Deconstructing the State Budget - November 2009

The Recession

• The recession in Oregon has been sudden and severe, like most of the country.  In April 2007  unemployment was 5.0%.  In September 2009 it was 10.8%.
• The Oregon economy depends heavily on exports.  Oregon exports have dropped 343% since the recession began. 18.6% of Oregon’s exports go to China.  14% go to Canada.  Two years ago these percentages were reversed, an indicator of China’s growing role in our economy.  Oregon’s major trading partners are all Pacific Rim countries.
• Oregon housing permits in recent years have averaged 1500 per month for single family homes, somewhat less for multi family housing.  Today about 500 permits are issued per month for single family homes, no multi family permits.
• Oregon is an income tax driven state, therefore it is heavily affected by employment.
• The State looks at nonfarm employment as the key indicator of economic health.  In Quarter 4 of 2000 Oregon had 1,627,435 jobs.  In Quarter 4 of 2009 Oregon had 1,616,706 jobs.  Our economy is losing jobs and not creating new ones.  Oregon has experienced a 5-6% job loss in 22 months.
• This recession is deeper than the 2001 recession, the deepest since WWII. So far, data indicates that the 1980 recession was worse for Oregon because it lasted seven years.  But no one knows how long this recession will last.

Oregon's Tax Structure

• Having no sales tax is offset in Oregon by a higher personal income tax but not the corporate income tax.
• Strong sales tax revenues depends on a diverse, “goods” based economy.  Sales tax is less successful in a service economy. 
• The personal income tax is a good revenue source, especially if there is a Rainy Day Fund.  There is no Rainy Day Fund requirement in Oregon.  The Legislature established a reserve fund, recognizing the likelihood that they would have to spend it.
• Beginning in 2013 should Ballot Measure 67 be confirmed, the corporate income tax would go into a Rainy Day Fund.

Oregon's Budget

Expenditures from the All Funds Budget 2009-2011
    10%    State School Funds
    5%    Other Education
    9%    Higher Education
    28%    Human Services
    7%    Public Safety
    41%    All Other

The All Funds Budget includes the General Fund, Lottery Funds, Federal Funds and Other Funds.  Other Funds include revenue from fees, licenses, charges for service, and special taxes.  Other Funds revenue is restricted by law for specified purposes.

The General Fund/Lottery Budget is the state’s discretionary budget. It reflects the State’s spending priorities.  The General Fund includes these resources:
    79.%    Personal Income Tax
    5.7%    Corporate Income Tax
    6.7&    Lottery Funds
General Fund Expenditures in 2009-2011 Budget
    51%    Education
    27%    Human Services
    18%    Public Safety/Judicial
    4%    Other
A 22% drop in General Fund revenue is projected for the 2009-11 Biennium.

Why the Budget Grows (and Why Not)

• Typically there is a 13% growth in spending each biennium; 7% annually.  During the 2009-11 Biennium, no growth is included in the State Budget.  The $4.5 Billion in new spending is from Federal Funds.
• Population growth is the main driver of spending growth.  From 1990 through 2000 Oregon grew by 20%.  In-migration is the main factor in population growth; one-third from domestic migration, one-third from international migration.
• The age cohorts moving to Oregon are retirees (to Central Oregon, primarily the Bend area) and young, highly education working-age people (primarily to the Portland area). Both groups bring high service demands.
• The 45-64 age group pay most of the income taxes.  The growth rate of this age group is starting to slow down which means that revenue will also slow.
• The growing age groups are 65-74 and 75-84. 75-84 is the highest service demand group.

Initiatives and State Spending

In the 1989-91 Biennium many policy choices were driven by citizen initiatives. The Initiatives had a major impact on General Fund expenditures.

Ballot Measure 5 greatly reduced local property taxes, shifted most K-12 education funding to State. 

        1989-91 Biennium – K-12 75% local funding, 25% state funding

        2000-01 Biennium – K-12 25% local funding, 75% state; has stayed there.

Measure 5 spending requirements also had a major impact on higher education funding. The 2009-11 State Budget cut Higher Education by 17%.

        1995-97 Biennium - $3,824 per student from State funds

        $4,977 per student from other sources (tuition)

        2009-11 Biennium - $4,182 per student from State funds

        $9,123 per student from other sources (tuition)

Property tax measures since the 90’s, including Measure 5, have significantly reduced property tax liability. Property tax liability is now measured at a low of 3% of personal income.

Measure 11 established Mandatory Minimum Sentences for specified crimes. The correctional institution inmate population has increased from 6000 to 14,000 as a result.  The 1993-95 General Fund Budget included 9% for Public Safety.  In the 2009-11 Budget that percentage doubled to 18%.  Last year’s adopted Measure 57 will continue to increase the Public Safety budget.