Budget gap gets $377M wider

By HANNAH HOFFMAN

Of the News-Register

The McMinnville Lions Club hosted two bearers of bad news Wednesday when Gov. Ted Kulongoski's Chief of Staff Tim Nesbitt and Reset Cabinet member Lane Shetterly spoke to the group about the budget reset the state is planning that will mean cuts and changes in nearly every sector of government.

The talk preceded Kulongoski's Thursday revenue forecast that announced a $377.5 million budget shortfall for the remainder of the 2009-11 biennium and a requirement that all state agencies take an eight percent cut from their budgets for the remainder of the biennium.

The recession that began in late 2007 and escalated during 2008 and 2009 hurt the Oregon economy badly, both men said, and the damage to the economy made its way to the state budget.

"We saw a birth, really, of a new reality of where we see the state going over the next decade," Shetterly said.

He said the current shortfall will continue to haunt the state budget unless serious changes are made now.

He explained that $377.5 million hole constitutes about three years economic growth lost and even if the economy begins to recover and grow at a normal rate, it won't make up the difference of that tremendous loss.

In addition, the loss of revenue was coupled with higher payroll costs and increased demand from people needing state services.

Nesbitt said the budget gap came from a reduction in income tax revenue due to the state's very high, recession-imposed unemployment. He said some people have accused the government of overspending in the past but maintained that the recession was the main culprit of the budget reduction.

"We have a spending problem because we have a revenue problem," he said.

Nesbitt said the Reset Cabinet focused on public safety, education and human services, the three sectors that make up about 93 percent of the state's general fund budget, whose funding comes from corporate and personal income tax revenue.

Other departments not in the general fund are either self-sustaining with fees or federally funded.

The largest cost in the general fund budgets is payroll. Shetterly said the public employees retirement system lost about 30 percent of its account balance in the stock market crash of 2008, which means state government has to make up the difference it lost.

Making up that difference will raise the cost of PERS every year for many years, Shetterly said, and it covers both working and retired state employees.

But on top of that, state payroll costs rise every year anyway, because union contracts have salary increases, cost of living increases and other costs written into them and the state is obligated to honor the terms of the contracts.

However, Nesbitt and Shetterly said some changes were likely in store for state employees. They said employees will probably have to begin paying part of their health insurance premiums the same way teachers already do.

In addition, they said the state will try to find ways to curtail the growth of the large salary and benefits packages employees receive to keep their growth more in line with the private sector.

But the changes to state government won't just affect the numbers on employees' pay stubs.

Nesbitt said the Reset Cabinet has discussed consolidating smaller school districts that have enrollments under 1,000 children. In addition, the state would eliminate some educational service districts.

In higher education, universities would receive more autonomy to set their own tuition levels and manage their own funding with less input from the state, which currently has tight control over the Oregon University System.

Health and human services, another large portion of the general fund, is trickier because more people need unemployment and other benefits during a recession than in other times, Nesbitt said.

But he said about one-seventh of Oregon adults under 65 are on the Oregon Health Plan, which means medical costs will have to be lowered to keep funding the program. He said the state will change some of its policies, such as ceasing to pay hospitals for costs that were caused by hospital staff.

Prisons, too, will get an overhaul.

Shetterly said the highest costs come from the number of staff and the inmates. He acknowledged some staff could be cut, but said the Reset Cabinet focused on reducing the number of inmates.

He said the cabinet members want to change the sentencing structure under Measure 11, which would significantly shrink the prison population. In addition, he said the state wants to create a mechanism that will release prisoners early, similar to federal programs that already exist.

Shetterly said none of the proposed changes will go into effect before the 2011 legislative session, and he acknowledged the cuts will raise tempers and probably start some fights.

"It's hard to talk about restructuring the state budget without having controversy because you're going to get into someone's favorite program," he said.

Nesbitt agreed, but said there's no way around changing the way government is run. He said cost cutting is completely unavoidable.

"We lost three years of economic growth. We're not going to recover it," Nesbitt said. "We have to adjust."