SALEM – Five months ago when lawmakers convened at the Capitol, financial predictions were dire. Top budget writers warned that without new taxes to close a $1.8 billion budget gap, hundreds of thousands of people would be kicked off Medicaid, class sizes and child welfare caseloads would spike, and teachers could be laid off.

The alarm bells set the stage for what Democrats hoped would be a game-changing overhaul of the way Oregon taxes businesses, yielding a larger and more reliable funding stream for government programs. But just 2 1/2 weeks before the deadline to pass a balanced budget for the coming two years, Gov. Kate Brown and Democratic leaders in the Senate and House abandoned that hunt for new money.

Surprisingly, though, with days left before lawmakers go home, they are on track to boost many of the budgets where they'd threatened cuts in January.

What changed?

The governor said recently that at least part of the budget balancing act involved state cost trimming.

"We have worked very hard at tightening our belts and reining in the growth in state government," including a freeze on hiring for many open state jobs, Brown said during a June 22 meeting with reporters.

But that was a relatively small part of the fix.

One of the largest puzzle pieces fell into place on its own: an additional $400 million in anticipated revenue over the next two years, thanks to two positive state revenue forecasts.

Next, at Brown's urging, lawmakers passed a plan to raise $550 million from higher taxes on hospitals and a new tax on insurance plans. That will keep intact Medicaid health insurance for hundreds of thousands of needy Oregonians.

They're still considering a package of ideas to reduce state government costs by $270 million over the next two years, such as limiting the growth of state-paid insurance premiums and requiring the state's public pension board to use more reserve funds to pay down a long-term deficit. It could be among the last bills to pass before lawmakers adjourn.

Another way lawmakers are closing the remaining gap between the money available to spend and the estimated cost to continue all state programs and services is by spending less than called for on three ballot measures voters passed in November to dedicate existing money streams for veterans, Outdoor School and high school graduation. The high school graduation initiative in particular will receive less money that it's supposed to: $170 million over the next two years, rather than roughly $290 million if it were fully funded.

Sen. Richard Devlin, a Tualatin Democrat and co-chairman of the Joint Ways and Means Committee, said decreasing caseloads for Medicaid, food stamps, welfare and other social programs due to the good economy also helped cut projected spending for the coming two years.

"Is it the budget everybody would desire? Perhaps not," Devlin said. "But programs will continue, people will get services. It's going to be a relatively functional budget."

Sen. Sara Gelser, a Corvallis Democrat and chairwoman of the Senate Human Services Committee, said the budget is shaping up to be "vastly better ... than I thought it would be."

For example, the state is poised to invest more in child welfare after cases of abuse, neglect and state oversight failures gained public attention. Still, Gelser cited several concerning cuts in the human services budget.

"We're cutting our family support program in half, which provides essential supports to children and families that have intellectual and developmental disabilities to help them stay at home," Gelser said.

Changes in eligibility guidelines will cause more than 600 children to lose welfare payments, which Gelser predicted "will discourage care by relatives, and the problem is that's going to push more kids into foster care."

And an $11.7 million cut to a program that helps cover day care for low-income working parents will mean more than 600 families lose the subsidy, Gelser said.

The Helen Gordon Child Development Center at Portland State University is among the day care centers around the state where young children attend with help from the state program. Will Parnell, professor of early childhood education and a liaison to the Helen Gordon Center, said assistance for child care helps low-income families improve their financial situations and do better in school.

"When they can't get it, it means things like losses of jobs and career changes and moving," Parnell said. "It's just like a downward spiral for people."

Devlin also cited early childhood education as an area he wished the state were increasing spending. "It's an area where I think we should actually be expanding expenditures, not making modest cuts."

Mike McLane, House Minority Leader, said Democrats showed once again this session they were unwilling to undertake major spending reforms necessary to improve the state's long-term finances.

"They equate, in essence, compassion to money," said the Powell Butte Republican, who has criticized the way the state budgets in that officials assume current programs must continue without adequate re-examination. "Now we have a budget that's exploded ... It's an environment ripe for bureaucratic embellishment."

McLane said the Legislature should have followed through on as many cost-saving measures as possible, regardless of whether lawmakers approved corporate tax changes. "It was a session of lost opportunities."

Many Republicans who opposed a corporate tax increase have also criticized budgets for inadequately funding important services, a tactic Gelser said is disingenuous.

"People can say all they want, 'Well these reductions are politics,'" Gelser said. "They're not politics, they're math."

-- Hillary Borrud

503-294-4034; @hborrud