Salem Turns Its Pockets Out

Legislators’ desire to keep the state budget from seesawing wildly with the economy may wane as Oregon recovers from the recession.

But outside pressures will make the issue hard to ignore:

Tax activist Don McIntire already is gathering signatures for a 2006 initiative that would limit state spending to the growth in population and inflation.

FreedomWorks, the nationally financed group that defeated the Legislature’s tax increase proposal earlier this year, is waiting to see what kind of limit lawmakers come up with before mounting its own initiative campaign.

Gov. Ted Kulongoski says his goal is to set aside 4 percent of the general fund as a reserve.

There is some internal pressure as well. Republicans who control the House say they plan to pick up where they left off this summer with a proposal that combines a spending limit with a rainy day fund. But Democrats, who took control of the Senate this fall, say the economy effectively limits state spending already.

Many lawmakers want to find a compromise linking a spending limit with a rainy day fund built with income tax kicker refund money, but the political math doesn’t add up. A multipurpose constitutional revision like that would require a two-thirds vote in each chamber, and neither party has near that kind of margin.

There is widespread agreement on the nature of the problem: The state’s heavy reliance on the income tax means tax collections soar during good economic times but plunge when the cycle turns downward.

As the high-tech boom fueled enormous growth in Oregon’s economy and poured billions of dollars into the state during the 1990s, lawmakers ignored warnings that the party would eventually end.

Even with evidence that the economy was cooling, the 2001 Legislature boosted spending by 13 percent.

When the recession hit later that year, revenues dropped $2 billion in the 2001-03 budget period and kept falling throughout 2003-05. Lawmakers came back for five special sessions in 2002 and struggled through the longest regular session in history in 2003 to bring the budgets into balance.

That got their attention.

“There is a clear recognition that the 2001-03 recession is not the last recession, and that some steps should be considered to better prepare the state for the next one,” said Paul Warner, legislative revenue officer.

“The same root causes of our fiscal problem are very much still with us.”

Lawmakers sought some combination of a spending limit, kicker reform and rainy day fund that could attract enough votes. But a scheduled special session in June to deal with the issues collapsed under the weight of election-year politics.

Republicans have staunchly defended the 25-year-old kicker law, which requires that when revenues exceed estimates by more than 2 percent, the entire surplus is returned to taxpayers.

House Majority Leader Wayne Scott, R-Canby, said House leaders are determined to resurrect a plan developed for the ill-fated June session that featured an annual growth limit. Revenues above the limit would spill into a capped rainy day fund, and when the cap was reached, the surplus would be sent back to taxpayers.

“I think it’s a piece of work that needs to be accomplished for the betterment of Oregon,” Scott said.

He said the plan may be tweaked to tighten the limit and reduce the rainy day fund, both aimed at increasing the amount of any potential kicker.

Less incentive to deal

Republicans consider a spending limit their price for accepting use of the kicker to build a rainy day fund. Democrats have suggested they might be willing to bargain on that basis. But now that they run the show in the Senate, the deal may not carry as much appeal.

“I’m not sure we’re going to see much, frankly,” said Sen. Kurt Schrader, D-Canby, co-chairman of the Joint Ways and Means Committee. “The dynamic has changed dramatically.”

Schrader noted that Oregon already has a spending limit, tied to the growth in personal income, and that the recession drastically reduced spending. He is wary of accepting a minor adjustment in the kicker law in exchange for a severe limit on spending.

Kulongoski is willing to talk about kicker reform or a stronger spending limit, but he thinks the budget discipline he is pushing will have the same effect, said Theresa McHugh, his chief of staff.

“Saying we’re only going to spend what we have is in effect a spending limit,” she said.

The Democratic governor recommends putting aside 4 percent of the general fund as a reserve, beginning in 2007, but he has not proposed a specific method.

“If you have discipline, you don’t have to do that,” McHugh said, “but understanding that legislatures and governors change, the governor is open to a conversation about how to do it.

“The bottom line for him is sustainability over time, making sure that when making decisions, you’re not making them just because it gets us through the next two years.”

Fleeting stability

Warner, the legislative revenue officer, is skeptical that the economy has stabilized. He cited rising energy prices and the largest trade deficit in the nation’s history as two risks.

“If the slow growth period continues for an extended time, some of the stability issue goes away,” he said. “But personally, I doubt that the economy is going to stabilize in a predictable way.”

Joe Gilliam, a grocery industry lobbyist and principal architect of the House spending-limit plan, said lawmakers must act now before the economy improves significantly and memories fade.

“We won’t do it as times get better,” Gilliam said. “We need to set the discipline track for the next 20 years.”

McIntire, meanwhile, is pushing ahead with his initiative, which would limit spending to population growth and inflation, similar to the Taxpayer Bill of Rights in Colorado. With his plan, the Legislature must submit any spending above the limit to voters.

McIntire, whose plan includes an exemption for money put into a rainy day fund, has met with Republican leaders and says he hopes the House will consider adopting his language.

Russ Walker of FreedomWorks said his group also is working on a spending-limit initiative. He said it would be better if the Legislature could reach a compromise that included a rainy day fund. Only lawmakers can put a measure on the ballot that amends more than one section of the state constitution.

“It would be better for us, and better public policy,” Walker said. But given the makeup of the Legislature, he doubts that will happen. “We’ll go with a straight limit if that’s what it takes.”

Despite these pressures, lawmakers will have their hands full with more immediate budget problems. Even though revenues are on the rise, they will fall short of paying to continue all programs and services at their current levels. And that means cuts.

“There’s very little motivation to take a long-term view,” said Pat McCormick, a veteran lobbyist and political consultant. “They really have to look at what they need for the next two years.”

James Mayer: 503-294-4109; jimmayer@news.oregonian.com

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