Saturday, February 21, 2009

This is going to be very interesting

With the revenue forecast yesterday, the game has changed even more than expected. This will be an interesting study in special interest politics to see which group protects itself the most from the shrinking budget.

You see, Oregon's government doesn't know how to shrink. Over the last 25 or so years, despite all the times we read about the budget "crisis," the problem was always that the money didn't grow fast enough to cover the planned growth of the budget.

But the current situation is quite different. They have to make actual cuts - not slow the growth, but actually cut. And it has to start right away.

Here are some numbers. At the end of the 2007 legislative session, the forecast was that the 2007-09 budget general fund resources would be $14.1 billion. The budgets were based on that amount, even though a lot of legislators warned that the economy was headed toward recession and therefore it was likely that actual revenues wouldn't be that high.

Senator Larry George was chief among those warning that the budget adopted in 2007 was going to create a crisis when revenues fell short. He's looking pretty prophetic now, as the estimate for the current biennium which (ends in June) has dropped from $14.1 billion to $13.1 billion.

Which means, in order to balance the current biennium's budget, they have to somehow find a billion dollars in cuts from the current spending trajectory, and do it in the last four months of the biennium.

(I'm getting these numbers from page 101 of the actual economic forecast report released yesterday. They are a bit different than what I remember the general fund forecast numbers that were bandied about at the time, but the point remains the same.)

Cutting a billion out of the last 1/6th of the biennium is not going to be pretty. It would be one thing if they had to spread the billion out over the full two years. But look at it this way: Of the 14 billion they planned to spend, the state would spend about $2.3 billion in the last four months. So they have to figure out how to cut that by a billion - by almost half.

There are reserves they can tap into, but it is still a big problem.

And then there's the problem of the NEXT biennium. When the government plans its budgets, it takes the current budget and "rolls it up," - it assumes this baseline, adds inflation and other factors for things such as increased caseloads for social programs, population increases, etc, and that's what it assumes it needs for the next biennium.

Rolling up a baseline budget of $14.1 resulted in a "current service level" budget for 2009-11 if about $16 billion. That is what the government says it needs to keep things the same. But the forecast says now that 2009-11 revenues are going to actually drop a bit from the new revised 2007-09 level of $13.1 billion. So instead of the $16 billion they say they need, they anticipate having $13.05 in 2009-11.

Yeah, that is a problem. They don't know how to cut. The whole system is built on an assumption of increased budgets. The cost structure of government locks in a need for more money every biennium.

So what happens when the money isn't there? Well, we will see. But you can sure make a few predictions:

1) Screams for tax hikes. Democrats ALWAYS want tax increases. It actually doesn't matter whether baseline revenues are growing or not, one thing has remained the same. Every single biennium since I have paid attention, the Democrat party has wanted some kind of tax hike. Even in the fat times of the 1990's, when biennial budgets grew at a 20% pace, there wasn't enough to go around and they looked for ways to squeeze more out of the economy. So they will surely do it again this time around, and they have the supermajorities to make it happen.

2) Different government constituent groups will turn on each other. Teachers unions, environmental groups, social service advocates, health care advocates - they will get increasingly shrill as they all vie for a bigger share of a shrinking pie, in order to keep their constituents relatively whole. This is the part that will be somewhat fun to watch, in a macabre sort of way.

None of this is good for Oregon. I have read several times recently criticism of conservative opposition to tax hikes. It goes something like this: "Conservatives say that a recession is a bad time to increase taxes. But they also say we don't need a tax increase when times are good. So just WHEN do they think it IS a good time to increase taxes???"

Well, to put it in a word: Almost NEVER!

Why should the government EVER get a larger share of the economy? When the economy is growing, the government revenues will automatically grow along with it (although never as much as the liberals spending wishes.) When the economy is shrinking, the one thing you can do to make sure it shrinks faster is to raise taxes.

The upshot is we really should almost never raise taxes. It is short sighted and self defeating. This is the path Oregon has gone down for two decades, and look at our economy. It is in a shambles. And it is not going to get better.

To some extent the Obama spending bill will alleviate some of the problem for the current crisis. But that only delays the day of reckoning. It just artificially props up government spending in one cycle through a windfall of outside dollars, making the problem worse next time.

And the liberals always accuse business of planning short term!

I don't have any "solution" to Oregon's budget woes. Nobody does, in reality. But I think it behooves everyone to have a grasp of the underlying numbers, which is why I wrote all this down.


Anonymous said...

Great info, Rob. I don't care where you stand politically, this is going to be a mess.

M2inOR said...

The challenge for government is to determine the right level of taxes, and then plan accordingly.
- never spend all that is received
- build a reserve for tough times
- grow as the economy grows, but shrink when the economy slows beyond what previous reserves covers

Our problem in Oregon, as well as in other states is that we find it easy to spend, but near impossible to scale back.

The holy grail is finding the right level of tax revenues to run our state.

Many argue for a sales tax for Oregon as that third leg to "fix" things. Looking to California and other states shows that even having sales, property, and income taxes is no guarantee of stable funding.

Like Rob, I don't have a solution for everyone in Oregon. But it does behoove EVERYONE to understand and grasp the current situation, and determine what each can do to get through this in the coming months.

By the way, if people have no income, raising the income tax isn't going to help much. Raising property taxes might help, but only if property owners actually have the ability to pay. Sales taxes on non-essential living expenses like food, clothing, and housing won't help much if people are not spending.

Let's hope that asset taxes are not being considered! Imagine a fix along the lines of: "how much money do you have in your checking, savings, retirement, mattress, and/or brokerage accounts?"

"Write a check for xx% of your balance, payable to the State of Oregon."

jim Karlock said...

We can look forward to Oregon's global warming "solution" cutting the State's income even more as it impoverishes all of us.


rural resident said...

Oregon's anti-business policies -- especially its land use laws -- really come back to bite us at times like this.

There's a reason why Oregon always leads into recessions and trails coming out, producing a smaller and less dynamic economy even in good times. The extra revenues we could have had with a more sensible approach to economic development aren't there just when the programs that the anti-growth advocates want to see funded are running into shortfalls.

In boom times, it's easy to pretend that we're just "too good" for many industrial and commercial firms that would like to locate here but are discouraged by silly policies and overregulation. It's during down cycles when our local and state leaders' lack of appreciation of the benefits of economic growth become apparent.

As you know, I've been beating this drum for years, both in good and bad times. Is it too much to hope for that there might be some re-examination of Oregon's negative attitudes that provide barriers to growth? The trade-off for accepting development is an expanded revenue base and more resources for programs. Even the NIMBYs and BANANAS should acknowledge that those revenues would look good about now!

Me said...

Our liberal Democrats see every cockamamie program as a core function of government.

They have absolutely sense of prioritizing.

In fact they deliberately avoid that concept in order to obstruct efforts to get rid of the low priority crap they have added over the decades.

Now we have a situation where they have absolutely no choice but to get rid of some of the government they created.
Unfortunately they are so used to
ignoring priorities and core functions they have lost the ability to recognize them.

So we'll be seeing them following their usual approach of funding all sorts of crap then holding schools and other vital programs hostage for more tax revenue.

Taxpayers, not having the extra revenue to hand over will be infuriated.

Can we bring back Governor Roberts to tell everyone all the cuts possible have already been made?

And why not throw in her threat to hand over more or people will die?

Charley B said...

This State went to hell in a handbag when it started to depend on people's gambling addictions to pay it's bills. I guess if those monies are drying up they can always legalize prostitution and dope, then tax that too. Yea, that's the ticket! We are an open society.

CB said...

its, sorry

Me said...

They have absolutely NO sense of prioritizing.


Along with Oregon's starting to depend on people's gambling addictions to pay it's bills the mission creep accelerated.

Even within the lottery itself as the games expanded beyond the promised limits when it was promoted.
Slot machines and video poker arrived on the scene along with an even higher demand to fund new programs and growing goverment.

Witnessing multiple budget cylces where 12, 14 and 18% increases were not enough should have served as alarms for more politicians.

But nooooo. The only alarm we heard was "we need more"!

Anonymous said...

Thanks, This is good information - It's hard to find actual numbers in all the media jabber.

Anonymous said...

There is also a lot of liberal screaming about kicker refunds in past biennia. Given the legislature's proclivity to spend all they can get their hands on I am sure those monies would have been rolled into even larger budget deficits now and in the next biennium.