Monday, February 21, 2011

First Take on the Kicker Reform Bill

As an ardent supporter of kicker reform to support a permanent rainy-day fund I am following, with considerable interest the new proposed bill in the state legislature.

Here is a synopsis from the Corvallis Gazette Times [which is a lot better than the fairly incoherent one in the Oregonian which is linked above]:

Here’s how [the] plan would work: At the beginning of each biennial budget cycle, the Legislature would set aside the first 3 percent increase in general fund appropriations over the previous two-year budget (after accounting for inflation and population growth) to go into the rainy day fund.

Any general fund money left unspent at the end of the biennium — up to 1 percent of general fund appropriations — would also go into the rainy day fund.

The measure would also divert most of the money from the state’s kicker law into reserves. Currently, any time general fund revenues exceed projections by more than 2 percent, the excess is kicked back to taxpayers — both personal and corporate — in the form of a refund.

Under SJR 26, half of the personal kicker would still go back to taxpayers, with the remainder going into the rainy day fund.

All of the corporate kicker would go into the university stability fund. Once the fund reaches its maximum — 15 percent of the prior biennium’s higher education budget — additional deposits would flow into a subaccount set aside for maintenance and capital improvements.

The rainy day fund also has a cap, set at 12 percent of the previous biennium’s general fund revenues. Any deposits beyond that level would be refunded to taxpayers.
I have not had a chance to examine it carefully but here are my first thoughts:

1) It isn't nearly big enough. Most economists who study these things advocate for a reserve that is 5% of state GDP. In Oregon's case that would be about $8.25 billion. The bill call for the rainy day fund to top out at 12% of current biennium revenues which today would be in the $1.8 billion range. The current biennium is facing a 3.5 billion shortfall and the past biennium there was about a 3.8 billion shortfall.  Clearly the proposed size of the kicker is too small.

2) Diverting general fund revenue before the kicker is a bad idea for a state with underfunded services.  With a sufficient rainy-day fund this should not be necessary and will be especially damaging to K-12 education.  Just how bad are we willing to let K-12 get?  

2) Dedicating the entire corporate kicker to universities is great for me but not a good move overall.  I am not a big fan of dedicated revenues and would prefer more independence for state universities rather than dedicated funding streams.  I do think support should rise, but I think K-12 is probably as or more important as universities are able to deal with low support levels by more price discrimination, more out of state and international students, etc.

Now, political realities are what they are, but I don't see why, after the mess we have been through, the simpler keep all kickers until we have a 5% of GDP reserve.  The kicker still does it's job in restraining state spending but also provides for the other side of the equation - allows sustainable spending levels during recessions.  I await the citizen sponsored referendum!

And, in case you are interested, you can read what I have posted previously on rainy-day funds by clicking here.

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