Speech: Prineville-Crook County Chamber

Speech Delivered to the Prineville-Crook County
Chamber of Commerce General membership meeting
by Crook County Judge Scott R. Cooper, June 5, 2002


Good morning, and thank you for the opportunity to address the Chamber of Commerce.

Diane has advised me that I can speak about anything I want to this morning. As you might imagine, such advice was tremendously helpful to me as I struggled to narrow the focus of my remarks. One of the disadvantages of speaking to a group with interests as broad as yours is that just about every subject I could conceivably address is somehow a part of your business and has implications for you and the interests you represent.

As I think about it, however, one subject does stand out in which all of you have particular expertise and which is very much on the minds of all of us in state and local government today: That subject is MONEY!

Unless you have been completely without access to any media or you have been out of the country for the past nine months, you have probably gathered by now that the state of Oregon is undergoing a rather serious financial crunch.

You might also have noticed that the governor and the legislature, having tried twice now without success to find common ground in special legislative sessions, are now planning a third special session, on the theory that somehow the crisis atmosphere created by an $870 million hole in the state budget will somehow force them to play nice together.

Oregonians are holding their breath to see what happens next.

My best prediction is that we are about to see a classic process set in motion, which a colleague of mine, Commissioner Bobby Green of Lane County, described very well at an Association of Oregon Counties meeting last week—that being the process of “awfulizing” an already bad situation.

Now you may not have heard this term before. I certainly had not, and I did not find it in my dictionary when I returned home from the AOC conference. To help you get the context, let me use this word in a couple of sentences for you:

“The business of the legislature is to take a fiscal problem
and awfulize it into a crisis.”

“Any meeting with Republican leaders, no matter how tense to begin with,
can be awfulized by the attendance of Governor Kitzhaber.”

“Now matter how bad you as a taxpayer think things have gotten,
rest assured that they can be awfulized further.”

As you can see, I am indebted to Commissioner Green for teaching me this new word, which I think does a wonderful job of capturing the present political situation in Oregon.

In a nutshell, here is the history of the current financial situation of that wonderful entity to which we all belong: Oregon.

When the legislative session ended in July 2001, the state of Oregon projected its revenues for 2001-2003 biennium at $11.5 billion. Most of that amount would come from income tax and lottery funds. Feeling fairly confident about this number, legislators projected expenditures of $11.4 billion dollars and decided to call it good and go home with a nice $100 million cushion in the bank.

What no one realized at that point was that the Oregon economy was already beginning a slide which was accelerated by the events of Sept. 11. Further accelerating the slide, the voters decided in November to pass Measure 88 and allow taxpayers to deduct $5000 in federal income taxes instead of $3000. Since most taxpayers pay more than $3000 in federal income tax, this put another hole in the state budget, by reducing the total taxable income of Oregon taxpayers in 2002.

These alarming events caused the state legislature to rush back into session at the invitation of the governor. They quickly cut $450 million in expenditures from the budget. Unfortunately, their cuts were not what the governor, who had called the special session in the first place, had in mind. It seems that the governor preferred a tax hike to expenditure cuts. So in March, he called them back to try again.

This time, the legislators cut $722 million in spending. Again, they refused to pass a tax hike.

The governor was furious. This time, he responded by substituting his own budget for that passed by legislators.

Now it was legislators who were furious. So in a mature and statesmanlike fashion, they sued the governor, claiming that a 1950’s-era statute passed by the legislature giving the governor authority to impose line-item cuts doesn’t really mean what it says.

Unfortunately, we will never know the outcome of this argument, because an intervening revenue forecast showed projected state revenues down yet again, this time by $1.4 billion over the close-of-session forecast. Faced with this crisis, the governor, wisely withdrew his cuts and the legislators dropped their lawsuit, and we now are preparing for a third special session, where we hope that our state leaders will find a way to agree on something other than their extreme distaste for each other.

So to summarize, as of today, the state’s projected revenues for the biennium, which is almost half over, stand at $10.1 billion. After taking into account cuts already approved, the state’s current projected expenditures stand at $10.65 billion. The difference is $550 million.

Making the situation worse, are recent revelations about the state of Oregon’s fabulously generous Public Employee Retirement System. On average, local governments around Oregon will face 37 percent increases in their PERS costs this year.

Why is this happening? A couple of factors are in play: first, the state has contractually obligated itself to pay a minimum 8 percent return to state employees vested in the retirement system before 1997, regardless of market conditions. May I ask how many of you have a retirement that guarantees you an 8 percent return. I would suggest no one who is not a state employee. Unfortunately, this is a contractual obligation of the state and it cannot be undone.

The second problem occurred due to a choice made by PERS trustees during the boom years of the mid- to late-1990s, when the retirement system was flush with cash. The trustees had a choice: they could either invest their enormous returns in a “rainy day fund” or they could distribute their enormous profits to individual retirement accounts. They chose to distribute the profits—a move which public employees applauded, of course. Most of those profits, of course, were paper gains, which vanished after a stock market correction. But under PERS rules, employee accounts don’t fluctuate based on market conditions. Once money goes into a PERS account, it is treated like a cash balance. Any shortfalls due to market conditions are made up by the taxpayers of Oregon. It is this crisis which is now causing a desperate scramble on the part of state and local government to find the resources necessary to cover the resulting $260 million shortfall.

So, on top of the fact that we don’t have enough money in the state treasury to meet our expenses, we also need more money to meet the unexpected obligations brought about by the PERS crisis. As you can imagine, this is a recipe for fiscal disaster.

To address this crisis, the governor is expected to call the legislature into special session at the end of June for the purpose of considering a five-point plan which the governor says is the answer to the state’s budget woes.

aFirst, he wants to spend the $80 million in unallocated monies remaining in tobacco settlement fund.

aSecond, he wants disconnect from the federal tax relief package so that Oregonians will see a paper increase in their adjusted gross incomes, which is the basis for calculating state income tax. This will raise $124 million, he says.

aThird, he wants to raise the cigarette tax by 50 cents a pack. This will generate $89 million, he says.

aFourth, he wants to you vote for an income tax surcharge in September in an amount he will not specify at this time.

Finally, he wants you to vote him some sort of new unspecified tax in November to create a $300 million “rainy day” fund for education. The governor previously proposed this idea in January, with the idea that it would be paid for with a combination of lottery revenues and a 1 percent real estate transfer tax.

Now here’s the funny thing about John Kitzhaber. Before he was John Kitzhaber, politician, he was John Kitzhaber, M.D. As in medical doctor. As in the kind of professional who knows the meaning of the term “Dead On Arrival,” which is pretty much what the Republican leadership says is the state of the Kitzhaber proposal.

Unfortunately, while Republicans know they don’t like the governor’s plan, they don’t seem to have a particularly well thought out plan of their own—or at least not one which they are ready to reveal yet.

In a speech to county commissioners last week, Republican Senate Majority Leader Dave Nelson says this is a short-term problem. The economy is already picking up, and we grow our way out of this hole. In the meantime, we have lots of one-time resources, such as the 911 fund, the Tobacco settlement money and some new lottery games, which will get us through until things get better.

In listening to this speech, I was struck by the thought that maybe the legislature should just go buy a lot of its own lottery tickets and it perhaps it will hit the big one and be able to balance the budget with its winnings and go home happy.

So, I am not particularly optimistic that the upcoming special session is going to be pretty, productive or non-partisan. Our state leaders are currently in a state of panic, and it shows.

The governor lives in a “la-la” land where he thinks the people in the state with the fourth highest unemployment rate in the nation will willingly retreat to their backyards on upon request to pick from their money off trees in order to pay ever higher taxes.

The legislative leadership after 10 years of staggeringly successful economic growth in this state has completely forgotten that the cure for excessive consumption the night before is not to continue the party in the morning.

Before this is all finished, I think it is going to fall to us as citizens to sort this all out-- through conversations with our current legislators during the upcoming special session, through the choices we make about which initiative petitions we support, through our choices in November of whom we send to the state legislature and the way we express our willingness to endure some cuts today in order to achieve a balanced budget tomorrow.

As you have opportunity ponder your input on all these things, I ask you to keep a few things in mind:

Since 1990, the general fund resources of the state have DOUBLED—in spite of the kicker, in spite of property tax limitation measures, and in spite of initiatives which have drained off nearly $3.4 billion in dedicated funding for specific purposes.

Between 1995 and 2001, the state’s AVERAGE net increase in general fund revenues, was 16.1 percent. That’s an average 8 percent per year.

Between 2003 and 2007, the state, which operates on a roughly $10 billion general fund, projects revenue growth of approximately $1.5 billion each biennium. Prudently managed, at that level, the state should be able to cover PERS costs, increased medical insurance costs and a slight cost of living increase for state employees.


These facts lead me to believe that we do not have a revenue problem in Oregon. We have a spending problem. Our appetite for new programs and our commitment to existing programs far outstrips our ability to generate the revenue necessary to support them. In addition, our state uses a budget process call “current service level” modeling. In other words, when the budget is drawn up by the governor’s office, he begins with the assumption that the state must preserve every program and save every state job at the current level of service. When the state discusses “shortfalls,” it doesn’t mean that it has less money than it had the previous biennium. It means only that it doesn’t have enough to continue to operate programs as they have been operated for the past two years.

Finally, the governor says that tax hikes will fly in Oregon because voters care about education and are willing to pay more to support it. He is curiously silent about the fact that voters have had the option to implement local option property-tax levies to provide support schools ever since Measure 47 was passed. Despite this, the number of districts that have done so can be counted on one hand. My conclusion from this fact is that Oregonians are not particularly bothered by volatility in the tax system. In fact, Oregonians like a system where the government is not insulated from the pain that communities and taxpayers feel when the economy falters. Oregonians have constructed a tax system which forces state and local governments to respond to changing economic conditions. The present “crisis” in which the state is operating is the system working exactly like it is supposed to.

There is one point where the governor and the legislative leadership do seem to be in general agreement. All say that current tax system is a mess. They unanimously condemn the state’s property tax limitation measures—5, 47 and 50—for having produced a system that makes the state responsible for the rising costs of education without giving the state the means to pass those costs on to taxpayers. They also criticize the fact that Oregon more than any other state relies on the income tax to fund state government. This is very bad, they say, because there is too much volatility in tax collections and because no one can be guaranteed a job from year to year.

Excuse me? Since when is government employment supposed to be a guarantee of lifetime employment? Are we so confused in our understanding of who works for whom that we now believe it is our duty to turn over all our resources to the state so that those fortunate to be on the state payroll can continuously be guaranteed a lifestyle? Not one of the private-sector members of the Chamber in this room enjoys that kind of security. Certainly local elected officials do not. And I would submit that it is absolutely outrageous for anyone to claim such a privilege.

So, having spent considerable time outlining the problem, what’s my solution to the state’s fiscal mess?

I think it’s time to set aside partisanship and executive-legislative bickering and start thinking seriously about what’s in the best interest of the state.

For his part, the governor needs to crawl out of the rabbit hole that he has fallen down and recognize that the way to climb out of an economic crisis is not to tax the very engine of progress. Fiddling with the personal income tax, raising corporate taxes or instituting a real estate transfer tax will only serve to deprive individuals and business of needed capital which would otherwise be reinvested in economic recovery and to drive prospective new employers to Washington or Idaho.

For their part, Republican legislators need to quit playing the silly game of competing with one another to prove who’s the most anti-tax Republican in the room. As far as I could tell, the governor’s proposed increases in the beer and wine tax and the cigarette tax only offended Republican legislators and a few heavy drinkers and smokers. Most Oregon voters seemed complacent about the idea. Let’s put these revenue sources back on the table for consideration.

Finally, the entire state government needs to recognize that curbing the government’s sense of entitlement is the real key to getting a permanent handle on the state’s finances. The “current service level model” of budgeting doesn’t work in private business. It doesn’t work in local government. None of us in this room assumes when revenues begin to fall that we will automatically protect all existing personnel and programs. We adjust our staffing and our services to the reality of the economic climate. We should expect nothing less from our state government.

Not all state programs are of equal value. Not all personnel are necessary to preserve public health and safety. Let’s start by eliminating new programs and freezing funding to begin any new programs. We can finish by agreeing on which of the state’s many services, while nice, are luxuries we can no longer afford.

As always, the answers lie in the middle of the road. I don’t know whether Oregon’s leaders can engage each other in productive dialogue. I don’t know if they are more committed to solving problems or to furthering the political fortunes of their respective parties. We will see.

But I do know this. If the politicians in Salem cannot find a way to align their philosophies with those of the constituents they represent, they should not be surprised when term limits, initiative-driven tax reform and all the other voter responses to bad government that politicians hate are once again at the forefront of the Oregon agenda. They will have no one to blame but themselves.

Thanks for the opportunity to speak to you this morning. It’s always a pleasure to speak with the Chamber and I hope for an opportunity for a return visit in the future.