VERIFY: If the economy is booming, why is there a $1.6B state budget deficit?

Verifying Oregon's budget shortfall

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Oregon lawmakers are grappling with a serious budget problem. They face a $1.6 billion shortfall as they look ahead to the 2017-2019 budget.

That shortfall has forced some tough conversations that harken back to more austere times during the recession.

Gov. Kate Brown implemented a hiring freeze at many state agencies and a bipartisan group of lawmakers on Friday laid out some broad suggestions to curb costs. Those suggestions include cutting public employee pay raises and not filling some open state positions.

But here’s a question we often hear in the KGW newsroom: how can our state face such a huge budget crisis when the economy seems to be booming? Is our state really in such dire financial straits?

Enter the KGW Verify team. We talked with economists inside and outside of government to figure out if things are as bad as lawmakers claim and ask how we got here.

As anyone who has made a household budget knows, there are two basic components to the state’s budget equation: how much money our state makes (the budget wonks refer to this as “revenue”) and how much money we are obligated to spend ("expenditures").

Let’s start on the revenue side of things.

Oregon’s Office of Economic Analysis puts out a quarterly “economic and revenue forecast.” The most recent analysis from March paints a fairly rosy picture.

Wages are increasing, businesses are making more sales, and more Oregonians are working. All those things lead to more tax revenue for the state.

Economist Mark McMullen with Office of Economic Analysis said the economic recovery won’t continue going full-throttle like it has been in recent years, but he said the economy is still on an “upward trajectory.”

That all sounds pretty good, right? So where’s the problem?

This is where we get to the expenditures side of the equation. Simply put, Oregon owes more money than it makes.

McMullen says Oregon is on the hook for about a billion dollars in health care and pension costs over the next several years.

“That’s the back-breaker,” McMullen said.

Economist John Topagna with the firm ECONorthwest said the additional health care costs are largely due to the Medicaid expansion under the Affordable Care Act.

In previous years, the federal government covered the full expansion, meaning it cost the state nothing to participate. But as time advances, participating states such as Oregon must cover more and more of the cost.

This year Oregon was responsible for five percent of Medicaid expansion costs. In 2017 the state will be responsible for six percent. By 2020 the state will be responsible for 10 percent of the costs. That could cost the state around $350-400 million a year.

Oregon’s pension system, known as PERS, is the other major culprit on the expenditures side of the equation. As Topagna explained, the state gave public employees hired in the 1970s and 1980s especially generous pensions. Now it’s time to pay the bill.

Topagna said we’re paying the price for policy mistakes enacted decades ago.

“It’s paying for what I have called a generational mistake in policy,” he explained.

At this point lawmakers are left with some unfriendly math. Yes, they have more revenue coming in, but costs are rising faster.

We can expect some tough conversations ahead in Salem. Oregon is legally required to have a balanced budget, which means lawmakers can’t just leave things as they currently stand. They’ll have to either raise revenues (read: taxes), cut costs, or do both.

VERIFY: Resources

Oregon Economic and Revenue Forecast 

Oregon Office of Economic Analysis 

Legislative Fiscal Office Budget Highlights 

VERIFY: Sources

Mark McMullin, State Economist, Oregon Office of Economic Analysis

John Topagna, President, ECONorthwest

 

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