Ka-boom!

Went the Oregon general fund.  The Office of Economic Analysis blog has a nice picture that does a good job describing the torpedo they good ship Oregon took to her hull.

This is net receipts from February though April for the last 14 years.  Note how Oregon is $400,000 in the red in 2010, meaning we refunded $400,000 more than we took in during that period, and this is with 66 and 67.

What is going on?

...preliminary numbers show that the biggest culprit was capital gains. Following a 60 percent decline in capital gains income from the 2007 tax year to the 2008 tax year, we were expecting an additional 10 percent decline for the 2009 tax year. This was in line with what many other states were projecting (5 percent to -20 percent) based on an informal survey conducted early last winter. Unfortunately, preliminary estimates show that capital gains income likely dropped at least another 50 percent for the 2009 tax year. Going forward we believe that we will see an uptick in capital gains income, but carry forward losses and low levels of business transactions will limit growth.

Sigh.

Which brings me to another topic. Polictical football is being made of the decision not to call a special session and institute a 9% across-the-board cut. But, of course, as OPBs Chris Lehman reported lots of agencies only rely partly on general fund monies.  In fact K-12 education makes up more than 40% of general fund spending thanks to Measure 5.  Higher ed. another 10%. Mandated Medicaid about another 12%.  After that the only other significant portion is corrections and we see what a 9% cut will do there.   Given the dire state of K-12 in particular it seems difficult to understand why we wouldn't want to try and protect it.  But the reality of the numbers is stark: there just isn't a way to protect K-12 without totally gutting other state programs.  So while I like the idea of being more nuanced about cuts, there just aren't many degrees of freedom here.

Which of course brings me back to kicker reform and a rainy-day fund.  Yes, it does not fix long run trends that Tim Duy has very clearly explained, but a substantial rainy-day fund would allow us to avoid these types of draconian cuts to basic services in recessions.

Fiscal Stability

My Op-Ed in The Oregonian today:

A rather depressing sense of complacency seems to have settled over the state Democratic leadership after the passage of Measures 66 and 67. But celebrating their passage as a major political victory -- and allowing their passage to become an excuse not to immediately address the fiscal instability that necessitated the new taxes -- is a serious mistake.

The taxes were not a victory to celebrate but a disheartening sign of the dysfunction of the state's fiscal system. The fact that we had to pass them should be seen as a defeat, not a victory, and as a condemnation of our stewardship of the state's finances. Letting these new taxes take our eyes off of real reform is to squander an opportunity to permanently fix what's wrong with the state's revenues.

.....................

Read the rest at the Os web site.

Once More on the Kicker

Fred Thompson chimes in again on kicker reform:

Chuck Shekatoff of the Oregon Center for Public Policy reminds us of a very simple fact, one that probably ought to be obvious, but evidently isn’t: “revenue stability shouldn't be the goal...stability of the fiscal system should be the goal.” The things that government does for us, the services it provides have one fundamental attribute: they are all things we depend upon to get by – the legal system, incapacitating criminals and fire protection, education, a transportation network, a social safety net, clean water, etc. Moreover, deferring their delivery is prohibitively costly; these services must be provided in real time. That means their providers cannot be permitted to fail. If one were to formulate an objective function for most government programs it might look something like the following: maximize sustainability or reliability, subject to some minimum performance constraint. The essential requirement for meeting this service objective is stable funding.

The extreme measures taken by public officials to stabilize service delivery, together with persuasive evidence that spending volatility severely degrades service performance in government, attests to the critical importance of stable funding. For example, during New York’s fiscal crisis I observed that the City’s first response was to cut maintenance. From a purely financial perspective this make no sense. A properly maintained bridge wears out a rate of 1-2 percent a year; a bridge that isn’t maintained at all wears out at a rate of 15-20 percent a year. That’s a very costly source of cash. When one asked why, the answer usually went to the need to maintain services. Maintenance can be deferred, at a cost, operations can’t. Besides, what New York paid for cash by deferring maintenance is actually less than the price Oregon has often paid during past recessions, when the state borrowed from PERS at an implicit interest rate that exceeded twenty percent.

Instability can be attributed in part to the myopia of existing public-sector budget norms and rules, which tend to focus on balancing budgets one year at a time. Consequently, many students of budgeting want to put spending growth on a more stable path by basing it on long-term revenue growth rather than annual forecasts. Aaron Wildavsky, for example, proposed that the average rate of revenue growth should determine the permissible rate of expenditure growth. If cash outflows nevertheless continued to outstrip cash inflows, he further argued, a percentage or two ought be knocked off the planned (real) rate of expenditure growth until it looks like spending was back on a sustainable path.

The effectiveness of this general approach, both for controlling expenditure growth and for stabilizing programmatic support, is suggested by various case studies, most persuasively by the Chilean experience. The Chilean government has adopted a budget rule that allows a steady rate of spending growth adjusted for changes in its net worth. This system allowed Chile’s President, Michelle Bachelet, to resist intense pressure to boost spending earlier in her administration, when government revenues soared. Then, when the global recession came and revenue fell sharply, it allowed Chile to continue to grow spending at a sustainable rate, using assets that it had acquired during the boom. The upshot of this is that Bachelet is leaving office with the highest approval ratings of any President since the return of democracy to Chile.

It would be easy to make such a system work for Oregon. By basing our annual revenue forecast on the geometric mean of past revenue growth and balancing the budget against that forecast, we could put the state on a stable, sustainable spending path. Then, if revenues exceed the forecast by more than 2 percent, the excess would be placed in a rainy day fund and prudently invested by Oregon’s Treasurer. If revenues turned out to be less than the forecast by a similar amount, the Treasurer would go to the credit market to redress the cash shortfall. My own view is that kicker funds should never be returned to taxpayers except when the corpus of the rainy day fund exceeds the sum of the state’s general obligations debt plus a safety stock for emergencies – 30 percent of general fund outlays would be sufficient to cover shortfalls about seventy percent of the time assuming a three percent real growth rate in spending. Beyond that point, I have absolutely no reservations about returning any additional excess to taxpayers.

Under this proposal, the rainy day fund could only be depleted to make principal and interest payments on debt and those depletions would be automatic.

Kicker Reform and Rainy Day Funds

On my way to Corvallis this morning I listened to a podcast of OPBs Think Out Loud show on kicker reform. It was an especially good show, largely because guests Tom Potiowsky and Lane Shetterly did a very good job explaining how the kicker works and how the Task Force on Comprehensive Revenue Restructuring's proposed reform would work. I recommend the show very highly for those wanting to familiarize themselves with the issues.

Two things that were said stuck out to me however:

1. Tom Potiowsky made the claim, when asked about why our revenue volatility is so high, that not having a sales tax is partly to blame. But there is a very large body of evidence that sales taxes are not significantly more stable than income taxes - especially in the short-run. [Just look at the current revenue situation in Washington state] So I was astonished to hear him say this.

That said, the focus was on the fact that we have revenue instability and what to do with it and the solution of a rainy-day fund was emphasized. But I think it is important that people understand that a sales tax is not a solution to revenue instability.

2. Steve Buckstein, of the Cascade Police Institute, made another astonishing claim in saying that kicker reform as proposed would decrease state volatility at the cost of increasing individual volatility. Say what? State revenues that come in in excess of a forecast do so mainly because individual incomes were higher than expected. To not return a kicker to households would actually decrease volatility to both parties. On what basis he made this claim is simply beyond me.

Also, his preferred solution, cutting state spending so money can be diverted into a rainy-day fund without touching the kicker is a pretty weak solution for a state that has, for example, one of the worst systems of public education in the nation.