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Sunday, June 11, 2017

Big Balls in Cowtown

All the big players in Cowtown have weighed in on what is necessary to reach sine die this legislative session.  The outside players - the unions, the various business alliances, the school boards associations, lobbyists for tobacco, liquor, forest fairies, poisonous mushrooms, mountain oysters, etc - have made their wishes (or their demands) known and what we have is, as they say, a “failure to communicate”.  The Dems in the House, the Senate, and possibly the Governor’s office are sort of on the same page, while the Rs seem to be on a different page in a different book, and the external players have each offered their input on which books are acceptable to them.  The bottom line is that no one seems to have the votes to do much of anything and legislative paralysis looks more and more likely.  The unions claim they don’t support SH 1068 - the PERS changes brokered by. of all people, the unions, UNLESS they get revenue reform that includes changes to the ways that corporations are taxed.  The other special interest groups want the PERS reform, but without the pesky tax increases the Ds and the Unions want.  There are less than 4 weeks left in the Legislative session before the mandatory adjournment date of July 10th rolls around.  Without agreement on these issues, the Legislature is doomed to a Special Session in the Fall.

I’m not advocating for PERS reform, but the problem isn’t going to go away without two things happening:  1) more revenue; and 2) some legal fixes to PERS.  There are two other options available, neither particularly appealing to legislators.  First, there is the problem created by Ballot Measure 5, which probably less than 50% of the current voters were either here for or alive at that time.  This problem is the result of saddling the State of Oregon with the responsibility for funding about 80% of public school operating costs, but leaving the control of the schools local.  That, to me, was a catastrophic failure of Measure 5, and the Legislature could remedy that in either of two ways:  a) taking over complete control of the schools, including hiring, firing, negotiating contracts, and establishing benefit levels; or b) returning total control back to the school districts by removing the obligation for supporting the schools from Measure 5.  The first would give what the original intent of Measure 5 was; the second, would destroy Measure 5, but from people I’ve talked to, most don’t even understand the first thing about how schools are funded.  The second area of mitigation would be to eliminate the “kicker”, which was created to stave off Measure 5-like effects before Measure 5 was even a gleam in the eyes of its proponents.  This wouldn’t solve the funding crisis, but it would eliminate a persistent nuisance in a growing economy.  Why should the state be forced to give back money legally collected for income taxes just because the state economist is unable to forecast the final expenditures in a biennium two full years before that biennium’s end?  If that requirement is necessary, why not have the reverse requirement, i.e. if the state economist overestimates end of biennium revenue, and the state comes up short, why not impose a tax increase?  You can’t expect a tax refund because of an underestimate, while not expecting a tax increase because of an overestimate.  My point is that the whole “kicker” is a monumentally stupid way of running a state.

I’m guessing that the status quo is what many want, although I suspect the only people who really are really happy are the swinging dicks with the big balls in cowtown (OBI, OSBA, SEIU, AFSCME, and all the other lobbying groups) who have played the game of fomenting paralysis as a high art form.  In in the meantime absolutely nothing of consequence has been achieved by the malingerers in Salem who have been bought by all the special interests lined up in opposition to anything but stasis.  What a waste of human capital, and that applies across the aisle.  However, as a trained evolutionary biologist, I can state with confidence that long periods of stasis are often followed by explosive adaptive radiations.  These can be good, or bad, kind of like the proposed asteroid that brought about the end of the dinosaur reign near the terminus of the Cretaceous period.  We can hope for something that catastrophic to wake up those who are asleep at the wheel in Salem.

19 comments:

Jay T. said...

"Why should the state be forced to give back money legally collected for income taxes just because the state economist is unable to forecast the final expenditures....?" This is the best question about the kicker. Government decisions, specifically tax breaks shouldn't be made by the ability or inability of an employee to forecast the economic situation. What a mess!

Measure 5 on property valuation and measure 11 on prison terms have wreaked havoc with state finances. I'm sick of them.

JB said...

Marc, this is well written as usual. FWIW, your blog is international as I'm reading this from my deck in south France this morning.

One small correction though. You state that one option is for the legislature to remove the obligation created by Measure 5 for the state to support the schools. That statutory obligation actually only lasted for a few years - five if I remember correctly. You can certainly argue that the state has a moral obligation to backfill what the property taxes now no longer cover, but the reality is there is no current statutory obligation that the legislature needs to remove.

Brian B. said...

I respectfully disagree with your comments on the Kicker. Oregon's budget is built around funding set at the beginning of a biennium. That means if the state takes in the same amount in taxes as was originally forecast when the budget was built, there would be no surplus and no shortfall. All programs would have been fully funded as originally planned and budgeted. If we learn at the end of the biennium that tax receipts are higher than originally forecast, that is extra money that has not been budgeted for anything. Why would we give the legislature even more money to spend on things they hadn't even thought of? Spending is already out of control with our budget having gone from around $10B just 15 years ago to $19B now. There is good reason for the state being "short" on funding. It's because we spend too much. It's not because of a lack of revenue.

An analogy for letting the legislature keep the kicker rather than returning this overpayment of taxes to the taxpayers is this:
If you had a $1,000 car repair bill, would you voluntarily give your mechanic $1,200 because you had extra money in your bank account?

The state told us what they needed to spend for the 2015-17 biennium and we fully funded their request. There is some extra money left in the checking account now at the end of the biennium and I want my share returned to me.

mrfearless47 said...

@Brian B. If you accept your argument, do you accept its corollary proposed in the piece, viz. that if the State Economist overestimates the revenue and the budget comes up short, that we should dun the taxpayers for the difference. That is where the rubber meets the road. By your logic, should the car mechanic accept $800 for your repair because you only have that much in your checking account at the time you had your car repaired. This is the logical trap we fall into. Forecasts are just that and nothing else. Why would be give back money if the economist underestimates the amount of revenue two years out, when we don't expect to have to pay extra if the economist overestimates the amount of revenue. The revenue forecasts are statistical models based on known data two years in advance of the close of the biennium. You are asking for precision that is unreasonable. In all scientific experiments, the cut-off between a significant and an insignificant finding is 5% (or roughly 1 in 20 outcomes of the same experiment). Why on earth would we expect an econometric forecast to be more precise than a scientific experiment when one controls as many of the variables as possible. Econometrics can only control for so many variables; human behavior is NOT one of them.

Brian B. said...

To answer your question - yes, if state law required us to pay more taxes in the event of a shortfall I would. But I think this speaks to the larger issue of the difference between how the government and it's citizens spend money. When a private citizen has expenses that exceed income, we generally cut our expenses rather than look for more income. Governments generally do the opposite. I was the budget analyst at my agency for ten years so I understand how forecasting works and I still feel that when revenue exceeds budgeted expenses, the surplus should be returned. I also feel that the state, like it's citizens, should cut expenses when revenue is lower than forecast. As is often the case though, the focus in Salem right now is to find more revenue to address the current "shortfall" by increasing taxes (as well as new attempts to rescind the kicker) rather than cutting expenses.

mrfearless47 said...

I agree with you up to a point. I simply do not believe that forecasts of economic outcomes can be made within +/- 2%. In an economy that is growing somewhat unpredictably (who could have accurately predicted the growth of Oregon’s population between May 2015 and now) plus the added revenue from our dversified economy, lplusthe added tax rvenue from Marijuana legalization, coupled with the non-secular expansion of school enrollments, and added infrastructure demands from the added population to within 2%). Truthfully,with so many things unknowns, how accurate were your own forecasts. Also, you carefully elude my actual question based on the car repair examle. You take your car in for repair and the mechanic tells you that it will cost $800. We all know how those things work. In he course of doing the repairs the mechanic discovers an essential additional repair that must be done. It adds $200 to the cost. You need your car to get to work, but you have only bdgeted $800 for the repairs and don’t have any fat to cut from your budget, and no rainy day fund. Whatbare you supposed to do? I see this as the perfect analog to the forecasting problem. If the state has unexpected revenue, why shouldn’t it be kept in a rainy day fund rather than turned back to taxpayers. I don’t have a problem returning the EXCESS over 2%, but returning the entire excess is poltically and economically stupid.

Brian B. said...

Although I agree that no revenue forecast is going to be 100% accurate (I actually understand better than most how complex the forecast is), I’m not sure how the accuracy of the forecast matters in this situation. The budget is built around a number. It doesn’t matter what that number is. For example, if the forecast calls for $18B in revenue and the legislature builds the budget for $18B and the actual revenue ends up being $19B, you still only spend $18B.

The problem Oregon runs into is it plans to spend 100% of the originally forecast revenue. That’s a disaster just waiting to happen and it happens all the time in Oregon. Only government would take a risk like that. As a private citizen I would never plan to spend 100% of my income. What the state should do knowing forecasts are never entirely accurate is always plan to spend less than the forecast.

I fully support a rainy day fund but I would not fund it from revenue that exceeded the forecast. I would instead fund it by proper planning. For example, if revenue is expected to be $18B, you plan to spend $17B and put the other $1B in the rainy day fund. The kicker wouldn’t be triggered because the budget met the forecast. I suspect this would require new legislation but it’s a sensible solution that I think people would support. You are planning in advance to set money aside rather than taking money away from taxpayers that you didn’t expect to get after the fact. There is a difference - at least in my mind.

And on an entirely different note Marc - thank you for all the time and effort you’ve put into your PERS blog over the years. It was very helpful to me as I planned for my retirement. You’ve forgotten more about PERS than I could ever hope to know.

mrfearless47 said...

I understand your position. It wasn't always this way. Oregon used to have a rainy day until Measure 5 came along, and moved support for public schools to the state general fund. As I have repeatedly said, this has screwed with budgeting in incalculable ways, with the local school boards and districts negotiating with their teachers, while sticking the state with the bill. This is no way to run a state. Either the state seizes control of the schools and their budgeting, or the state needs to return control totally to the local school districts and their property taxes. Measure 5 has been a catastrophe in that it created the perfect budget storm where the state gets the bill and the locals are responsible for the budget. I've lived and worked in Oregon since 1969 and have watched this disaster play out in slow motion since then. If we could rid ourselves of Measure 5, I think that many of the problems created by the "kicker" would go away. You have locals demanding that the state spend more on the schools, while their local elected school boards demand more money from the state to pay for spending that the state didn't authorize. While I rarely agree with the Oregonian, today (or yesterday's) piece on total compensation was a real eye-opener. Why is my own town (Lake Oswego) spending $6K per year/per teacher more than other metro districts on health care? We all use the same providers? Does LO provide platinum care while Bvtn/Tigard only provide Gold care? I don't understand why there is such a huge differential. The state could negotiate with a half dozen plans to provide care for every teacher in the state. With the scale effect, you'd expect prices would be lower, yet the OSBA and the teacher's unions oppose this. I don't get it.

You are welcome. I have, indeed, forgotten a great deal about PERS as time goes on. Some of the questions I'm getting today have never come up before in more than 19 years of doing this.

Brian B. said...

I agree completely with everything you said this time :-)

I hope I live long enough to see real improvement in how Oregon funds all of our programs as well as how we plan to spend that funding.

Kona said...

For me, I'm annoyed by senseless spending. For example, our agency recently replaced all partitions and work space desks. It wasn't that long ago it was all replaced with the Herman Miller furniture. The building was completely revamped for office space, meeting rooms, and a huge fancy break room, including a kitchen and tv. I can't even imagine the cost. And now, a hiring freeze. Just seems pretty messed up to me. I'm a May 1 retiree, but still a tax payer. I wouldn't mind the Kicker going for something important. But after 38 years working for the State, I've seen management spend, spend, spend like there is no tomorrow.

mrfearless47 said...

@Kona. I’m sure that all of us have examples of senseless spending within government agencies. For me, the problem isn’t the fact of its senselessness, but the scale of it. And for all of the examples I can think of in my experience of 35 years in higher education, it pales at the level of unnecessary spending in public education following Ballot Measure 5. To me, Bill Sizemore and Don McIntire perpetrated the greatest bait and switch in Oregon history. The sold taxpayers on the notion of a free lunch by suggesting that a reduction in property taxes could be achieved at no additional cost to taxpayers. My property tax bill argues to the contrary, and my state income tax is through the ceiling. In the meantime, we are paying for non-retirement benefits for public school teachers that are between 25 and 100% higher than in surrounding states. As the husband of a retired physician, I can tell you with 100% certainty that physicians in the metro area are not seeing salary increases matching the premium differences, and physicians in Washington are better paid than those in Oregon. There is something fundamentally wrong when 4 metro school districts pay for health care benefits that vary by more than 50% for the same providers. I’d be willing to bet that the state could save a ton of money by negotiating for all school districts, rather than letting the districts negotiate individually. We aren’t talking about penny ante savings; we are talking a shit ton of money. Since the state is compelled to pay for more than 80% of public school operating costs, why shouldn’t they controll the cost of benefits. This is the shit storm that has resulted from Measure 5. It is necessary to change that stupid and scabrous law.

Native60 said...

Back to the Kicker. Perhaps a better analogy is to think of a person that gets a yearly bonus because profits at their company are really good for several years. So what does the average person do? Rather than paying down debt they already have (mortgage, cars, boats, etc), they use the extra cash to buy more toys and leverage more debt. Life is good! Then the economy sinks, and they no longer get that bonus from work. Maybe even no cost of living increases, and furloughs on top of that. Suddenly they don't have the funds to make payments for the toys. Loans default, and they could even loose their house if the debt is too deep.

Government is no different. Extra cash - spend it. Don't use it to pay unfunded liability in PERS. Don't pay off old bonds. Use it as leverage to sell more bonds. Simply put, Oregon's budget would be in even a worse mess and have a bigger hole to deal with if Oregon did not have the Kicker. In my opinion, the Kicker is genius to rein in out of control spending by our government.

mrfearless47 said...

Don’t necessarily disagree but believe that the kicker wouldn’t be an issue without the cluster f*ck that is Measure 5. My property taxes have gone up by $2000 in the 11 years I’ve lost ved in Lake Oswego. My house value is at about the same as it was when we bought it. So explain how Measure 5 was supposed to save me money. My state income tax is mid 5 figures. So, the kicker will return money that is not enough to pay for the rising property taxes without an increased valuation. The whole thing is stupid.

mpguy said...

There is one fix that would make perfect sense, and it wouldn't even violate the spirit of Measure 5. In fact, it's included in Prop 13, the godfather of M5. That would be to increase assessed valuations of both residential and commercial/industrial property at the time of an arm's length sale, or an inheritance by someone other than a spouse or child. The average property changes hands about every eight to ten years, so it wouldn't take long for there to be a significant increase in the amounts of money collected at the local levels. That would take lots of pressure off of the legislature, which would be funding a smaller percentage of schools and some other local programs. It makes no sense for a buyer of a property worth, say, $400,000 to pay taxes on the basis of a former value that might be half of that or less. If someone is going to buy a $400K house, they should be prepared to pay property taxes based on that valuation.

Maybe this just makes too much sense for it to be referred to the people as a Constitutional amendment.

mrfearless47 said...

In my experience here in Clackamas County that already happens. We bought our house in 2006, and the price of our house was established the first time through the tax rolls at precisely what we had paid for it. It was significantly less when we bought it. So, I think this already occurs to some degree around the state, but it may not be uniform.

mpguy said...

It doesn't happen for the most part. If it did with yours, it was an accident, because that's not the way the law currently reads. In most jurisdictions, there is a huge difference between fair market value and assessed valuation. If AV were updated whenever there is an arms-length sale, that difference would be there, but it would be much smaller. In Washington County, for example, the difference between the two is almost 50% for residential property--$371K average FMV versus $253K AV. For all taxable property, the difference is even more stark: a little over $101 billion FMV versus $59 billion assessed valuation. If assessed values were updated as properties are sold or inherited by those outside of the immediate family, those two numbers would be much closer together. Counties would have much more money to work with, and the pressure on the legislature to close the gap would be reduced.

mrfearless47 said...

Whether the law reads that way or not, it seems to be the way it is done in Lake Oswego in Clackamas County. I know this because we had a lot of turnover in our immediate neighborhood in the past few years, and when I'm out talking to neighbors, they all tell me that their houses are assessed at the sales price either the first year or the year after they move in. I also know, by looking it up, that our previous house was reassessed at the sales price the year following the year we sold it in Multnomah County, in Portland itself. So I suspect that what is happening is that the larger taxing entities have use sales prices to trend homes up when they can (usually upon sales) and the actual evidence supports it. I'd be perfectly happy to see this as a trend across the state. Of course, it would probably lead to another property tax revolt, but not from me. As I said in an earlier response. In 10 years, my property taxes have risen by more than $2000, and yet my house is assessed today at what we paid for it in 2006. Go figure.

Unknown said...

The kicker came about because of the inability of State Government to control costs. The State always starts a budget with the assumption that every budget line is necessary and then ramps up costs for the next fiscal period. I can remember for years as the State budget was near the end the Courts and other state departments would order new furniture, replacing perfectly good furniture, in a spend it or lose it mentality. If the Kicker was eliminated the same liberals would be screaming for more money the next year. Until Union influence is reduced to the many Dems they own and the Legislature gets more balance (which will probably never happen) Oregon will continue on the same path.

mrfearless47 said...

The "kicker" came about as a way to deflect the impact of California's Proposition 13. It was enacted years before our own Property Tax limitation (Ballot Measure 5) passed. By then, both the kicker and Measure 5 were left in place, with the "kicker" eventually enshrined in the Oregon Constitution. The way Measure 5 was enacted created an environment that fostered the consistent disinvestment in education because schools were largely left at the mercy of the State budget meisters. But they stupidly left local control of the districts in the hands of petty fiefdoms in School Boards and Superintendents that had no real responsbility to rein in expenses for personnel. Every excess benefit granted to teachers automatically went to non-teaching personnel. The result was that each district goes hat in hand to the Legislature to fund for their own (local district's) fiscal irresponsibility. To blame the Legislature is to misunderstand how the state got into the fix it was in. I have no animus against teachers (I and 4 other members of my family are or were in the business), but the disconnect between Salem and local negotiations cannot be permitted to go on. I don't think teachers and administrators are overpaid, but they are overcompensated. Blaming the Legislature enables the local beggars to escape without blame. That's the story that the news fails to tell; if people understood the way the system works, they'd be working to elect a new set of school board members and new contract negotiators. If the state has to pay for salary and benefits, then the state should be negotiating with all districts simultaneously with contracts set to expire at the end of a biennium. This comment won't make me popular, but it is reality.