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Growing economy adds up to more budget reserves

Government — By the end of the June 30 budget cycle, economists predict the state will have nearly $900 million in reserves

SALEM — Along with a projected $473 million rebate to taxpayers and hundreds of millions more available for schools and state services, Oregon’s growing economy is producing more money for the state’s financial reserves.

By the end of the current two-year budget cycle June 30, the state budget will have just shy of $900 million in reserves distributed among three funds.

“We are starting to get to some decent level of reserves,” state economist Mark McMullen told lawmakers on the House and Senate revenue committees. “It would help us should things not live up to this rosy outlook.”

But as senior economist Josh Lehner was quick to say, that total is only about 5 percent of the $18 billion-plus budget that will be drawn from the tax-supported general fund and lottery proceeds. Lehner said reserves should total 7 percent for the state budget to weather a mild recession, and preferably more.

Until voters are willing to consider more far-reaching changes, Sen. Mark Hass, a Democrat from Beaverton who leads the Senate Finance and Revenue Committee, has said lawmakers need to reduce the ups-and-downs of Oregon’s dependence on income taxes for schools and state services.

“We have to fix a (tax) system that brings in too much in the good times and not enough in the bad times,” he said.

Until recent years, Oregon was virtually alone among states without a formal reserve fund. Lawmakers have debated setting one up as far back as the 1981-1982 recession — Oregon’s most severe since World War II — but only got around to doing so after the 2001-2002 recession.

Oregon’s 197 school districts, which get the lion’s share of their operating costs from the state budget, are not required to have a specified level of reserves — only that projected costs are balanced with available revenue.

But the Oregon School Boards Association recommends that districts maintain reserves amounting to between 5 and 8 percent of their general funds. That range is slightly narrower than the 5-to-15 percent recommended by the Government Finance Officers Association.

Still, the school boards say ending balances ought to be considered just that, not as funds to be tapped for regular operating costs such as salaries and benefits.

“Ending fund balance is not a sustainable source of revenue for a district; thus it is generally designed to address the one-time expenditures,” a 2009 OSBA guide advises districts. “Once you draw those reserves down to cover lost revenue or to pay for ongoing expenditures, they are gone.”

What Oregon has

Here are the state reserve funds Oregon has:

• Education Stability Fund, which voters in 2002 converted from an endowment fund. The fund gets 18 percent of net lottery proceeds — the state’s share after prizes and operating expenses — and can be tapped for any education program. The fund cannot exceed 5 percent of the state’s tax-supported general fund. The end-of-cycle estimate: $179.3 million.

• Rainy Day Fund, which lawmakers created in 2007 using about $350 million that otherwise would have been rebated to businesses as excess corporate income taxes. The fund gets a specified transfer every two years from the unspent ending balance in the current budget. The end-of-cycle estimate: $212 million.

• Ending balance, which is not an official reserve, but is the amount remaining in the state budget after payments to schools and other spending by agencies. End-of-cycle estimate: $503.4 million. Some of that amount (about $160 million) will be transferred to the Rainy Day Fund, and the rest carried over into the new budget cycle starting July 1.

For legislators to withdraw money from the first two funds, there are economic triggers that require specified declines in tax collections — as measured by the state’s quarterly economic and revenue forecasts — and in employment.

Also, withdrawals from these funds require approval by 60 percent votes in each chamber. Lawmakers can tap only two-thirds of the Rainy Day Fund in any two-year budget cycle.

The economic downturn that started in December 2007 forced lawmakers to drain virtually all of those funds before they had time to build up.

The ending balance can be tapped by simple majorities in each chamber.

The budget submitted by then-Gov. John Kitzhaber on Dec. 1 proposed an ending balance of about $100 million for spending of $18.6 billion.

But the Legislature’s chief budget writers, in their budget framework, proposed an ending balance of $191.5 million.

One of them is Rep. Peter Buckley (D-Ashland), who said lawmakers should consider saving even more considering what will happen in the 2017-2019 budget cycle. That’s when the state budget will be on the hook for higher public pension contributions for state and school employees, and the loss of federal aid for medical care for low-income recipients.

Saving more

There are proposals, dating back a decade or more, to divert into reserve funds some of the excess income tax collections — known as the “kicker” — that otherwise go back to taxpayers. Some proposals would divert all kicker money into the reserve funds until they reached specified limits. Others would split the amounts so that taxpayers would still receive some rebates, which are currently in the form of credits against the following year’s taxes, and the reserve would get the rest until it reached a specified limit.

No proposal has advanced yet to a vote of either chamber. Voters also would have to approve it, since they made the kicker part of the Oregon Constitution in 2000.

In addition to the ending balance, McMullen said after his presentation of the latest forecast that there are other ways lawmakers could save money.

One way, which lawmakers did in 2011 and 2013, is to require agencies to withhold a small percentage of their approved first-year spending until lawmakers meet for their 35-day session in February of even-numbered years.

McMullen said “not one dollar” of the projected tax collections for the next two-year state budget has come in yet.

“So to the extent we are expecting additional revenue in 2015-2017 … it might make sense to dedicate some of it toward a reserve fund,” he said.


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