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.

  • Anonymous

    In the words of Lany Davis, “Where’s the proportionality”?

    The level of urgency demonstrated by the legislature and governor does not match the circumstances we are in. It’s not even close.

    None of these revenue forecasts are suprises and it is at least somewhat likely things could get much worse.

    All told this is a severe emergency.

    Yet apparently the legislature and governor do not have an emergency gear to shift into.

    That can’t be good.

    We’re facing a near perfect storm for fiscal catastrophe and our electeds are acting only slightly concerned as they conduct the business as usual political posture of an election season.

    • Jay

      Anonymous: Could it be that most Oregonians are missing the “real” agenda of “our electeds” and the unions they blindly serve? “Crisis” and “emergency” is what they want. When there is crisis and emergency, they then have given themselves unfettered license to trample on our rights. A State on the verge of financial collapse is the “perfect storm” for “the elected” because the redistribution of wealth among its citizens and the intrusion of the federal government then become absolute necessities. Think of this as an oppportunity not to missed for “the elected” – taxing the “rich” individuals and corporations into oblivion and turning it over to the “have nots” and welcoming the federal government to impose onerous long-lasting mandates on us in return for bailouts of federal tax dollars. Are “the electeds” capable of such an evil conspiracy? You bet they are and it has already begun!

      • Rupert in Springfield

        Actually you are spot on with this. It is the genesis of Rahm Emanuel’s comment “never let a crisis go to waste”.

        I think most knew what Rahm meant by that – in an economic downturn, government solutions have traditionally been more popular than private sector ones. This was the basis for FDR’s New Deal and to some extent Wilsons programs as well as LBJ’s great society. Use an economic downturn to start a government program to ostensibly solve the problem but in reality to gain greater control over the populace.

        What is significant historically is that the traditional popularity of growing or creating new government programs in an economic downturn is that this time it didn’t work. The growth of government in general, as well as specific programs such as Obama care, have been rejected by the populous. Why is this?

        The answer is simple arrogance. The last time we saw this was under Clinton. In 1992 Democrats came in after a solid year of the press going along with their line that one of the mildest recessions on record was “the worst economy in the last 50 years” as Al Gore put it. Democrats tried to pass Hillary care and the public was outraged. That was the first nail in the coffin. The second nail was the power grab with the semi auto ban. Chuck Schumer was the first out of the gate with passage of that saying “the NRA has always worried about the camels nose getting under the tent, well, now we would like to show you the rest of the camel”. The blatant arrogance of this, combined with Hillary’s secret meetings with a cadre of mysterious people she was later sued over was just too much. By 1994 people had had it and threw Democrats out.

        The lesson here is during an economic down turn Rahm was probably right. People are likely more amenable to giving up their rights for some sense of security. They value their rights less then because people feel they can’t take advantage of any rights if they are in the process of losing their house or job. Thus its a ripe time for the Democratic agenda. The failure here, whereas FDR, LBJ and Wilson has success is the arrogance.

        Make no mistake, FDR, Wilson and certainly LBJ were all very arrogant men. FDR was a noted snob who would do all he could to avoid the ?? ??????. The difference is they simply were better salesmen. They hid their arrogance in order to accomplish their agenda.

        When you are dealing with a guy like Obama, who writes two autobiographies before being out of his 40’s, it gets real hard to hide the arrogance.

        • valley p

          “When you are dealing with a guy like Obama, who writes two autobiographies before being out of his 40’s, it gets real hard to hide the arrogance. ”

          Yeah the nerve of this guy. He thinks he is better than us. So what if he also managed to get elected president before being out of his 40s. That makes him special?

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    • eagle eye

      There will be a revised legislature and a completely new Governor early next year, before the new biennium starts. What exactly would you have them be doing right now?

  • Rick Hickey

    #5, Illegals are even more expensive than what FAIR estimated.

    For further proof check out the Dec. 2007 C.B.O report on the Costs of Unauthorized Immigrants to State & local governments.

    This report has the usual forked tongue government speak that illegals are not supposed to get Social Services however state & local gov’ts are required to hand them out and also local laws require this as well.

    This report proves that Oregon, not the FEDs, are paying the lions share of these costs.

    One glaring example from this report; States paid out over $900 Billion for K-12 education in 2006 and ESL/ELL students (over 5 Mil. now) cost us 25%-45% more. Here was waste $500 Million per cycle (this IS just the extra $3K each for ELL, not including the 50,000 illegals getting that $10K each already each yr.) on Failed not really Bilingual programs and Distircts like Woodburn now force all K-12 to take Spanish Immersion. This just after M-58 English Immersion only, passed in Marion, Polk & 28 other counties and missed statewide by only 2%.

    NEA & OEA took over $10 Million from our Teachers to lie on TV about the costs of English immersion and yet S/K District has hit FIVE years of not passing the low standards of NCLB, mostly from ELL students. Hello?

    If you put Dr. No or Peter Courtney back in office, thier record proves that this will only get worse.
    I am working hard to help ensure that doesn’t happen, what are you all doing about it?

    COMMIEs on Parade! This Saturday @ the Capitol (to coincide w/DC Rally supported by Pres. Obama). Watch/Listen/Learn as Democrat Leg. hopefuls such as the Dem. running against Kevin Cameron, and Dem. running against Sprenger, literally Rally with the Communist Party of America & SEIU & Nat’l Council of “The Race” and much much more!
    Marx & Lennin would be Proud, MLK & Lincoln would be disgusted.

    Who has the Guts do join me and stand up for Freedom, before we are no longer allowed too?

    • Rick Hickey

      Woops, i meant to say the Dem. running against Jackie Winters, will be at the Comunist Rally.

      • Colorblind Justice

        Mr. Hickey – Thank you for highlighting this massive economic threat to Oregonians. If you’re not familiar with Greg Kord’s platform, please visit and poke around a bit. For freedom first, not the false choice of lesser Socialism…Cheers, CBJ

  • Bob Clark

    I would add another important budget measure: Stop using lottery and other funds to subsidize Portland’s public luxury goods such as the proposed Milwaukee Light rail project which is mostly to serve the city of Portland and allow it build a new foot and rail bridge over the Portland waterfront. The city of Portland is just as leveraged in debt if not more than the state of Oregon. It needs to be reined in fiscally rather than pampered by giving it more state subsidies.

    The Democrats are hitting Dudley for his capital gains tax cut and its projected cost to state of Oregon revenues (impact estimate provided by the Department of Revenue). However, this same department estimated more revenue from Measures 66 and 67 than has been realized to date (so I hear). So, I wonder if the Revenue Department forecasters are not using too low of economic multiplier in their estimates. I think Dudley’s capital gains tax cut might be closer to revenue neutral as it will send an encouraging message to businesses seeking to expand or move to Oregon.

    A funny thing is you have Dudley being pounded by Oregon Democrats for advocating a capital gains tax cut, while Representative Wu, first Congressional District Democrat, is advocating such a cut in the federal capital gains tax rate. So, the Oregon Democrats should also be pounding Wu but life is full of inconsistencies I guess.

  • a retired professor

    So $1.27 billion out of $3.7 billion are due to increased state employee costs — about a third, as Kitzhaber (and others) have been saying. So bash the state employees all you want, they are only a part of the problem at most.

    Larry’s proposals to cut worker compensation — items 2 and 3 — would actually save less than $800 million. So the rest would have to come out of other cuts, mostly service cuts.

    But Larry still doesn’t seem to get it — that you don’t just “adopt” these pay cuts unilaterally. These things all have to be negotiated, in many cases with the unions. Otherwise, you’re just asking for big trouble in the courts. Even if you negotiate, you’ve got to get the other guy to agree to the contract. A pretty tall order.

    • Steve Plunk

      I agree that service cuts will be necessary. The state can no longer be all things to all people.

      I also agree regarding the labor negotiations. What the state needs to do is hold the line even if it means a strike. Too often negotiators capitulated before they needed to resulting in a ratcheting up of salaries and benefits beyond what the citizens wanted or now can afford. If we get to the point of actually firing the strikers there are plenty of people ready to take those jobs at a lot less money.

      • Mary’s Opinion

        Negotiators will need the courage of President Reagan regarding the air traffice controllers strike when he fired them all. There was no shortage of applicants to fill the newly vacated positions and air travel was not significantly disrupted.

        • eagle eye

          The air traffic controllers strike was illegal. Public worker strikes in Oregon generally are not illegal. Does the state have the legal authority to fire public workers who are striking legally? Just wondering if you’ve checked on this.

          • Mary’s Opinion

            The research on the illegal air traffic controllers strike was interesting. Their union was asking for a pay increase of $10,000, a work week reduced from a 5 day 40 hour week to a 4 day 32 hour week and full retirement after 20 years. They also wanted better working conditions, updated equipment and recognition of the stressful nature of their job.

            My point was that President Reagan did what many did not expect him to do. He had the courage to uphold the law.

            Oregon needs negotiators who will not back down in negotiations with union heads. Oregon tax payers should not be held hostage by government employee unions.

          • eagle eye

            Maybe so, but remember, strikes by public workers are legal in Oregon. It’s not a matter of “not upholding the law.” I haven’t the slightest idea whether it’s legal to fire striking public workers or not. I don’t promoting the idea is a strategy for getting elected Governor in Oregon. Certainly, neither Dudley nor Kitzhaber is talking about any such thing.

          • Mary’s Opinion

            I agree with you that neither gubernatorial candidate is talking about firing striking government employees in this lead up to the November election. That would not be wise. And like you I don’t know if that is even legal. However, union leaders/negotiators have the option of saying they will strike if their demands are not met and that to me is holding Oregon tax payers hostage.

            Public employees are not a special class of workers. To appreciate what they have, I believe they should “have some skin in the game” so to speak by paying their own share into PERS and a portion of their health care premiums.

            With all the current labor laws in place, state and federal, that protect workers, I’m not sure I see a need for public employee unions. I’m sure someone will have response to this.

          • valley p

            “With all the current labor laws in place, state and federal, that protect workers, I’m not sure I see a need for public employee unions. I’m sure someone will have response to this. ”

            Apparently the public employees do see a need for their unions. And if this blog is any indication, they will have an even greater need in the months and years ahead.

            Larger picture, we live in a consumer driven economy. 75% of our GDP is determined by the ability and willingness of ordinary people to buy the daily stuff of life, and also the extras. Cutting wages of government employees is fools gold. What it does it helps drive down everyone else’s wages, and to the extent we go down that path we will impoverish ourselves just to make an ideological point.

            This country had its best economic period when we had the highest numbers of union members.Its hard for those on the right to understand this, but its a historic fact. We can’t fix the economy by making working people more poor and letting the rich claim ever larger shares of the economy. Its a dead end.

          • Anonymous

            “And if this blog is any indication, they will have an even greater need in the months and years ahead.”

            LOL. They will be lucky to avoid summary execution!

          • Marvin McConoughey

            Whether rich or poor, the nation needs a source for investment capital. Currently, the rich provide considerable venture and investment capital. If that is to be reduced via higher taxes, then another source should be found. It can’t be the government because the need for higher taxes is to sustain current spending habits. If it is neither the government nor the rich, who is left to get investment capital from except the middle class and the poor?

  • Marvin McConoughey

    The legislature should set aside a special section devoted only to tax loophole deductions. Start with the state’s list of tax expenditures. Controlling public employee costs, including PERS, could be assigned to a special board, akin to the base closing commission set up by Congress. The board should have power to implement what they propose, barring a two-thirds contrary vote of the full legislature..

  • Jan

    Bailout Ben cannot save every state. Oregon is not “too big to fail.” CA & WA will get bail outs. Oregon will end up on its’ butt in the dirt. State employees need to tell their union leaders to shut up and sitdown and agree to making the pension and health care cost payments. State workers probably all have friends or relatives who have lost their jobs and their homes through no fault of their own. To expect to continue to receive free benefits, COLA’s and pay increases in this economic climate is very selfsih. Count your Blessing government workers you have a job and a benefits. If your leadership tells you the state can tax to pay you more, fire them.

    The sooner Oregon gets its’ financial house in order the better.

  • I’m taking over

    Indiana governor Mitch Daniels.

    First term
    On his first day in office, Governor Daniels decertified all government employee unions, removing the requirement that state employees be union members; within eight months, 92% of government union members quit their union.
    On his first day he also created Indiana’s first Office of Management and Budget to look for inefficiencies and cost savings across state government. In 2005, Governor Daniels led the state to its first balanced budget in eight years and turned the $600 million deficit he inherited into a $300 million surplus in a single year. Governor Daniels used this surplus to repay hundreds of millions of dollars the state had borrowed from Indiana’s public schools in previous administrations.

    • eagle eye

      I don’t know, but I doubt that the Governor of Oregon has any such legal authority. Furthermore, a $900 million budget reversal in a state like Indiana (which is larger in population than Oregon) is small change compared to the situation Oregon faces.

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    • Mary’s Opinion

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