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Oregon’s Budget Deficit Presents a Provocative Choice

$1.8 billion deficit could force drastic cuts unless the legislature agrees to raise taxes. But it will be an uphill battle.

An Oregon state budget drawn to douse the political establishment with a splash of reality was released on January 19 by Ways and Means Co-Chairs, Sen. Richard Devlin (D-Tualatin) and Rep. Nancy Nathanson (D-Eugene). Presented as a “framework” designed to work within existing projected resources, this budget will be considered by the 79th Oregon Legislative Assembly Session when it begins on February 1.

Facing a $1.8 billion deficit, lawmakers say they will be forced to make drastic cuts to state programs unless the legislature agrees to raise taxes. Raising taxes will be an uphill battle, however.

First, taxes remain a taboo subject among Oregonians who have opposed nine of the last 10 tax measures.

Second, the Legislature requires a three-fifths majority vote in both chambers to pass a tax bill. Republicans say they would be willing to support a tax hike, but only if Democrats agree to reduce the deficit by cutting back on public employee retirement benefits.

Third, even if the Legislature could find its way to a grand bargain of cuts and revenues, Oregon’s Constitution enables citizens to challenge any revenue increase by referendum to the ballot.

The co-chairs propose slashing $881 million from the state’s $3.2 billion health care and human services budget. This draconian cut would impact more than 355,000 low-income and unemployed Oregonians who receive benefits from the Oregon Health Plan’s dental and addictions services, mental health care counseling, school-based health care centers and family planning services.

They also recommend $212 million cuts to the $8 billion State School Fund. These cuts are equivalent to the salaries of 2,000 schoolteachers whose jobs might be at risk. Should these cuts go through, Oregon’s notoriously large class size — one of the highest in the nation — would swell even more.

But the state faces other challenges as well.

It is required by law to fund Ballot Measure 98, passed by voters last November. Known as the High School Graduation and College and Career Readiness Act, this mandate forces the state to fund career and technical education, dual-enrollment programs and dropout prevention strategies for high school students at a tune of $294 million over the next two years.

Stand for Children, the measure’s sponsor, a group funded by hedge funders and the Gates Foundation, claims that it would boost Oregon’s low graduation rate, improve college and career readiness, and broaden career opportunities in technical fields, such as health care and information technologies.

Measure sponsors built something of a release valve into this mandate in the event state revenues should dip by an arbitrary $1.5 billion in either of the first two biennia after enactment (no such release valve exists beyond that time). The state’s current $1.8 billion structural deficit, based on costs rising faster than revenues, does not qualify for this relief, however.

Critics of the measure, including teachers and school administrators, say that it is an unfunded mandate that will force school districts to lay off teachers, counselors and other education staff.

Given that Oregon’s primary line-items in the discretionary “general fund” budget are education, health care and public safety, there is precious little budget writers can do to balance the budget as required by the Oregon Constitution.

Republican lawmakers are eyeing the state’s Public Employee Retirement System (PERS) as a place to cut spending, because the fund’s $54.4 billion assets are overshadowed by its $76.2 billion actuarial liabilitya $22 billion deficit. The fund’s cost is expected to rise by $885 million next biennium.

What has caused the fund’s deficit and costs to rise?

Experts say that the 2008 Great Recession wiped out portions of the fund’s assets. Its annual rate of return on stock market investments has fallen below the expected 7.5 percent. Before the recession, the ratio of the fund’s assets to liabilities was 97 percent, but plunged to 71 percent by 2015. The fund’s annual rate of return was a disappointing 1.24 percent in 2016, and 2.11 percent in 2015. It has averaged 5.91 percent over the last decade — an anemic return compared to historic averages.

Republican and Democratic lawmakers claim that public employee retirement benefits are not affordable. They want to roll back PERS benefits to reflect its comparators in the private sector. Lawmakers have already filed more than 40 PERS reform bills before the pre-session filing deadline in early January. More PERS bills are expected once the session gets underway in February.

Two bills targeting PERS are Senate Bills 559 and 560. SB 559 proposes using the last five years of a public employee’s salary to calculate their final average salary. Current practice figures the benefit on the last three years — typically resulting in a higher benefit. SB 560 limits the annual salary of public employees used to calculate their final average salary to $100,000. Both SB 559 and SB 560 aim to reduce the retirement benefits of public employees.

Oregon business leaders, corporate news media and lawmakers have joined forces to undermine the public employee retirement fund, even as they recommend cuts to both public education and health-care services for working people. As Hector Cordon aptly puts it:

What all these forces — the media, Democratic and Republican politicians and their respective parties — have in common is a refusal to place the blame for the dismantling of education, social services and even PERS itself on the real culprit: the systematic implementation of pro-corporate tax cuts that have proliferated in Oregon over the last three decades and decimated its tax base. They refuse to name the culprit since they themselves have played the central role in promoting these tax cuts. Instead, they attack ordinary workers for seeking to defend the right to a decent pension to protect their later years.

At the end of the science fiction film, The Matrix, Morpheus asks Neo whether he knows about the Matrix, to which Neo replies: “The Matrix?” Morpheus explains that the Matrix is “the world that has been pulled over your eyes to blind you from the truth.” Confused, Neo asks: “The truth?” Morpheus replies:

That you are a slave, Neo. Like everyone else you were born into bondage, born into a prison that you cannot smell or taste or touch. A prison for your mind…. Unfortunately, no one can be told what the Matrix is. You have to see it for yourself. This is your last chance. After this there is no turning back. You take the blue pill, the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill, you stay in Wonderland, and I show you how deep the rabbit hole goes…. Remember, all I’m offering is the truth, nothing more.

Oregon lawmakers and political pundits in Salem are now at a crossroads. The question they face is this: Will they choose the blue pill or the red pill?