The Oregon Budget: Unavoidable Choices, Unwilling Choosers

In my March 31, 2010, column I noted:

“At the conclusion of the 2009 legislative session the state budget included a projected $233.8 Million surplus which would serve as a contingency if anticipated funds fell short. By September of 2009 the revenue forecast had fallen to $13.436 Billion and the “surplus” had dissipated to $94.8 Million. In December there was a further erosion as the revenue forecast fell to $13.393 Billion and the “surplus” shrank to $79.2 Million. The most recent forecast reduced revenue projections by another $182 Million and basically wiped out any remaining surplus.

“In all probability by the time the legislature meets again in 2011, the revenue forecasts will have eroded further and the increased costs of PERS will result in a projected deficit of closer to $4 Billion than $2.5 Billion.”

The latest budget forecast now projects a $3.2 Billion shortfall for the 2011-13 general fund budget and we still have at least two (probably three) more “forecasting” updates before setting the next budget with nothing on the horizon to suggest that Oregon’s economy will improve anytime soon.

I hate to spend time on Oregon’s state budget because it distracts from the real issue facing Oregonians – jobs. One hundred sixty thousand Oregonians have lost their jobs. Another 40,000 Oregonians have entered the workforce eligibility ranks with no hope of finding a job. Add to that Oregon’s habitual 5.5% unemployment and you have a state in crises and a political class that largely ignores it in favor of talking about the “catastrophe” facing state government – as if that’s important to someone who hasn’t had a job in twenty months.

And I hate to spend time on the “budget crisis” because it really is no crisis at all. Only those who, like the Oregonian, believe in the primacy of government – government first, last and always – depict this a crisis and for them it is a revenue crisis. Unfortunately, the facts prove quite the opposite.

The $3.2 Billion gap in the budget is, according to the Legislative Fiscal Office, caused by $3.7 Billion in increased spending – a 26% increase in spending.

The $3.2 Billion deficit projection utilizes what is referred to as Current Service Level (CSL) budgeting. It assumes that all things funded in the previous biennial budget will be preserved in the next budget and increased by a complicated factor based on inflation, programmed increases (mostly wages for public employees) and growth in program recipients. Of the $3.7 Billion in increased spending, slightly more than $900 Million represents salary increases, position increases (step increases) and inflation increases (COLA). And another $368 Million represents the increased cost of PERS. There is another $250 Million in increased debt service reflecting the habit of past legislatures to borrow in order to spend more than revenues would permit.

Regardless of how much Democrats would like to portray Oregon’s budgetary problems as a revenue problem, it is in fact a spending problem. In a time of near collapse of Oregon’s economy, how dare the legislature attempt to increase spending by a whopping twenty-six percent?

It would be nice if just one of the gubernatorial candidates had the courage to dismiss this “budget crises” as hot air and not worthy of serious debate. It would be nice, if just one of the gubernatorial candidates would refuse to be drawn into a debate over the budget as a waste of time and direct his attention solely to doing whatever is required to get Oregon’s economy moving again so as to create jobs for those 200,000 plus Oregonians currently without hope of any future employment.

Republican Chris Dudley has advocated that public employees start paying their own six per cent employee contribution for PERS and that they begin paying a percentage of their healthcare premiums. Both are laudable suggestions that are long overdue.

Democrat John Kitzhaber predictably defends Oregon’s public employee unions and maintains that the unions will “work with him” to address the budget crises. Don’t believe it. The unions will never agree to the multitude of concessions that are necessary (pay, benefits and pensions). Kitzhaber points at programs rather than personnel. Kitzhaber suggests that, in order to balance the budget, programs benefiting the sick, the elderly, the disabled, public safety and the school children will have to be reduced. It’s always this way because it sets the stage to demand that taxes be increased rather than cause such suffering. As a result, Kitzhaber continues is long history of carefree spending of other people’s money.

The fact that neither Kitzhaber nor the public employees unions are calling for tax increases – yet – is only a polite nod to election reality. Once the election is over, the Democrats and their financial arm – the public employees unions – will begin the drumbeat of horror stories that always proceed their deference for increased spending and increased taxes.

Look, this is about the philosophy of government. Oregon is at a point where the unfunded future liability for PERS exceeds the general fund budget, the State Treasurer has ruled out further borrowing to finance the general fund, and the projected deficit for the next biennium is rapidly approaching $4 Billion – a nearly 25% shortfall. And the last tax increases, Measures 56 and 57, failed to produce the amount of revenue projected by the legislature. (That should be no surprise given the consistent inaccuracies of Oregon’s fiscal analysis and the fact that no tax increase during an economic downturn produces its projected income – its what is called a repression effect.)

The entirety of this problem lies in the fact that Oregon’s politicians have ignored economic realities for at least two decades and engaged in social engineering without regard to its long-term economic impact. It goes for Democrats and Republicans alike who have agreed to spend at a rate far in excess of the growth of Oregon’s total personal income. In other words they are spending faster than Oregon’s ability to pay. The delay in addressing the problem has raised an ordinary management problem to a perceived, but not necessarily real, crisis.

The fact of the matter is that you simply cannot reduce spending by $4 Billion without reducing the number of people employed by state government. You cannot reduce spending by $4 Billion and continue to provide welfare, healthcare and education for people illegally in the United States. You cannot reduce spending by $4 Billion and continue to subsidize uneconomic businesses no matter how laudable their intent – particularly those whose ability to become self sufficient over a biennium’s planning cycle is nil. In all probability you cannot reduce spending by $4 Billion and continue to provide welfare and healthcare in perpetuity for those capable of working.

In order to balance Oregon’s budget for the next biennium the following measures, at least, must be adopted.

1. Freeze total general fund expenditures at current levels.
2. Stop paying the employees’ share of PERS – six percent of their salaries. Savings $432 Million per biennium. (72,000 public employees X six percent of $50,000 annual salary X 2 years).
3. Require public employees to pay one-half of the costs of healthcare above $1000 per month. Savings: $345.6 Million per biennium. The figure is arrived at using 72,000 state employees and a low estimated cost of healthcare at $1,400 per month for two years.)
4. Eliminate tax breaks for green energy projects. None of these can exist without government subsidies. Savings: $299 Million for the biennium according to the Oregonian.
5. Oregon is overrun with illegal immigrants. They impose an enormous burden on the state’s education, healthcare and welfare budgets. By removing the incentives for people to enter the country illegally, you can have a dramatic impact on the budgets without reducing benefits to those that are here legally. Let me repeat that. By removing the incentives for people to enter the country illegally, you can have a dramatic impact on the budgets without reducing benefits to those here legally. The Federation for American Immigration Reform (FAIR), utilizing a Pew Research study of United State Census Bureau statistics, estimates that there are over 125,000 illegal immigrants in Oregon. FAIR estimates that these illegal immigrants impose a cost of approximately $400 Million annually ($800 million for the biennium).
6. To the extent there continues to be a gap, the state must reduce the number of employees. One could start with the nearly 7.000 employees added by Kulongoski.

Each of these steps represents prudent management and recognition that government cannot be all things to all people. It is irrelevant whether these steps are viewed as intolerance, environmental insensitivity, or lacking in respect for public employees. Being generous with other people’s money has its limitation and Oregon has reached those limits.