What’s Next? Stopping the Revenue Roller Coaster and Other Hurdles

Wednesday afternoon, October 2nd, produced a remarkable event in Oregon political and policy history. Members of the Oregon House and Senate partnered with the Governor to engage in what the political process often aspires to, but has recently seldom achieved; two sides debating issues and reaching a compromise that moves the state forward. No one got everything they wanted from the Special Session, and everyone gave up something in the process.

As a result:

  • Schools will receive an additional appropriation of $100 million plus PERS reforms that will save districts approximately $70 million a year in PERS payments moving forward. These additions for schools roll up into the next biennium and form a stronger base budget for 2015-17.
  • Higher education will receive an additional $40 million in tuition support. In order to reach the goal established by the Legislature in 2011 for Oregon schools and higher education known as “40-40-20,” the reality is that increasing numbers of students of color and students from lower income families will need to access higher education. Additional tuition support is a clear need.
  • Mental Health services will, for the first time, receive a specific funding stream of $20 million.
  • Senior citizens, a growing population, will receive $41 million in service support plus a significant change in being able to subtract medical expenses from state income taxes for Oregonians with adjusted gross incomes of under $100,000 or under $200,000 if filing jointly.

To reach these benefits:

  • Public Employee Retirement System (PERS) recipients will see a drop in their annual cost of living adjustment from 2.0% to 1.25% on the first $60,000 of benefits and .15% on benefits above $60K. There is also a restriction against letting a salary adjustment in lieu of insurance coverage count in calculating benefits. Future members of the Oregon Legislature will no longer be covered by PERS for their Legislative work, and there are changes in how convicted felons in Oregon can lose or have garnished PERS benefits they hold. These changes are in addition to PERS changes approved in the 2013 Regular Session of the Legislature.
  • Smokers will pay an additional 13 cents per pack tax in the current biennium, 14 cents more in 2015-17 and 15 cents more in 2017-19. This revenue is targeted specifically toward mental health services.
  • Taxpayers with adjusted gross incomes of $100,000 or more, or joint filers with $200,000 or more, will no longer be able to take a $183 personal exemption credit on their income taxes. The Oregon earned income tax credit rises from 6% to 8%. Small businesses and LLC’s will see a range in income tax rates from 7% for annual income below $250,000 to 9.9% for annual income greater than $5 million. Corporations with income of $ 1 million or more will see an increase in their income tax rate to 7.6%.
  • Agricultural interests will not be allowed to have local governments regulate seed products, including the use of Genetically Modified Organisms (GMOs). Such regulation is now reserved to the state. An exception is Jackson County which already has a ballot measure related to GMOs on the ballot for May, 2014. No other local elections will be allowed.

You can read more at:

http://www.oregonlive.com/politics/index.ssf/2013/10/oregon_special_session_how_cha.html

WHAT’S NEXT?

Within an hour after the close of the Special Session, the Governor and other legislative leaders turned to “what happens next?” As readers of this space know, the Governor has frequently mentioned the “Three Session Strategy” that started with governance changes in 2011, has now achieved significant financial stabilization in 2013, and will focus on tax reform moving into 2015. Read more at:

http://www.oregonlive.com/opinion/index.ssf/2013/10/tax_reform_up_next_for_john_ki.html

http://www.oregonlive.com/politics/index.ssf/2013/10/tax_reform_becomes_next_big_pr.html#incart_m-rpt-2

Even though the fiscal improvements that have been achieved in the 2013 Regular Session and in the Special Session are substantial , they have not addressed the core fiscal problem in Oregon which is the inherent instability in state funding streams. This has been the central issue in state funding since passage of Ballot Measure 5 in 1990. By capping local property taxes at 1.5%, shifting payment for critical services, such as, schools, health care, higher education, social services, etc., to the state income tax, and capping growth of assessed property value at 3%, a structured instability was created. We now have an over-dependence on the state income tax coupled with severe limits on property taxes, and an absence of taxation on consumption, either as a sales tax or other “value added” revenue. Oregon capped property taxes, capped growth of property taxes, and decided to finance services primarily on state income taxes which require high levels of employment to keep pace with needed revenue. The result, for example, in the 2008-09 recession was significant cuts in state services, especially in education, leading to staff layoffs and furloughs, shorten school years, closures, higher tuition rates, etc. As the economy of the state has slowly rebounded from the recession, we have seen a modest increase in available state revenue, highlighted by increases in educational funding by the 2013 regular session. This is only possible in Oregon when people are working, and, therefore, paying income tax. In any significant recession or economic downturn resulting in higher unemployment. the state revenue stream dries up. The absence of taxation on consumption means that there is no offsetting balance to potential loss of revenue from the income tax. This“revenue roller coaster” has taken a severe toll on Oregon education, social services, and local and state government in general. The Governor and legislative leadership are correct to call this issue out as the next major issue that needs correcting.

WHAT ARE THE HURDLES?

No one should underestimate the difficulty in addressing tax reform in Oregon. The Governor’s “Three Session Strategy” is a clear indication of his understanding of the complex political and fiscal realities in Oregon that need to be taken into consideration. He knows it needs to be fixed, as do legislative leaders, such as, Sen. Ginny Burdick, (D-Portland), who chairs the Senate Finance and Revenue Committee, Rep. Vickie Berger, (R-Salem), who chairs the House Revenue Committee, and Sen. Mark Hass (D-Beaverton) and Rep. Tobias Read (D-Beaverton) who have actively campaigned for changes in the Oregon tax structure. There may be no better time since 1990 than now to build consensus going into the 2015 Regular Session for addressing this problem.

However, there are many potential hurdles to get over between now and then. Here a just a few:

1. Will Governor Kitzhaber seek reelection? There is a general election to get through prior to the 2015 legislative session. Governor Kitzhaber has not confirmed that he will run for a fourth term. Announced opposition so far has come from Representative Dennis Richardson and businessman Jon Justesen. Given the successes the Governor has achieved in 2011 and in 2013, he will be very difficult to beat on the issues and many have referred to the November, 2014, election as his to lose. To say this more positively, he will be a very strong candidate if he decides to run, but he has not, as yet, made that announcement. His victory in the Special Session this week may provide the energy to move him into a position to want to complete the three session strategy.

2. PERS Court Challenge. The changes made to PERS in the 2013 Regular Session and the Special Session were not universally applauded, to say the least. Passionate testimony during both of the recent sessions indicated that significant opposition to these changes exists from public employee organizations, and a court challenge is likely. The core issue is whether the existing PERS agreements with current and retired PERS-eligible employees represent a contractual agreement and whether the legislature has the legal authority to change that agreement. If the Oregon Supreme Court were to overturn these recent changes, a huge financial hole opens in the state budget.

3. Reauthorization of the Elementary and Secondary Education Act. The Governor and the state of Oregon have gained significant national attention in both health care reform and in the educational governance changes approved in 2011. The education changes came at an opportune time when the scheduled reauthorization by the U.S. Congress of the Elementary and Secondary Education Act (aka No Child Left Behind) had hit a brick wall and has remained stalled since 2008. In response to the lack of movement, President Obama and Secretary of Education Duncan created a waiver process for states looking to modify and improve their state education operations in areas covered by the federal law. For example, when the Governor’s new Oregon Education Investment Board approved an alteration of school accountability measures to utilize new “Achievement Compacts” that looked at district-identified growth targets and focused on factors other than state test scores, many saw this as the development of a more rational and appropriate approach to school accountability. The U.S. House has already approved its version of the reauthorization of ESEA and the Senate was working on its version until the most recent fiscal and political crisis led to the shut down of the federal government. When Congress finally gets back to work on this, an important question will be how the final version of ESEA reauthorization impacts the changes being made in Oregon.

4. Results. The 2013 Regular Session appropriated $6.55 Billion for schools in Oregon and the Special Session has now added an additional $100 million. This is an increase of over $1.1 billion over the previous appropriation. It does not restore everything that was lost in Oregon since 1990, but it does represent the first significant increase in a long time. It includes “strategic investments” in such areas as teacher preparation and professional development, early childhood education and regional improvement planning initiatives. The 2015 regular session will be much more open to additional effort to support both PK-12 and higher education if the 2011 governance and structural changes and the 2013 financial enhancements lead to clear system improvements. School districts, community colleges and universities will need to be specific in both the use of the additional revenue and the impact of those funds. Did more students access higher education through tuition assistance? Were class sizes reduced and by how much? How many days of instruction were restored? Did we make progress on reducing the drop out rate and improving graduation and entry into post secondary education. Are we making reasonable progress on the 40-40-20 goals? Have we prepared more students to enter work and technical careers that provide direct benefit to Oregon? Are we making progress in reducing the achievement gap and addressing issues of equity and diversity? The single most important thing that could benefit continuing the reforms that are underway is demonstrating that the modified governance structure and improved funding have produced solid results that put Oregon education back on track for national prominence. The next regular session opens in January, 2015, and a strong case will need to be made that continuing reforms and possible tax revisions will support a system that is moving in the right direction.

Patrick Burk, Ph.D.
Department of Educational Leadership and Policy
Portland State University Graduate School of Education

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