SALEM -- With the legislative session at its halfway mark, leaders in Salem have a decision to make.

They could take a huge risk and try to emulate 2013's "grand bargain" between business and labor groups to raise taxes and cut costs. Or they could cobble together a package of temporary fixes that, like Band-Aids, would keep the state functioning without requiring complex surgery to address the underlying causes of the chronic budget pain.

Gov. Kate Brown has signaled that she favors the latter. During her inaugural address in January, she acknowledged that the hodgepodge of cuts and tax increases she had proposed was a "short-term solution."

But most lawmakers prefer a big fix now. With a strong economy, they say, there's never been a better time to change the way the state collects and spends its money. Wait much longer, they warn, and Oregon's boom times will fade, leaving the state with an even bigger budget problem.

Either way, the state's leaders must address the looming $1.6 billion budget shortfall for the upcoming two-year budget cycle. The state has a shortfall because its costs are rising faster than its revenues. Put another way, it's spending money faster than it's bringing it in.

Lawmakers are required by the state's constitution to balance the budget before calling an end to the legislative session. So far, Democrats and Republicans alike have agreed that they will balance the budget with a combination of spending cuts and new taxes – but they are far from agreeing on the particulars of either.

Last week marked the first flurry of budget activity at the state capitol: Democrats on Monday released a list of possible cuts they said could happen without new revenue. Republicans and Brown both unveiled plans for state hiring freezes later in the week.

On Friday, a bipartisan group of budget committee leaders put out a wide-ranging package of proposals to slow the state's spending over the next several years.

In response to the Friday's proposals, House Speaker Tina Kotek, D-Portland, said they were a necessary part of a big package that would right the state's ship.

"It's not enough to cobble together a budget that merely avoids the worst cuts for a couple of years," she said in a statement. "We need real cost-containment, real revenue reform, and real statesmanship to do right by the people who elected us to wrestle with these difficult issues."

Failed meetings

These moves come more than two months after Democrats first convened closed-door meetings between business and labor groups. Their hope was that the two sides could find some common ground after the bloody fight over the corporate tax proposal, Measure 97, left a wide rift between them.

But nothing of substance has come of the secret meetings, lawmakers say. Those familiar with the meetings said they have been attended by representatives of eight of the state's heavy-hitting groups – four from business, four from unions.

Until recently, the groups met about every two weeks, they said. Now, the meetings are held on an ad-hoc basis as the Legislature releases additional proposals, multiple people said.

The people declined to give specifics on the substance of the meetings, citing an agreement that whatever was discussed would remain secret.

The meetings weren't negotiations on what kinds of public pension system reforms one side would exchange for higher taxes on corporations, they said.

Instead, the meetings were meant for the two sides to get to know each other a little better. Multiple people in the meetings said it was encouraging that the two sides were meeting at all.

It's up to lawmakers to come up with the real solutions to the state's budget deficit, said Oregon Business Association President Ryan Deckert.

"We definitely think the decisions will be made by elected leaders at the Capitol on this," he said.

But Senate President Peter Courtney, D-Salem, who helped convene the meetings with Kotek, said he was disappointed that nothing has come of them. Despite signals that they were ready to compromise, the two sides never intended to work together, he said.

"In truth I'm the one who called the meeting, and in hindsight now, I don't know if I ever would have done that, because I don't like to be made a fool out of," he said. "I don't like to be humiliated, and I really feel that way. That's my problem. I made the mistake of believing that people were operating in good faith. And now I really wonder about it."

Oregon House Minority Leader Mike McClane, left, R-Powell Butte, talks as House Speaker Tina Kotek, D-Portland, listens in Salem on Jan. 26, 2017.

Kotek said the lack of productivity was the fault of business groups, who she said weren't willing to compromise. But House Minority Leader Mike McLane, R-Powell Butte, said the talks failed because Republicans weren't involved in setting them up.

If they had been involved, he said, they would have ensured that the group was more representative. The business groups in the meetings are heavy on Portland-based Democrats and independents, he said, and short on timber and manufacturing interests from elsewhere in the state.

"Is that how you build consensus?" he asked.

Since lawmakers are unlikely to have joint business-labor input as they craft their plans to raise taxes and slash spending, they'll have to create those plans and readjust once they gauge reaction, in their best attempt to hit an elusive sweet spot.

McLane says a comprehensive package is needed now, before the state's economy starts to slow. But they can't do this without leadership from the governor, he said. In 2013, former Gov. John Kitzhaber was unquestionably the key architect of the deal between business and labor.

"You have to be a governor who is saying 'I'm going to shepherd a negotiation that's going to result in a deal and I know it's not going to serve the interests of the people who paid for my campaigns,'" he said.

Chris Pair, a spokesman for Brown, said she has "met extensively" with business and labor leaders throughout the state since the legislative session started Feb. 1. Those meetings have showed her that curbing the state's spending is key to reaching an agreement on the budget, he said.

After the "grand bargain" was reached in 2013, the courts struck down some of its key elements, particularly cuts to the public employee pension system. That created many of the problems the state is dealing with now, Pair said, and Brown is hoping to avoid the mistakes that caused the deal to fail.

So far this month, Pair said, Brown and her staff have met with lawmakers, hospital and insurance executives and others on ways to fill the budget gap, such as funding Medicaid with taxes on hospitals.

Fix-it-all solutions

Legislators hoping to pass any sort of "grand bargain" this year have many hurdles ahead: Because any tax increase requires a three-fifths majority, Democrats will need at least some Republican support.

And even if they do pass a package that balances the state's budget with both spending reform and tax increases, the tax increase is almost guaranteed to be put before voters, said Jim Moore, political science professor at Pacific University.

Typically, he said, voters approve one out of every three taxes put on the ballot.

"Most taxes go to referendum, but the only one voters are likely to pass is a sin tax," he said.

The governor's budget proposal included several of these: She wants to raise taxes on tobacco products and liquor and increase alcohol licensing fees.

Another way to mitigate the public's dislike for taxes is to propose a temporary tax, Moore said, as lawmakers did in 2009 when they passed a bill temporarily raising personal income taxes on the state's top earners. Residents opposed to the bills put them on the ballot. But voters said "yes" to both Measure 66 and Measure 67, albeit by slim majorities.

As chair of the Senate Revenue Committee, Mark Hass, D-Beaverton, is working on a plan to reform corporate taxes by taxing businesses on their sales instead of their profits. According to Legislative Revenue Officer Paul Warner, the plan in its current form would bring in about $500 million a year. If his fellow lawmakers pass the plan, businesses will likely force it onto the ballot. Hass has said he's ready for that.

But if the Legislature's tax plan fails at the ballot, that could leave lawmakers with only half a package, and a big hole in the budget. In that case, lawmakers would have to hold a special session to make deep cuts, Moore said.

Taxes aren't the only part of a deal that can fall through. In the 2013 deal between business and labor groups brokered by Kitzhaber, lawmakers agreed to raise taxes and cut cost-of-living increases for state pensioners.

But two years later, the Oregon Supreme Court partially overturned the public pension reforms, ruling that lawmakers couldn't lower cost-of-living adjustments on retirement benefits that were earned before the reforms. That decision left the "grand bargain" lopsided, and now lawmakers are once again trying to tackle the pension system's ballooning costs.

Despite these risks and lessons from history, Moore said lawmakers have a sort of "eternal optimism" that pushes them toward grand, fix-it-all solutions.

The governor as a deal-maker

Both Moore and Oregon State University political science professor emeritus Bill Lunch agree that Kitzhaber was key in shepherding the 2013 negotiations. Despite its eventual partial failure in the courts, at the time, the bargain was a shining example of bipartisanship.

The 2013 bargain was more than the sum of its parts, Lunch explained. One of its biggest successes was what it didn't include, he said: Kitzhaber was able to head off a vicious fight between business and labor groups.

He got both groups together in his office and convinced them to lay down their weapons, Lunch said.

"Coming from a guy who was pretty popular, both business and labor groups retreated, and said, 'Okay, we won't go forward,'" Lunch said. "It didn't create any new public policy. It simply headed off what would have been a pretty ugly, nasty set of initiative campaigns in 2014."

At that point, in his third term, Kitzhaber was enjoying a set of circumstances that aren't yet available to Brown, Lunch said. He had experience and popularity and was also a moderate. Those things gave him political capital to spend, he said.

Brown, in her first elected term with her re-election bid just around the corner, doesn't hold the same sort of sway and has to be more careful, he explained.

"Suppose Brown gets re-elected," Lunch said. "If that were to happen, she'd be in a position to go to the business groups and say, 'Let's talk about bargains.'"

But for now, as a progressive Democrat, "she does not have the same reputation, the same political currency, with the business groups," he said.

-- Anna Marum

amarum@oregonian.com

503-294-5911

@annamarum

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