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State economists: Oregon budget has a $3 billion gap

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SALEM — Gov. Kate Brown says federal aid must go hand-in-hand with spending cuts to offset almost $3 billion that state tax collections and other sources will be short.

Brown made her statement Wednesday after state economists told lawmakers the COVID-19 coronavirus pandemic has resulted in an unprecedented economic downturn from shutdowns in business activity and public life.

Oregon’s unemployment rate jumped from a modern low of 3.5% in March to a modern high of 14.2% in April. Oregon’s state general fund budget draws more than 90% of its money from personal and corporate income taxes. The combined general fund and lottery budget for the 2019-21 cycle is $23.7 billion, and virtually all of the potential spending cuts of $2.7 billion will fall within the year starting July 1.

“The steepness of this decline is unprecedented,” state economist Mark McMullen said during a video conference of the House and Senate revenue committees.

While he and senior economist Josh Lehner said they expected a quick economic recovery when business activity resumes — as early as the second half of 2020, and an “all clear” by mid-2021 — “it takes a full year or more before pain is realized.”

They also projected state coffers will get less than originally forecast in the following two budget cycles. Oregon did get $1.4 billion as its share of $150 billion in federal aid from the recent CARES Act, although $415 million is tentatively earmarked for local and tribal governments other than Portland, Multnomah County and Washington County.

“Make no mistake, the budget gap created by this pandemic is too large to bridge without additional congressional action,” Brown said. “I am thankful for the work of our congressional delegation to secure federal funding for Oregon in the relief packages Congress has passed so far. But those funds only address a fraction of our current need, especially since we are not permitted to use the funding we have received so far to address state budget shortfalls.”

“As a state, we took action to shutter our economy in order to save lives in the middle of a once-in-a-century crisis. Now it’s time for Congress and the president to step up and provide once-in-a-century support for important state services, including schools, health care, and public safety.”

More federal aid uncertainThe Democratic-led U.S. House passed a $3 trillion aid bill on May 15 with $500 billion for states and $375 billion for local governments. But the Republican majority in the U.S. Senate has balked at the price tag, and President Donald Trump has taken a wait-and-see stance, so more aid for states does not appear to be imminent.

Brown has received agency plans she ordered earlier this month for $3 billion in spending cuts, amounting to 17% of their general fund support starting July 1. But no one expects those cuts to pass the Legislature. Brown has the authority to cut spending across the board, but only lawmakers can approved selected cuts.

Brown also could impose a hiring freeze — although more workers have been needed at the Employment Department and other agencies affected by the pandemic and the downturn — or employee furloughs.

“The latest forecast for state revenue makes it clear that we have tough choices ahead,” she said in her statement Wednesday. “We will need to tighten our belts. I am working with legislative leaders to preserve critical state services, find efficiencies, and prepare for potential budget cuts.”

But neither she, Senate President Peter Courtney of Salem, nor House Speaker Tina Kotek of Portland have said when a special legislative session might occur. Kotek, in a video conference Tuesday sponsored by the Portland Business Alliance, said lawmakers still need to assess other sources of aid stemming from the $3 trillion CARES Act.

She did say a session is likely before August, and lawmakers cannot put off action until their next regular session starts Jan. 11.

Lawmakers were told the state has $1.6 billion in its two main reserve funds — one generated by lottery proceeds for education, the other from income taxes for general programs — plus $1 billion in ending balances that lawmakers could tap. The reserve funds have had a chance to grow since the most recent downturn a decade ago, but lawmakers are barred from using all of the money in a single budget cycle.

The forecast by state economists also projects a 23% decline ($364 million) in Oregon Lottery proceeds, the lion’s share of which is generated by video machines — which are mostly in restaurants, bars and taverns that have been shuttered since March 16. Lottery proceeds go to economic development and education, but voters have earmarked shares for an education stability fund, parks and watersheds, veterans’ programs and outdoor schools. Lawmakers also have used lottery proceeds to repay bonds.

A new corporate activity tax, proceeds from which are earmarked for school improvement and other programs, is projected to generate 25% less ($414 million) than originally forecast. The tax took effect at the start of this year. Business coalitions have urged Brown and lawmakers to suspend the tax, which essentially is on gross Oregon receipts for all but the smallest businesses. Brown directed the Oregon Department of Revenue to waive penalties for late filings for businesses making good-faith efforts to pay, and allow the smallest businesses to pay in 2021.

McMullen said the pandemic-induced downturn has resulted in $9 million more than projected in marijuana taxes — but even they will decline slightly over the next few years. Most of that money is earmarked, so it does not go into general state services.

“We’re trending high in marijuana sales,” he said. “But even those taxes are not immune to the downturn.”

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