcements made with calm assurances that larger banks always assume the insolvent banks’ accounts and assets, and the transition will be seamless for depositors.

It is no surprise that Oregon is in finacial free-fall. The May 2009 economic and revenue forecast was the basis for the 2009-11 State Budget. Although the May 2009 forecast anticipated $12.5 Billion in General Fund revenues, it was down $532.5 million from the forecast released only two months earlier in March 2009. (Click here.) Notwithstanding the clear indication from such a large revenue
reduction—not to mention the reductions in the previous four Revenue Forecasts—in June of 2009 the Oregon Legislature ended the session by balancing the 2009-11 State Budget using the declining revenue figure as well as $1.6 Billion of federal stimulus money and other “one-time” revenues. (Click here.) Draining Oregon’s savings accounts and accepting huge grants of federal “stimulus” money
might have made sense if there was reason to believe we were in a short-term recession. In that event, such money would be merely a bridge to the rising side of a “V” shaped recovery. Instead, we had reason to believe then and we should clearly recognize now, we are living in a multi-year “L” shaped recession/depression and the spending of $1.6 Billion of one-time money was a bridge to nowhere.

In short, the bridge funding is over and Oregon’s economy is continuing its fall into dark waters of economic depression. As President Reagan once said, “A recession is when your neighbor loses his job. A depression is when you lose yours.”

The freefall in Oregon revenues raises two questions:

1. What is causing Oregon revenues to plummet?

The June Revenue Forecast dropped $526 million from the March Forecast, only three months earlier. Today the September Revenue Forecast dropped another $377.5 million lower than the June Forecast. How is it possible for 10 consecutive Revenue Forecasts to be wrong? One reason for the string of flawed revenue forecasts is the reliance on overly optimistic assumptions. One such assumption has been that personal income tax withholdings would increase 6%
this biennium, while they have increased only 2%. Oregon has had a year of 10% unemployment or higher, and fewer workers employed results in less personal income taxes being withhold; in addition, those who have private sector jobs in Oregon are making less money.

Notwithstanding the precipitous reduction in personal income tax withholdings, corporate income tax revenues have actually risen. Corporate tax revenue increases might be attributed to the tax increases contained in Measure 67–that remains to be seen. They might be attributed to a recovery in Oregon’s economy. When considered more closely, the opposite may be true. There are two primary ways for a business to increase its taxable income:
increase sales or decrease expenses while retaining cash that might have been invested in depreciable or deductible items.

Consumer statistics show that inflation and consumption are both quite low. Oregonians are buying less, using less credit, paying down debt where possible, and saving more than they have saved in recent years. Thus, with retail sales flat, businesses are not generating more income from an increase in sales. The additional corporate taxes showing up in Oregon’s coffers likely results from increases in taxable revenues resulting from money
saved by reductions in workforce, lowering wages and other costs, and retaining capital instead of investing it in rolling stock, business expansion and other tax deductible or depreciable expenditures. In short, businesses may be paying taxes on retained capital that would normally have been spent in tax-deductible ways if the businesses were growing and investing in the future.

The bottom line is this: 93% of Oregon’s General Fund revenues are income tax related, and notwithstanding wishful forecasting to the contrary, Oregon’s workers and businesses are not generating the income tax revenue the State Economist has estimated for the past nine quarterly forecasts.

2. How should Oregon’s leaders respond to plummeting revenues?

Basic economic principles apply to everyone—individuals, families, businesses and governments. Here is one such basic principle: When you cannot pay your bills, you must increase income, decrease expenditures or do both.

Increase Income. Our elected officials have contributed to Oregon’s economic drought by increasing taxes in a recessionary economy, and by incurring large amounts of long-term debt.

The passing of Measures 66 and 67 have dramatically chilled Oregon’s business climate by instituting the highest personal income tax in America (11%–tied with Hawaii), and installing a corporate sales tax based on the volume of business sales, regardless of the profitability or profit margin of the company. Benjamin Franklin described such actions as “penny wise and pound foolish.” Businesses and high earning
individuals are attracted by incentives and repelled by constraints. Economic research has demonstrated that high tax jurisdictions drive away business (and the jobs they create), while low tax jurisdictions attract such businesses. (Click here.) Oregon’s high income tax and regulatory environment are contributing factors to Oregon’s higher-than-national-average unemployment rate.

In addition to tax increases, Oregon’s legislature has dramatically increased our State’s long-term debt. Government debt for the State is much like household debt for individuals—after spending the immediate influx of cash, the temporary benefit is replaced by the burdensome reality of having to pay the money back with interest.

In 2006 Oregon’s “Net Tax-Supported Debt” was roughly $6 Billion. By the end of the current 2009-11 biennium, Oregon’s debt-load will exceed $9.6 Billion in Net Tax Supported Debt—a 57% increase in long-term debt in less than four years. In only two biennia, Oregon went from a low debt state to one of the highest indebted states in America. (Click here.) The cost of servicing Oregon’s high debt levels is extremely expensive. Large amounts of revenue are diverted from high priority uses for decades. The total payments for all Oregon debt over the next two years is $1.3 Billion. (Click here.)

Decrease Expenditures. As I see it, the expected shortfall for the 2011-13 Oregon State Budget will exceed $4 Billion. This opinion is based on the following:

(1.) The $1.3 billion reduction in revenue since the June 2009 close of session is not just foreboding, it is indicative of a new and austere era in Oregon revenues and spending.

(2.) The likelihood of replacing the $1.6 Billion of one-time money used to create the current State Budget, is a pipedream. The State Economist estimated a 6.5% growth in income to support a forecast for $1.8 billion in new income tax revenue for the 2011-13 biennium. I’m no economist, but when I look at the declining revenue chart above, the precipitous drop in housing prices and demand, the perennial level of high
unemployment, the lack of consumer confidence and spending, and the lack of available credit even though interest rates are at an all-time low, it is clear to me, our economy is not in recovery. The $1.6 billion in one-time spending used to balance our current budget is not coming back for a long time.

(3.) The dramatic increase in PERS employer payments will cost the State $400-$500 million in additional PERS payments in 2011-13 and $1 billion in 2013-15. The PERS problem is dramatic and systemic. To learn more about it see the PERS March and April newsletters at

(4.) The $2.3 Billion required to maintain the Current Service Level (CSL) of State government in 2011-13 cannot be paid. (Click here.) In sum, there is no way to deal with such a large financial hole without cutting costs, programs and services. Oregon’s new Governor and Legislators wlll be forced to look at all options and take hard budget-bill votes in order
to balance the 2011-13 State Budget—not to mention the additional cuts that will be required to maintain a balanced budget for the remaining ten months of the current biennium.

Oregon is not the only state to suffer reductions in revenues. Oregon budget advisors and legislators would be wise to consider carefully what is being done in other states. The National Conference of State Legislatures (NCSL) has gathered information on what budget balancing measures are being used in all 50 states. To see a sampling and how they might be used in Oregon, Click here. NCSL is an excellent resource to legislators in all 50 states. When we legislators utilize the research and services provided by NCSL we gather information and ideas in an effective, efficient and economical manner, without having to “reinvent the wheel.”

In closing, Oregon’s financial situation is dire. With revenues falling, with the economy floundering and with expenses skyrocketing, there is no alternative but for the State of Oregon to change its ways. Oregon has spent too much in the past and has failed to make cuts when they could have been made more discretely. Now such myopic spending practices are coming home to roost. There will be no quick economic
recovery and we should adjust our living and spending habits accordingly. It will require creative and courageous new ways of running our State if we are to balance our Budget and restore a vibrant economy. Effective leadership will require the willingness to learn from other jurisdictions, eliminate non-essential programs (and they are not all essential), and restructure Oregon government with a more lean and efficient design.

It is up to us, the people, to see that our elected officials make the changes necessary to reform and restore our government of the people, by the people and for the people.

If you have ideas that could help Oregon resolve its financial problems or if you know of areas we should look at to cut waste, or redesign agencies & programs, please share them on the Richardson Newsletter Blog (Click here.)

Now is the time.