Today, state economists Mark McMullen and Josh Lehner of the Office of Economic Analysis presented the September 2014 Economic and Revenue Forecast before a joint meeting of the House Revenue and Senate Finance and Revenue committees. The underlying theme of the past several forecasts has been that Oregon’s economy was finally starting to pick up speed after years of sluggish growth during the Great Recession.
Traditionally, economic recoveries in West Coast states take longer than they do in other parts of the country due to their geographic distance from East Coast financial hubs and lag in trade. However, for the first time since the recession began, Oregon is among the states leading in the economic recovery. In fact, job growth in Oregon is approaching 3 percent, which is 1 percent higher than the national average.
However, there is still plenty of room for the state economy to improve. Only the Portland metropolitan and Columbia River Gorge counties have fully regained the jobs lost during the recession. Interestingly, the Bend, Eugene and Salem metropolitan areas have begun growing at similar levels as during the housing boom of the 2000s at 5 percent over the past two years. In fact, Bend will soon have no excess supply of available homes to accommodate the migrating population. Similarly, rural counties are experiencing job growth, albeit at a smaller rate. During the initial phases of the economic recovery, job growth in rural areas was sitting at just over 0 percent. Today, these areas are up to 1 percent job growth.
The gains in employment have steadily improved revenues for the state. The General Fund is up $278.4 million from the original close of session estimate. This means that, so long as the kicker doesn’t reach its 2 percent threshold, there may be additional budgetary capacity at the legislature’s discretion during the five-month session in 2015. However, it is worth noting that the legislative budget writers are already considering the budgets for the 2015-17 fiscal year knowing there will be a push for all-day kindergarten and an expansion in mental health services at the state level.
If the kicker does kick, which is a very real possibility at this point, as current projections suggest that we are $27 million shy of reaching the threshold, budget writers and leadership will have to cut programs in order to balance the budget. The real impact of the kicker would be felt during the 2015-17 biennium, to the tune of about $300 million, as money would be received during the following year’s tax returns.
As a result of rapid growth of the economic recovery in recent months, state economists are expecting the corporate kicker to reach its 2 percent threshold before the end of the biennium. After Oregonians passed Ballot Measure 85 (2012), refunds from the corporate kicker are re-directed to the K-12 education system. Economists are predicting a $43 million corporate kicker by the end of the biennium.
While many of the funding mechanisms for the state are rebounding in response to the positive economic growth, the lottery fund continues to lag. During the recession, lottery fund receipts fell 25 percent and have only regained slightly over the past several years of the recovery.
This is actually good news for the state when compared to the rest of the country, which is still experiencing a low growth rate or a decline. As this trend continues, we expect to see diminishing lottery disbursements for capital construction projects.
State economists left the meeting with a final thought for lawmakers regarding the future of the budget process: that the state may want to consider revamping its methodology for funding the Rainy Day Fund. Currently, the legislature is expected to dedicate 1 percent of available funds as reserves, but in their perspective, the state should be saving 7 percent (approximately $1.4 billion) in reserves for the next economic downturn, which would require a significant reform of the budget writing system seeing as the most the state has ever saved for reserves is $500 million.
Overall, lawmakers are gearing up for a legislative session where the attention is not only on crafting the next biennial budget but possibly transforming the underlining methodology of the tax code and budget-writing process. As lawmakers questioned state economists on the conditions of the state economy and revenues, there appeared to be an appetite from nearly all of them for dedicating more funds to reserves and how to diversify the ways the state collects revenues.