For weeks, state officials have been bracing for the coronavirus pandemic to lop off up to $3 billion in tax revenues Oregon had been planning on.
Under the latest official forecast of the state’s budget picture, they weren’t far off.
State economists warned Wednesday that the state should expect to take in nearly $2.7 billion less in the current two-year budget than expected in March.
Things don’t improve much in the short term, with economists now predicting Oregon will bring in $4.4 billion less than formerly anticipated in the budget running from 2021-23, and $3.3 billion less than expected in the budget after that.
“We’re really doing our best to tear the Band-Aid off all at once,” state economist Mark McMullen told lawmakers at a Wednesday morning meeting. “… Oregon’s underlying economy is much more volatile than that of the typical state. Our exposure to personal and corporate income taxes has led to real boom and bust cycles relative to other states.”
While it’s not yet clear that Oregon will necessarily be affected worse than other states — the unprecedented downturn brought on by COVID-19 has unique characteristics — tough choices are certain. State budget writers will use the forecast to craft a package of proposed spending reductions that will almost certainly be needed to balance the current budget.
“If the estimate of between $2.5 billion and $3 billion for this biennium holds true, the cuts are going to be draconian,” state Sen. Betsy Johnson, co-chair of the Legislature’s budget writing committee, said last week. “What we need to do is to try to see what we can do to mitigate those cuts.”
A picture of what “draconian” could mean emerged last week, when state agencies unveiled proposed 17% spending cuts as part of a budget preparation exercise ordered by Gov. Kate Brown. Those trims are far from certain, however.
There is some good news for Oregon’s budget.
Some of the expected gap will be covered by more than $1.1 billion in excess cash the state had formerly expected to have on hand at the end of the year.
Oregon will also have record reserve funds to help beat back a recession — some $1.75 billion by the end of this budget cycle.
Just how deeply lawmakers should delve into those reserves is likely to be a matter of debate. While Johnson last week said the state should be “very conservative” with the money, House Speaker Tina Kotek signaled Wednesday she was eager to use it to help recovery.
“We have strong reserves that should be tapped early to avoid additional damage to our economy,” Kotek said. “I also believe increased bonding for public infrastructure will help to jumpstart the economy and put people back to work.”
A lingering uncertainty is how much federal aid the state will ultimately receive to help pay for government services in the downturn. Oregon has already banked nearly $1.4 billion in federal aid from the $2 trillion CARES Act, but that money is subject to spending restrictions, and some will be given to cities and counties.
As she has repeatedly, Brown responded to the forecast Wednesday by calling on Congress to send states more relief.
“The latest forecast for state revenue makes it clear that we have tough choices ahead,” Brown said in a statement. “We will need to tighten our belts … Make no mistake, the budget gap created by this pandemic is too large to bridge without additional Congressional action.”
The projected hits to the state’s budget come from a number of key areas. Unprecedented reductions in employment in the state — unemployment is at more than 14%, compared to less than 4% in March — have led economists to predict an enormous hit to personal income taxes: nearly $1.6 billion this budget alone.
The state’s lottery revenues are also expected to take a hit of hundreds of millions of dollars, after terminals went dark in bars and restaurants. Some of that money has begun to return in recent days as businesses began reopening in much of the state.
In addition to the declines in income tax revenue, a statewide reduction in sales also promises to cut expected funding for schools. Economists predict Oregon’s new corporate activities tax, meant to pay for education, will come in $414 million lower than anticipated this budget.
“It’s ironic that exactly a year ago today we were celebrating Gov. Brown’s ceremonial signing of the Student Success Act and its historic investment in our students,” said Oregon School Boards Association executive director Jim Green in a statement. “Now we are looking at budget cuts.”
Green said he hopes the Legislature will take steps to minimize the impact of budget cuts on students.
Before COVID-19, Oregon’s largest school district had started hiring for positions created by Student Investment Account funds. Portland Public Schools was expected to receive $39 million from the new tax.
Since COVID-19, the district instituted a hiring freeze. Next week, the PPS school board will begin its budget process for next year — board chair Amy Kohnstamm said the district is looking at a more than $50 million cut to funding.
“It’s really devastating to think we won’t be able to act on those plans to support our students,” said Kohnstamm.
One revenue bright spot? Cannabis taxes. Economists expect those will come in $9 million higher in the current budget.
As with all such forecasts, McMullen said Wednesday’s report comes with caveats.
“We know for sure that it will be off, and the forecast will be off quite a bit,” he said, adding: “It’s just as likely that those errors will be on the high side as it is on the low side.”
While COVID-related economic reductions have been unprecedented in their swiftness and severity, McMullen and another state economist, Josh Lehner, both predicted a relatively quick partial correction as the economy begins to open back up. They expected that would be followed by a far slower years-long recovery until the state eventually got back to its pre-recession baseline.
A key question for the economy, Lehner said, is how much permanent damage is done before things improve. In particular, Lehner said, business closures could lead to longer ramifications.
“It’s one thing to see massive dislocations in the labor market,” Lehner said. “It’s going to be something entirely different if there aren’t firms to hire back workers on the other side.”
State economists predicted Oregon’s unemployment rate would pass 22% this quarter and remain in double digits for some time. That’s a stark contrast from the record-low unemployment the state experienced earlier this year.
“We’re expecting a four to five-year cycle where, if you look out to mid-2024 is when Oregon will have regained all of its lost jobs,” Lehner said.
Industries likely to see the largest long-term impact from the recession include retail, manufacturing and construction.
What happens next isn’t entirely clear. The governor has said she would call the Legislature into special session to begin to grapple with the budget at some point after Wednesday’s forecast, but a date for that session has not been set.
Lawmakers and others were quick to respond to the forecast, offering their own expectations for coming weeks.
“The state must take reasonable actions to bring the budget in line with declining revenues,” Rep. Christine Drazan, the House Republican leader, said in a statement. “The best approach going forward is for the legislature to do all we can to support a full economic recovery for hardworking Oregon families across this state, who were disproportionately harmed by the governor’s executive shutdown orders.”
Drazan’s counterpart in the Senate, Sen. Fred Girod, blamed the bleak budget picture on Brown keeping portions of the state economy shuttered.
“Governor Brown’s insistence to keep Oregon’s economy shutdown despite flattening the curve weeks ago, has cost Oregon billions of dollars of revenue, impacting generations to come,” he said in a statement. “This revenue loss could have been mitigated if the governor had been a leader and opened our state weeks ago.”
Democrats, meanwhile, showed more optimism — none more so than Senate President Peter Courtney.
“The Governor and the Legislature have been preparing for this,” Courtney said. “We have the nerve, the moxie, to get through this.”
Elizabeth Miller and Kate Davidson contributed to this story.