Governor Calls for Cuts; Most State Services, Schools Will be Affected (OR)

May 26, 2010

Triggered by tax collections projected at a half-billion dollars less than expected, Gov. Ted Kulongoski ordered state agencies Tuesday to prepare spending cuts of 9 percent to balance the state budget.

Agencies that draw from the tax-supported general fund — including education, human services and public safety programs — are scheduled to submit specific plans in two weeks to George Naughton, the state budget director. Proposals will be made public.

Although there are no specifics, Kulongoski said that unless Congress comes through with federal aid to the states in the next month, virtually every state service and aid to public schools will be affected. The state picks up 70 percent of operating costs for schools.

"When 93 percent of our state revenues go to three areas … all of these critical areas will have to reduce the level of services they provide wh en we have drops in revenue of this magnitude," he said.

Cuts would take effect July 1, the start of the budget cycle’s second year.

Kulongoski issued the order after lawmakers were told that sagging state income-tax collections, based on 2009 returns due April 15, would leave a projected hole of $560 million in the two-year budget. State Economist Tom Potiowsky said key indicators, including job growth, are improving this year — but are not doing well enough to overcome what happened in 2009.

"For Oregon, I think the technical recession is over," Potiowsky said. "But the feel-good part, where we start to see job growth, is just starting to come along — and it is going to be relatively mild job growth."

Tuesday’s forecast is the eighth consecutive drop in quarterly projections, which matches the downward streak from September 2001 to September 2003.

Short of calling lawmakers into a special session, the governor is limited to invoking a 1951 law that allows him and the budget director to cut uniformly.

"I do not like the option of across-the-board cuts," Kulongoski said. "I have always maintained that government services are not of equal value — that a governor should be able to make more targeted cuts in one area to prevent greater harm in another."

Kulongoski said there is not enough money in reserves — further tax increases are off the table — and that an election-year session of the Legislature had "the unfortunate potential for partisan gridlock."

The Oregon Constitution requires budgets to be balanced. It also gives lawmakers final authority over spending.

House Speaker Dave Hunt, D-Gladstone, held open the possibility of a special session after lawmakers and the governor review what cuts are proposed across the board. An aide said it would be similar to how lawmakers dealt with cuts in the 2007-09 and 2009-11 budgets.

The Legislative Emergency Board, which meets between sessions to review budget matters, already had planned an extra session in June to review the budget of the state university system.

Under the allotment formula, the state school fund within the Department of Education would be cut by $237.3 million — spread across 198 school districts — the Department of Human Services $154.3 million, the Department of Corrections $50.6 million, state universities $30.8 million, community colleges $20.6 million, Oregon Youth Authority $11.6 million and Oregon State Police $10.2 million.

Those projected cuts amount to 92 percent of the total projected shortfall of $562.6 million.

Some agencies, such as Transportation and Consumer and Business Services, draw virtually no money from the state general fund and are not affected by the governor’s order.

The order also technically does not apply to the Legislature, the courts, the secretary of state and the state treasurer, whose budgets are not subject to the governor’s control. Except for the treasurer, the others receive general-fund support.

Legislative leaders said they will apply the 9 percent cuts to legislative-branch agencies. Secretary of State Kate Brown said her office will do the same.

Although state government has some reserves left, including about $100 million in the education reserve and $3 0 million in the emergency fund, they are not enough.

However, Oregon could gain $200 million under a pending bill in federal Medicaid funds for the Oregon Health Plan, possibly allowing lawmakers to ease other cuts. Another pending bill in Congress would supply as much as $230 million for schools and $40 million for community colleges and universities.

Oregon has tapped nearly $1 billion for health care and millions more for schools under the 2009 federal economic recovery act.

Senate President Peter Courtney, D-Salem, said it might be better for lawmakers to wait for another forecast or two before acting.

"Right now, this is unstable enough that I am convinced you are simply going to go from one special session to another at this time, given what we’re hearing," he said.

That position drew fire from Senate Republican Leader Ted Ferrioli of John Day.

"Democrats facing election this November would rather let the governor make cuts to services with a hatchet than come into session and do the job right with a scalpel," he said.

Kulongoski said there appear to be few options for the Department of Corrections, which, unlike human services and education, is not in line for federal aid and relies almost totally on the general fund.

The current two-year discretionary budget is $14.4 billion, $13.4 billion of it from the general fund — mostly personal and corporate income taxes — and $1 billion from lottery proceeds, which are stabilizing. Potiowsky said there is not enough data to determine the effect of income-tax increases, which lawmakers passed in 2009 to balance the budget and voters upheld as Me asures 66 and 67 on Jan. 26.

There was some good news from Tuesday’s quarterly forecast.

Potiowsky said taxes collected from employee withholding were up 6 percent above projections, a sign that employment is up.

During 2009, he said, Oregon lost 10,000 jobs each month for the first six months and 3,200 jobs each month for the final six. In the first four months of this year, he said, the net gain each month was 875 jobs.

"We’re not making much of a dent in all the jobs we have lost," he said. "But it’s moving us finally in the right direction."

There are encouraging signs in employment in professional and business services, health care, computers and electronics, and retail, Potiowsky said.

"We had a horrible storm in 2009," he said. "In essence, this is cleaning up the remnants of that terrible year."