Oregon Economy: Laughing at California… Who’s laughing now?

10.6%

By Dennis Richardson

My name is Dennis Richardson and I’m an Oregon State Legislator. I write this newsletter for Oregonians interested in our State and what can be done to improve it.

I believe Oregon’s future depends on an informed citizenry.

Today’s newsletter focuses on Oregon’s financial status. As we look forward to the 2011 Legislative Session, it is crucial to anticipate the fiscal challenges we face.

The seriousness of Oregon’s financial situation becomes apparent when we consider the following:

1. Oregon Spending has grown 46% in two budgets. The “All Funds” revenues include funds from every source–general fund revenues, other taxes, fees, lottery revenue, debt, federal money, etc. In the past two budgets, Oregon’s total “All Funds” budgets have increased 46%, from $41 billion to $60 billion. (Click Here.)

2. $1.6 Billion of “One-Time Money” used to balance current budget. The “General Fund” revenues include personal and corporate income taxes, tobacco, insurance, estate taxes and some revenues from liquor, fines & fees. To balance Oregon’s current 2009-11 General Fund & Lottery Fund (GF/LF) $14.4 billion, the Legislature cobbled together $1.6 billion in “one-time money,” that will not be available to help balance the upcoming 2011-13 budget. (To see the source of the $1.6 billion, Click Here.)

3. Expected revenues down $891 million; Governor orders 9% cuts from agency budgets. Since the close of last year’s Legislative Session, the official State Revenue Forecast has decreased every quarter and is currently $891 million less than at the close of session. (Click Here.) As a result, the Governor has ordered a 9% cut in state agency budgets in the final 12 months of the 2009-11 biennia. The cuts will total $577 million, and the consequences to education, public safety and health and human services will be profound. (To see which programs are being cut, Click Here.)

4. Oregon is an income tax dependent state, yet 10.5% unemployment remains the norm. Ninety-three percent of General Fund revenues come from Personal and Corporate Income Taxes. Yet, since 2008 Oregon’s official unemployment rate has averaged more than 10.5%. More than 200,000 Oregon workers are officially unemployed and tens of thousands of others are jobless and without benefits. Since 2007 Oregon’s private sector has lost 154,000 jobs. (Click Here.) It is illogical to believe income tax revenues will substantially increase when so many workers are out of work and so many businesses are out of business.

5. $2.7 Billion of “new revenue” required to maintain Current Service Level in 2011-13 Budget. Notwithstanding successive reductions in revenues in each of the four quarters since the close of session in June 2009 (Click Here.), the cost to maintain state government’s Current Service Level (CSL) continues to rise at an unsustainable rate. The anticipated increase in spending necessary to maintain our state’s CSL in the 2011-13 budget after various adjustments will require $2.7 billion more than the amount needed for 2009-11. In other words, $2.7 billion of additional revenue will be needed in 2011-13, assuming revenues increase to compensate for the $1.6 billion in one-time money used to balance the current 2009-11 budget. ( Click Here.) To keep in perspective the magnitude of this $2.7 billion of addition revenue needed for 2011-13, we should remember that as a result of decreasing income tax revenues, the forecast for our current budget has decreased $891 million since the 2009 session ended.

In short, Oregon’s revenues are dropping like a rock, while Oregon’s expenditures are skyrocketing — Oregon has an unsustainable level of spending.

To visualize the budget information above, consider the following graphs:

1. Oregon’s All Funds budget history. Note the accelerating upward curve.

2. Oregon’s General Fund budget history.

3. Oregon’s Growth Rate plummets as depicted in this “Even Year” biennial chart.

Why is Oregon in such dire financial straits? A primary reason is the unsustainable growth in government expenses, and especially in the expanded hiring of government employees. Most of the state employees I know are dedicated and hard-working. The problem is not with the state employees as individuals, it is with the increase in hiring and the costs to maintain such a large work-force. Consider the ramifications of the following statement. According to the recently released Final Report of the Governor’s Reset Cabinet, three of every four General Fund dollars is ultimately spent on payroll or benefits. (Click Here.)

With the private sector continuing to lose jobs, how can we pay for thousands of new state workers? As Oregon’s public sector hired additional 4300 government workers since November 2007, workers in the private sector have not fared so well.

As our state government expands its overhead, the number of jobless Oregonians who no longer pay income taxes continues to grow. Just since the March 2010 Forecast, nearly 15,000 more jobs have been lost. (Click Here.)

The Capitol and its surrounding buildings have been described as “one square mile surrounded by reality.” The reality for most Oregon families and private sector businesses is this– times are hard and cutting back on expenses is a fact of life.

Such has not been the case in our State government. At a time when the State should have been prioritizing its spending it has expanded “non-essential” agencies and programs–sometimes at alarming rates.

In my opinion, the highest priorities for state spending should be to the following:

1. Ensure public safety;

2. Provide care for the health and well-being of Oregon’s most vulnerable citizens, who cannot care for themselves; and

3. Ensure that Oregon’s students receive a quality education.

In contrast, consider the growth of spending between 2005-07 and 2009-11 of the following state departments and agencies:

State Agency/Dept. 2005-07 2009-11 % Change
Dept. of Energy $102.8 m. $259.5 m. +152%
St. Dept. of Lands $19.7 m. $33.2 m. +68%
Dept. Environmental Quality $303.4 m. $401.3 m. +32%
Dept. Human Services (DHS) $10,000 m. $16,000 m. +60%  (+ $6 billion)
Ore. Dept. Of Trans. (ODOT) $2,881 m. $4,073 m.  +41%  (+ $1.2 billion)
PERS $6,805 m. $10,488 m. +54%  (+ $1 billion)
Governor’s Office $10.9 m. $17.2 m. +58%
(Source: Leg. Fiscal Office 2009-11 Budget Highlights Update. (Click Here.)

 

Where does the money go when there are such huge increases in budgets? Most of the increases in the budget for the Department of Human Services have gone to pay the increased demand for benefits. Nevertheless, since 3 out of 4 dollars are related to payroll expenses, they certainly are a primary factor in escalating costs.

Recently I was joined on an Oregon Public Broadcasting (OPB) program by a public union representative and union employee. Both passionately (and erroneously) stated that government workers earn substantially less than their private sector counter-parts. If such a disparity were true in the past, it certainly is not true today. There is a concerted effort to misinform the people by repeatedly saying public workers are paid less than private sector workers. On average, Oregon State government workers earn more per year than their private sector counter-parts. (To read the facts on state vs. private sector pay disparities, Click Here.) The growing disparity between public and private compensation is most obvious in the areas of retirement and health benefits–100% of Oregon’s state workers’ benefits are paid for by Oregon taxpayers.

As discussed in a previous newsletter, State workers after 30 years are retiring at 58 with life-long retirement annuities that pay 80% of the employee’s highest salary and would cost more than a million dollars if purchased from a private annuity company. Such expensive retirement benefits are paid entirely by the State. When such State workers add their Social Security benefits at age 65 to their PERS retirement annuities, they often are receiving more money when retired than they earned while employed. The cost to state taxpayers to fund the Public Employees Retirement System (PERS) will increase in 2011-13 by 60% in PERS-related expenses and consume between $400 – $500 million from high priority State services. (Click Here.)

While PERS benefits are a substantial drain on state revenues, Oregon state workers also enjoy similarly generous health benefits. Oregon is the only state that pays 100% of the group insurance premiums for both the employee’s and his or her family’s benefits. Presently, the monthly costs for those health benefits are $1,100 for medical, $80 for dental and $1 for life insurance–that’s a total of $1,181 per month and it is all paid by the state. (Click Here.)

I have received estimates of the number of State employees ranging from 37,000 to 54,000. Irrespective of the actual number, if State employees who are covered by health benefits were required to begin paying ¼ of their monthly group insurance costs ($1181 x ¼ = $295.25), the savings to the State would be substantial. The total savings from having state workers pay a quarter of the cost for their group insurance benefits could free up between $262 million and $350 million for high priority State services in the next biennium.

It is time for State workers to pay their “fair share” of their retirement and health benefits — and this also pertains to members of the Legislature and the Judiciary.

In conclusion, the Governor’s Reset Cabinet states in its report that $1.6 billion of one-time money was used to balance the 2009-11 State Budget and that it will cost an additional $2.2 billion to $2.7 billion to maintain current service levels in the 2011-13 State General Funds Budget. The Reset Cabinet bases their calculations on the assumption that an economic recovery is under way and there will be sufficient “new revenue” in 2011-13 to make up for the $1.6 billion of one-time money consumed to balance our current budget. From the evidence, information and links above, I am much less optimistic.

In an average economy Oregon creates approximately 25,000 new jobs per year. Since November 2007 Oregon has lost 154,000 jobs, which includes the loss of 15,000 jobs in the past three months. Oregon’s economy today is not “average,” and even if it were, it would take more than six years merely to regain the jobs lost since 2007. In addition to the jobs lost, Oregon’s expected tax revenues have decreased $891 million since the June 2009 “Close Of Session” Forecast.

Based on all of the above, I believe there is little chance the Governor’s Reset Cabinet’s expectation will be realized for enough “new revenue” to off-set the loss of the $1.6 billion in one-time funds expended in the current biennium.

Assume, for the sake of argument, that Oregon’s revenue were to gain enough “new money” to make up for the $891 million in lost revenues since the close of session. The Legislature, in order to maintain Oregon State government’s current service level, will still be facing both a $1.6 billion hole (to make up for the one-time money used to balance the current budget), as well as $2.256 billion in additional expenses set forth in the Cabinet’s “Components of the 2011-13 Expenditures” box on page 26 of their final report. (Click Here.)

Added together the $1.6 billion hole and the $2.256 billion additional expenses total more than $3.8 billion needed to balance the 2011-13 budget. Since Oregon has a population of 3.8 million, per capita, in addition to all existing Oregon financial obligations, $1,000 for every man, woman and child in Oregon will be needed to balance the proposed 2011-13 budget.

When considering the dire situation in which Oregon finds itself, many have said, “At least we are not as bad-off as California.” Oregon and the nation are laughing at California–the state with the basket-case economy.

But, wait a minute. How does Oregon’s situation contrast with that of California? Both California and Oregon have greatly increased their number of state employees and related government expenditures. Both states have increased their social programs, their regulations and taxation of businesses and individuals; and, both states now have unemployment rates significantly higher than the national averages.

California has a top-end budget hole of $25 billion. California also has a population of 38 million. Thus, with a simple calculation, California’s budget appears to have a per capita deficit of $658 per person. Oregon’s budget appears to have a per capita deficit of $1,000 per person.

Who’s laughing now? Not me.

Sincerely,

Dennis Richardson
State Representative

P.S. Oregon is divided into 60 House Districts and 30 Senate Districts. Every Oregonian has both a State Representative and a State Senator. If you want your voice heard on Oregon’s spending practices, contact your elected officials. If you would like to add your voice to my blog, please Click Here.

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District Office
55 South 5th Street
Central Point, OR 97502
Tel: (541) 601-0083
Fax: (541) 664-6625
E-Mail: rep.dennisrichardson@state.or.us

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