Gordon Friedman

Statesman Journal

State bureaucrats are preparing the next two-year budget, but problems are mounting. The projected deficit is $1.4 billion, and a controversial tax measure is pushing state agencies to brace for opposing budget extremes.

If voters approve Initiative Petition 28 — which would be the largest tax hike in Oregon history — the state would collect $6 billion in new corporate taxes in the biennium, according to official state estimates. That would trigger public sector job growth and expanded state services.

If IP-28 doesn't pass, estimates predict a $1.4 billion gap between revenue and what the state needs to maintain service levels in the next budget, said state Chief Financial Officer George Naughton.

The deficit would mean 7 percent cuts across state government, including "possible significant service reductions" to education and human services programs, said Kristen Grainger, a spokeswoman for Gov. Kate Brown.

The governor has talked with officials about reigning in spending this fiscal year, but she doesn't have legal authority to order cuts because there isn't a deficit this budget cycle, Grainger said.

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Healthcare, pensions drive state costs

The Oregon Health Authority and public pensions are driving costs of the 2017-2019 budget, said Sen. Richard Devlin, D-Tualatin, co-chair of the Legislature's budget committee.

OHA is expected to ask for an additional $988 million in the next budget, Devlin said. Agency officials did not respond to public records requests for budget projections.

Some additional costs stem from changing who pays for what, including the end of a deal brokered by Gov. John Kitzhaber with the federal government over Affordable Care Act payments.

OHA will also seek increased funds for the Oregon Health Plan, the state Medicaid program. The Oregon State Hospital may also need $70 million to open two additional wards, Devlin said.

If approved, OHA's two year budget would swell to more than $3 billion.

"It's frankly not doable," Devlin said. "There's no way you can move that much funding into the Oregon Health Authority without doing very significant damage in K-12, community colleges and higher education."

About half the state budget is typically spent on education. Police and prisons make up another sizable chunk, along with healthcare and other human services programs.

Public pension costs are also mounting. The system carries more than $21 billion in unfunded liabilities. The debt means an estimated 12 percent increase in state payroll costs over the next six years, Devlin said.

Grainger, the governor's spokeswoman, said the state is "severely limited" when it comes to pension costs because of an Oregon Supreme Court decision restricting pension benefit reductions.

Much depends on corporate tax measure

IP-28 would create a 2.5 percent tax on corporate sales above $25 million and generate $3 billion a year in revenue. Staff from the nonpartisan Legislative Revenue Office told elections officials Monday that it's indeterminate how that revenue would be spent by the Legislature.

Even though the election is months away, the belief by some lawmakers that IP-28 will pass is making it difficult to address underlying budget problems, Devlin said. "I don't think there’s a high recognition that there is a significant budget issue that has to be resolved," he said.

Even if IP-28 does pass its effects won't be as broad as some envision. Devlin said that after paying for healthcare, pensions and expanded education services, "the money is gone."

Voters will have a chance to approve IP-28 in November. Until then, state agencies will prepare for both boom and bust, Naughton said Monday at the Capitol.

State law requires agencies to plan for 10 percent budget reductions. How seriously agencies take those hypothetical cuts depends largely on revenue projections, Naughton said. Emails released by the governor's office show Naughton has instructed agencies to plan for cuts, but to keep options open for the "what if" of a revenue boost.

State agencies are now submitting budget requests to the Department of Administrative Services, run by Naughton.

With agency asks in mind, and forthcoming revenue projections, Gov. Kate Brown will publish a recommended budget Dec. 1. The Legislature has full discretion over the adopted budget.

Send questions, comments or news tips togfriedman2@statesmanjournal.com or 503-399-6653. Follow on Twitter@GordonRFriedman.

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