Updated Reset Cabinet Report

8/8/2019 Updated Reset Cabinet Report

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Acknowledgements

Governors Reset Cabinet 2.0 Report 1December 2010

Best Steps ForwardA Budget Balancing Path To

Reset State Government

&

Overcome A Decade Of Deficits


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Acknowledgements

Governors Reset Cabinet 2.0 Report 2

I want to acknowledge the ongoing efforts of my agency directors and their management teams, thecontinuing work of his Reset Cabinet, its staff and resource persons and the engagement of the manyOregonians who joined the debate over the Reset Cabinets recommendations since release of itsreport in June 2010.

Reset Cabinet

Bruce Goldberg Director, Oregon Dept. of Human ServicesJames Sager Assistant Superintendent, NW Regional Education Service DistrictLane Shetterly Attorney, Shetterly Irick & OziasDoug Stamm CEO, Meyer Memorial TrustCory Streisinger Director, Oregon Dept. of Consumer and Business ServicesMax Williams Director, Oregon Dept. of CorrectionsDave Yaden Member, Oregon State Board of Higher Education

Staff

Tim Nesbitt Chief of Staff, Office of the Governor

Resource Persons

Scott Harra Director, Dept. of Administrative ServicesGeorge Naughton Administrator, Budget and Management DivisionTom Potiowsky State Economist

Others

I want to acknowledge the work of the many private citizens and individuals from outside of stategovernment who served on the subcommittees of the Reset Cabinet and contributed their time andeffort to developing the recommendations contained in the Cabinets report.

I also want to acknowledge the contributions to the research and analysis that informs this report by theOregon Business Council and its President Duncan Wyse, by ECONorthwest and its President JohnTapogna and by the members of the Education Reform Work Group that worked with his office duringthe past three months.

Finally, I want to acknowledge the many citizens who joined in the debate over the Reset report,including Steve Schell, Joe Smith and the many other Oregonians who hosted presentations, conveneddiscussion groups and helped to raise the profile of the findings and recommendations of the Resetreport.

Theodore R. Kulongoski, Governor


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Governors Message To The Citizens Of Oregon


Dear Fellow Oregonians:

The burdens of this recession on our people and on our state have diminished only slightly since Idelivered the report of my Reset Cabinet last June. Even after an encouraging jobs report last month,almost 200,000 Oregonians remain unemployed, and the revenues that support public services andprovide help for needy families continue to lag in a still sluggish economy.

Economists at the national and state levels have cautioned that the recovery now underway will beslower and more modest than the rebounds we experienced in the past. As a result, the decade ofdeficits that I warned of earlier this year looks even more daunting now, and the need to reset stategovernment has become all the more compelling.

Resetting state government and bringing our future revenue and spending into balance is a project thatbegan with my Reset Cabinet. I am continuing that effort with this report, so that the work of myadministration and the many individuals who joined the Reset debate can be handed off in good orderto Governor-elect John Kitzhaber and the 2011 Legislature.

I began this project with the recognition that state government will emerge from this recession with farless revenues than we need to sustain the services we currently provide. Even in a recovering

economy, it now appears that we will be unable to meet the rising costs of our responsibilities if wecontinue on our current path.

Our budget is balanced for now. But our reserves are nearly exhausted, and our borrowing capacityhas reached its practical limit.

The same prospect confronts almost every state in the nation. Oregon is not alone. But, in rising tomeet this challenge, we are very much on our own. Further federal assistance is unlikely. Our successwill depend on our own resources, our ability to work together and our determination to create a betterfuture for our people.

In this environment, we must play to our strengths in the global economy and build on our well-earned

reputation as a center of innovation and sustainability.

Recently, major energy and technology companies stepped up to announce new, multi-billion-dollarinvestments in Oregon, and last months employment report showed a gain of 7,600 jobs, including4,100 jobs in the private sector.

These investments in Oregon and the new hiring now underway by employers are votes of confidencein our people and in our future. As Oregonians, we must apply that same confidence to the ways inwhich we manage the finances and meet the core responsibilities of state government to keep ussafe, to educate our children and to protect and assist our most vulnerable and needy citizens.

As the nation recovers from this recession, I am confident that Oregon can again outpace most states

in the creation of new jobs, just as we did after the last recession. But we will not be able to do so in thenew economy if we cling to old ways of doing things and rely on outmoded benchmarks to guide ourefforts.

We must adopt more farsighted approaches to budgeting, apply a laser-like focus to the coreresponsibilities of our government and redesign the manner in which we meet those responsibilities inan era of more limited resources.

As my Reset Cabinet concluded in June, states that succeed in this effort will serve their citizens best inthe years ahead. Those that continue on their current paths will struggle and fall behind.


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Governors Message To The Citizens Of Oregon

The path to a better future will test both our minds and our will. Redesigning how we deliver services,setting aside old models to take advantage of new technologies and looking beyond government tomeet the needs of our citizens will require rigorous thinking and a willingness to make hard choices.

Examples of the decisions we face can be found throughout this report. Do we have the will to redrawthe boundaries that define our school districts, rethink the policies that are swelling our prisonpopulation and restructure our social services system?

Adjusting to a slower-growth economy will require other changes as well, including the need to revampour practices for setting employee compensation not to balance the budget on the backs of publicemployees, but to keep them in step with all working Oregonians.

No Governor before me has had to hand off a more difficult fiscal challenge to his successor. But I amable to do so with a roadmap that identifies the best next steps to meet that challenge more than halfway.

The recommendations presented in this report will, if adopted, close almost two-thirds of the budgetshortfall than now confronts us and do so in a way that helps to achieve balanced budgets for many

years hereafter. I am confident these best steps forward will put us on a path to realize the full potentialof our people and secure the prosperity that we seek in the decade ahead.

Governor



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Table Of Contents


Executive Summary ..................................................................................................................................6

A Decade Of Deeper Deficits Confront Us Now .......................................................................................8

Long-Term Deficits Require Long-Term Solutions..................................................................................14

Step 1: Carry Forward Interim Budget Reductions.................................................................................15

Step 2: Keep State Employees In Step With All Working Oregonians ...................................................18

Step 3: Keep School Employees In Step With State Employees ...........................................................23

Step 4: Modify Retiree Benefits To Keep Pers Costs Affordable ...........................................................26

Step 5: Hold The Line On Spending For Services And Supplies ...........................................................28

Step 6: Implement Reset Report Recommendations .............................................................................30

The Need To Balance Other Commitments............................................................................................36

Sustainable Solutions Are Needed To Resolve The Remaining Deficit..................................................38

Revenue Stability Remains A Critical Goal.............................................................................................40

Sources And Terminology ......................................................................................................................41

AppendicesA Report Of The Education Reform Work GroupB Report On The Joint Board P-20 Education Budget ExerciseC Strategies For Reducing The Cost Of Corrections In OregonD Recommendations Of The Reset Cabinet, June 2010E CHAMPS III (Arts And Heritage Programs)


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Executive Summary


EXECUTIVE SUMMARY

Decade of Deeper Deficits

Oregon faces a decade of even deeper deficits than the Reset Cabinet projected just six months ago.The shortfall for the states general fund budget in 2011-13 is now estimated $3.5 billion, just shy of 20percent.

The loss of one-time funds supporting the current budget for 2009-11 is accountable for just over half ofthe deficit.

These one-time funds include federal stimulus funds and the states own reserves, a total ofapproximately $1.8 billion.

The remainder of the deficit results from higher costs (for payrolls, services and supplies) andgreater demand (more Oregonians qualifying for safety net services).

Deficits in the range of 20 percent are expected to persist through 2019. Therefore, short-term ortemporary solutions to the immediate deficit are not feasible, and the need to reset state government isall the more compelling. Solutions to the deficits the state is facing must be ones that realign spendingand revenues for the decade ahead.

Addressing the Deficit in 2011

This report details six steps that can be taken to address the deficit in 2011-13 and continue to narrowthe deficit in later years. These steps are as follows.

Step Recommendation Savings in 2011-13(Millions of Dollars)

Step 1Carry forward interim budget reductionsenacted in 2010

$1,014.1

Step 2Keep state employee compensation instep with that of all working Oregonians

$280.7

Step 3Keep school employees compensation instep with that of state employees

$252.6

Step 4Modify retiree benefits to keep PERScosts affordable

$258.6

Step 5Hold the line on spending for services andsupplies

$124.7

Step 6Implement Reset Reportrecommendations

$295.6

The savings from these recommendations would total $2.2 billion in the next biennium, or almost two-

thirds of the projected deficit.

If all of these recommendations are adopted by the 2011 legislature and the Governor-elect, theshortfall for will be reduced from 20 percent to seven percent.


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Executive Summary


New Policy Recommendations

This report builds on the 38 recommendations contained in the Reset Cabinet report and providesdetailed estimates of savings from those recommendations that the Cabinet believes are feasible foradoption in 2011-13. It also includes more specific recommendations to modify PERS benefits goingforward.

Finally, this report includes to following new or modified policy recommendations from the Governor.

Employee Compensation

Terminate the PERS Individual Account Program (IAP) and the states payment of the six percentemployee contribution to that program. The state can no longer afford to maintain two retirementprograms. It is obligated to maintain the pension program and guarantee its benefits, but it is notobligated to continue the IAP. By terminating the IAP, the state will save more than the cost of thePERS rate increase attributable to current employees.

Adopt value-based benefits. The Public Employees Benefit Board should establish a lower-cost,value-based benefits plan. The state could then peg its contributions for employee health benefits to

the cost of that plan. The benefits, costs and contributions to such a plan should be comparable tothose offered by large public and private employers in Oregon and comparable states.

Add a public member to PEBB. To ensure that the Public Employees Benefit Board is not subject tolabor-management deadlocks, the legislature should add a tie-breaking public member to theboard.

K-12 Funding

Establish a state-defined maintenance of effort requirement, keyed to minimum hours ofinstructions, which school districts must meet to receive their full share of state funding. Futurefunding from the State School Fund be conditioned on each districts compliance with the minimum

school year requirement set by the state Board of Education, with no further approval of waiversfrom this requirement and penalties for non-compliance in the form of proportionate reductions instate support for districts that fail to comply.

Public Safety

Establish a task force on sentencing guidelines involving all three branches of state government.The Governor supports the creation of a task force representing all three branches of stategovernment (executive, judicial and legislative) to develop proposals for more flexible sentencing

guidelines for Oregons criminal justice system.


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A Decade Of Deeper Deficits Confront Us Now


A DECADE OF DEEPER DEFICITS CONFRONT US NOW

The state economist has delivered two additional revenue forecasts since the June Reset report. Theseforecasts found that the hoped-for economic recovery will be slower to materialize and produce moremodest gains than previously predicted. As a result, the decade of deficits that the Reset Cabinetwarned of earlier this year has turned into a decade of even deeper deficits, beginning July 2011.

It is now expected that both Oregon and the nation will not regain the jobs lost in this recession until2015. And our states general fund spending power, as measured by revenues adjusted for inflationand population growth will not reach pre-recession levels until the 2016-17 fiscal year.

The bottom line for the states next general fund budget in 2011-13 has dipped from a projected deficitof $2.7 billion estimated earlier this year to more than $3.5 billion now. This represents a shortfall ofalmost 20 percent when compared to the costs of current services and obligations projected forwardthrough the next budget period. (See Table A.)

Approximately half of this shortfall results from the loss of one-time funds, both federal stimulus fundsand the states own reserves. These funds have been used to sustain services in the current budgetperiod but will have to be replaced in the next budget period. The other half of the shortfall is due to

higher costs and more citizens qualifying for safety net services.

Further, the decline in revenues in the later years of the decade has become even more problematic.Prior to the recession, state forecasters projected biennial revenues of $28.6 billion in 2017-19. Thatnumber was reduced to $23.2 billion in the June Reset report. Now, those same forecasters tell us notto expect more than $20.5 billion in that period. When combined with the projections for higher costsand greater demands for state services, the states budget shortfall throughout the next decade isexpected to persist at approximately 20 percent of current service levels, if nothing is done to bringongoing expenditures into balance with expected revenues. (See Table B.)


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In its June report, the Reset Cabinet described a recovery that would produce rates of economic andrevenue growth in sync with long-term trend lines not the kind of dramatic bounce back gains thatOregon and the nation have enjoyed after prior recessions, but more of a normalizing return to anaverage rate of revenue growth amounting to six to seven percent a year. Now state forecasters expecta new normal period, in which revenues slow to five to six percent a year. This new normal hasprofound implications for state government and the people it serves. It bends the states revenue curvedownward when we can least afford it in a period in which the baby boom generation entersretirement, the elderly and the unemployed create greater needs for state-financed services, and theproportion of our population in the workforce begins to decline.

Chart 1A:Working-age Population (1980 2020)

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Forecast

Chart 1B:Elderly Population (1980 2020)

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It is important to recognize that a slower-growing economy and a more slowly growing cohort of themiddle and higher-income Oregonians who provide the greatest support for state services will not beable to match the rapidly growing needs for those services and the higher costs now projected todeliver them. (See Charts 1A and 1B.)

Whatever the variations and margins of error in the states quarterly revenue forecasts, there is aninescapable reality in the story that these forecasts repeatedly portray.

Members of the Reset Cabinet have used an aircraft analogy to describe this story in visual terms. It isas if the state has hit an air pocket in its economic and revenue trajectory the same free fallexperienced by working families and businesses in what is now called the Great Recession. The climbback from this sudden drop will be long, slow and arduous. We cannot expect to regain our old flightpath any time soon. In addition, state government now faces higher costs for fuel (the cost of deliveringservices) and is taking on more passengers (the greater number of Oregonians who qualify for itsservices.) In this context, we cannot afford to keep state government on autopilot. We need to devise acourse correction that responds to the new circumstances we are facing.

Slower revenue growth is one factor in this new environment, reflecting slower growth throughout theeconomy. But this is not a problem the state can expect to solve to any great degree with higher taxes,

nor is it prudent to count on higher economic growth in the distant future to close the budget gap thestate faces today. The Reset Cabinet made these points in its June report, and this report expands onthose points below (see the section on Sustainable Solutions).

By contrast, higher costs and greater demands for services are just as large a contributor to the decadeof deficits and are largely factors within the states control. An analysis of these cost drivers ispresented in Table C.

Table C: Cost Drivers Summary

Components of 2011-13 Expenditure Increases

Beyond Replacement of One-Time Funds(Millions of Dollars)

Payroll Cost Increases

Phase-in of Collectively Bargained steps added in 2010 $ 42

Restoration of Furloughs and 2011-13 Step Increases $ 130

Maintain state employee health benefits at 2011 cost levels for the remainder of 2011-13 $ 46

Increase state employee health benefits for projected increases that will occur in 2011-13 $ 58

Potential Cost of Living Adjustment for State Employees in 2011-13 $ 118

PERS (Both state and school district costs)

State Employee Costs $ 127

School District Costs $ 222

Other K-12 Personnel Services Increases $ 383

Inflationary Cost Increases

State Inflationary cost increases (including provider payments) $ 296

K-12 Services & Supplies Inflation $ 20

Funding for projects started midway through 2009-11 $ 239

Higher number of Oregonians qualifying for safety net services $ 466

Increase in Debt Service $ 172

Set aside Emergency Funds for 2011-13 $ 40

Total Increase $ 2,359


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These cost drivers took on added significance in discussions with organizations, such as the OregonBusiness Council, which focused on a resource-based approach to building the budget going forward.In such an approach, the starting point for budgeting would be the resources identified for the nextbiennium. These resources are now estimated to be just under four percent less than the total generalfund resources sustaining the current budget, including the one-time funds received from the federalgovernment and deployed from the states reserves.

This approach does necessarily lead to different budget balancing solutions, as building the budgetfrom revenue side of the ledger will still leave the state short of sustaining current services on theexpenditure side. But it does highlight that the most daunting challenge in the next budget period arethe increased costs projected to sustain those services. If the states general fund programs have onlyfour percent less in total resources to work with in the next biennium after the replacement of one-timeresources, why are they facing a shortfall of 19 percent? The answer lies in Table C and the increasedcosts and demands it represents.

The Reset Cabinet took a hard look at these cost drivers to come up with its budget balancingsolutions. This report does the same, with a new focus on the next biennium and a continuedcommitment to address the decade of deeper deficits that confronts us now.


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Long-Term Deficits Require Long-Term Solutions

LONG-TERM DEFICITS REQUIRE LONG-TERM SOLUTIONS

This report details what the Reset Cabinet has identified as the best next steps to reduce futureobligations, control costs, achieve efficiencies and redesign the delivery of services. It alsoacknowledges that, as a last but necessary resort, the state will have to cease providing certainservices, restrict who is eligible for others and find ways to shift support for some of what it pays fornow to other public or private resources. Finally, this report reiterates the need to stabilize revenuesand rebuild reserves by amending the states kicker law.

Most importantly, this report places its recommendations in the context of an eight-year planninghorizon, from July 2011 through June 2019, in which the state faces persistent deficits in the range of20 percent per biennium.

Chart 2:A Decade of Deeper Deficits Ahead

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Revenues (11/2010)

Expenditures

This longer-term outlook should convince everyone engaged in the budget balancing process thatattempting to solve a recurring deficit by shifting costs to later budget periods can only be counter-productive. In this environment, kicking the can down the road is like planting land mines for thosewho come after us.

Only solutions which help to close the budget deficit over time are put forward in this report.



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Step 1: Carry Forward Interim Budget Reductions

STEP 1: CARRY FORWARD INTERIM BUDGET REDUCTIONS

Carry forward the interim budget reductions enacted in 2010

Savings from Current Service Level in 2011-13 =

$1,014.1 Million

Chart 3:Carry Forward Interim Budget Reductions

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Revenues (11/2010)

Expenditures

Continue Allotment Cuts

As state revenues continued to decline this year, the Governor initiated two rounds of spending cutsamounting to $954.6 million, or 7.7 percent of the current two-year budget. Of this amount, about $330million in cuts were averted with the use of one-time federal assistance and the states own reservefunds.

State law (ORS 291.261) requires that interim cuts of this kind (known as allotment reductions) beapplied in equal percentages to all state general fund programs across-the-board. Lottery-fundedservices are excluded from this process, as are debt payments for state bonds. All other general fundservices must be cut equally.

The Governor has objected to the requirement to enact interim cuts on an across-the-board basis, andhis Reset Cabinet recommended giving the Governor the authority to enact targeted allotmentreductions in the future. But, as the law now stands, his reductions were initially applied in equalpercentages to all general fund services.

Subsequent to the Governors actions, the legislature, in most cases with the Governors agreement,created exceptions to his across-the-board cuts by tapping reserves or applying new federal funds tosave certain services.



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These exceptions included the following.

The Legislative Emergency Board voted in July to cancel $15.4 million worth of reductions to

services for seniors and the disabled, including payments to nursing homes, and directed the

Dept. of Corrections to hold off on prison closures to avert the early release of prisoners.

K-12 schools benefited from $118 million in federal stimulus funds known as Education Jobsfunds, enabling the Governor and the Legislative Emergency Board to offset what would have

been another round of allotment reductions for schools in September of this year.

Health and human services benefited from another $123 million in federal Medicaid funds,

which has enabled the Dept. of Human Services to postpone any further reductions from the

second round of allotment reductions.

Other adjustments and use of one-time funds were arranged to forestall smaller reductions in

the Oregon Youth Authority, the Dept. of Revenues tax collection functions, early childhood

programs and the funds that finance District Attorneys salaries.

The effects of the interim reductions that did take effect were significant.

Education:K-12 schools took reductions of $235 million in July, following an infusion of $200 million instate reserve funds enacted by the Legislature over the Governors veto in February. Districts thatheeded the Governors advice to hold these extra funds in reserve were better able to weather the Julyreductions. Others were forced to cut teaching positions and school days. More than 100 districts thatresponded to a survey by the Confederation of School Administrators reported cutting an average oftwo student contact days in the current school year. Eugene School District 4J and Lincoln CountySchools reported cutting six and ten school days respectively.

Public Safety:The Dept. of Corrections closed a minimum security prison in Salem by moving inmatesto available beds in other prisons. But it will be all the more difficult for future cuts in the departmentsbudget to be accomplished without releasing inmates.

Human Services:The Dept. of Human Services (DHS) reports that the elimination of positions andincreased demands for services are taking a toll in child welfare, evidenced by the fact that overdueinvestigations of child abuse reports are up 30 percent and children are staying longer in foster homesbecause of inadequate staffing to process adoptions. Similarly, reductions in staffing in services forseniors and persons with disabilities have created a backlog of 1,700 persons seeking disabilitycertifications to qualify for the Oregon Health Plan and delays in licensing inspections of assisted livingand residential care facilities.

Other Programs:Reductions in agencies which did not benefit from access to additional federaldollars or state reserve funds amounted to 7.7 percent of their biennial budgets. Cuts of this magnitudehit agencies such as the states Water Resources Dept., which are heavily dependent on general funds,especially hard.

Almost all affected agencies eliminated vacant positions or have continued to freeze positions to securesavings from attrition. Many have done both. In these cases, the effects on service levels have yet to befully felt.


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It is important to recognize that these interim cuts were devised when labor agreements prevented theimplementation of other cost cutting options. However, the cuts that took effect were recommended bythe affected agencies and withstood scrutiny by the legislature.

Recommendations

Given the magnitude of the deficit facing the state, carrying forward these cuts or equivalent reductionsis a necessary first step to addressing the shortfall in 2011-13. Doing so will bend the expenditure curvefor that biennium by more than one billion dollars and reduce the states obligations by even greateramounts in the future.


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Step 2: Keep State Employees In Step With All Working Oregonians

STEP 2: KEEP STATE EMPLOYEES IN STEP WITH ALL WORKING OREGONIANS

Keep the pay and benefits of state employees in stepwith those of all working Oregonians

Savings from Current Service Level in 2011-13 =$280.7 Million

Chart 4: Keep State Employees In Step With All Working Oregonians

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Align State Employee Growth

Controlling costs in the state budget necessarily involves controlling labor costs. But such controlsshould not be arbitrary. Jobs should be paid what they are worth in the larger economy, with pay andbenefits on par for employees doing similar work in the public sector and the private sector.

But when the economy is growing slowly and employees compensation grows slowly in tandem withthe economy, the state should align its budget for labor costs to reflect those trends. Such arealignment, which appears at this time to require a slowing of the rate of compensation increases

rather than a freezing or reduction of compensation, will go a long way toward solving the projectedshortfall for the next biennium.

NEW DEVELOPMENTS

Since release of the Reset Cabinet report, the Governor continued in effect the freeze on salaries formanagement and unrepresented employees and asked employee organizations to modify theircontracts to follow suit. None agreed to do so. As a result of these actions and the ongoing effect ofunpaid furloughs throughout the state workforce, the average pay of represented employees will



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increase approximately two percent in this biennium, while the average pay of management andunrepresented employees will decline by almost three percent.

But pay is only part of the story, as further developments this year have highlighted.

2011 Compensation Survey

The states Labor Relations Division recently completed an updated survey of total compensation costsfor a cross-section of state jobs and their counterparts in the larger labor market. The findings of thenew survey were essentially unchanged from the findings of the 2009 survey. Both surveys show that,when looking at an average of the results for all jobs studied, the combined pay and benefit cost ofstate employees is close to par with the combined pay and benefit cost of their counterparts in theprivate and public sector.

Chart 5: Labor Costs: Findings

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The average total compensation of jobs at all levels of state government is slightly ahead of the total for all comparable public

and private sector jobs in the larger labor market and slightly behind the total for all comparable private sector jobs.

Retirement Cost Increases

Pursuant to state law, the Public Employees Retirement System (PERS) must raise employercontribution rates to begin to make up for losses incurred on its investments in 2008 and get back ontrack to full funding for its promised pension benefits within 20 years. The first rate increase of 6.8percent of payroll will take effect for state agencies on July 1, 2011, to be followed by further increases,now estimated at five percent and three percent of payroll respectively in 2013 and 2015. In addition tothese costs, state law provides for a separate retirement savings plan (known as the Individual AccountProgram or IAP), supported by employee contributions of six percent of payroll. The state and theuniversity system pick up these employee contributions (a practice known as the six percent pickup)pursuant to the terms of their collective bargaining agreements and management compensation plans.



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Once adjustments are made for the states pension obligation bonds, which reduce the states effectivecontribution costs, the rates paid by the state for both the PERS pension and the separate IAPretirement savings plan will rise from 15.1 percent of payroll in the current biennium to 21.2 percent in2011-13. These increases will raise the states general fund payroll costs by $127.1 million in the nextbiennium.

Oregons fully-paid pension plan is becoming less common as a standard for state employees aroundthe country. Most states have contributory plans, in which employees share in the cost of funding theirretirement benefits. In such plans, employee contribution rates are often increased when unfundedliabilities develop. Fifteen states increased employee contribution rates for their retirement plans thisyear. The state of Arizona apportions its retirement costs equally with its employees, and raised bothemployer and employee contribution rates from 9.6 percent this year with additional increases plannedfor future years. California state employees will have to pay an additional three percent from theirpaychecks to their retirement plan next year. State employees in Iowa and Minnesota will see theircontribution rates increase to 5.25 percent and 6.25 percent respectively in 2011.

Health Benefit Cost Increases

The rates paid by the state for employee health benefits (medical, dental and vision) will increase by

9.9 percent for the 2011 plan year. These increases are the equivalent of three percent of salary for thetypical state employee and will increase the baseline costs of health benefits in the states general fundprograms by $46 million in 2011-13, before any new increases are considered for the 2012 and 2013plan years.

The composite cost for health, dental and vision benefits and a $5,000 life insurance benefit is nowestimated at $1,263 per employee per month, including all dependents. This cost is paid in full by thestate for all full-time employees.

These new rates were adopted by the Public Employees Benefit Board (PEBB) after the fourmanagement representatives on the board deadlocked with the boards four employee representativesover changes to benefits that would have reduced costs and boosted reserves for PEBBs self-insured

health plans.

Oregon is one of two states that pay the full cost of health benefits for employees and their dependents(the other is Alaska) and is the only state to do so in plans with no deductibles.

According to the Kaiser Family Foundation, working Americans pay an average of $333 per monthtoward their health benefit premiums for full family coverage; only five percent of such workers havesuch coverage fully paid by their employers. Also, most working Americans have deductibles in theiremployer-sponsored plans, although the incidence of deductibles varies from a high of 77 percent inpreferred provider plans (PPOs) to a low of 28 percent in health maintenance organizations (HMOs).The average deductible for single employees covered by PPOs is $675 per year and $601 per year inHMOs.

Increases Projected For All Working Oregonians

According to the states Office of Economic Analysis, total compensation (wages and benefits) in theOregon labor market is expected to increase by 3.2 percent in 2011, 2.9 percent in 2012 and 2.9percent in 2013.

Based on these data, this report uses as its working assumption that working Oregonians will see anaverage increase in their total compensation of three percent per year.


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What The Budget Assumes

The state budgets current service level for 2011-13 assumes the following increases in compensationfor state employees. (See Table D.)

Table D:Increases in State Employee Compensation Budgeted for 2011-13

Compensation ComponentsGeneral Fund and

Lottery Funds Cost(Millions of Dollars)

Phase-in of Collectively Bargained steps added in 2010 $42

End of furloughs and restoration of step increases $130

Maintain 2011 health benefit contribution levels $46

Increased contributions to maintain existing health benefits $58

General salary increase of 2.5% and 2.0% $118

PERS rate increase $127

The compensation items listed above, combined with the phase in of new positions, are estimated toincrease payroll costs during the 2011-13 biennium by an average of 5.5 percent per year.

But the increases measured from the beginning to the end of the biennium for individual employeeswould be higher. For a typical state employee, these increases, if enacted, would produce an increasein total compensation of more than 13 percent by the end of the biennium on June 30, 2013 anaverage of 6.5 percent per year.

Conclusions

Because of PERS cost increases (which are unavoidable) and other pay and benefit increases (whichcan be controlled by state policy makers), the increase in total compensation budgeted for stateemployees in 2011-13 (at 6.5 percent per year) is expected to more than double the rate of increaseprojected for Oregonians in the larger labor market (at three percent per year) over the next two years.

Avoiding increases of this magnitude is necessary to keep the pay and benefits of state employees instep with those of working Oregonians and will go a long way toward closing the states deficit in 2011-13 and beyond.

Recommendations

The state should limit increases in total compensation (pay and benefits) for its employees to no morethan the increases for all working Oregonians, which is expected to total three percent per year. Doingso would shave the 2011-13 general fund deficit by $280.7 million if applied to both employees of stateagencies and the Oregon University System.

This can be accomplished without reducing employee paychecks, but only if PERS Individual AccountProgram and the six percent contribution to that program are terminated.

Terminate the IAP and the states payment of the six percent employee contribution to thatprogram. The state can no longer afford to maintain two retirement programs. It is obligated tomaintain the pension program and guarantee its benefits, but it is not obligated to continue theIAP. By terminating the IAP, the state will save more than the cost of the PERS rate increase


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attributable to current employees, leaving funds to help cover health care cost increases orprovide a modest raise during the biennium.

The Governor has prepared legislation to eliminate the IAP as of January 1, 2012. Thislegislation will be introduced in the 2011 legislature.

Controlling health benefits costs is critical to the goal of keeping the cost of state employeescompensation in step with that of all working Oregonians.

Adopt value-based benefits. The Public Employees Benefit Board should establish a lower-cost,value-based benefits plan. The state could then peg its contributions for employee healthbenefits to the cost of that plan. The benefits, costs and contributions to such a plan should becomparable to those offered by large public and private employers in Oregon and comparablestates.

Add a public member to PEBB. To ensure that the Public Employees Benefit Board is notsubject to labor-management deadlocks, the legislature should add a tie-breaking publicmember to the board.

The Governor has prepared legislation to add a ninth member with experience in health policy or riskmanagement to the Public Employees Benefit Board. This legislation will be introduced in the 2011legislature.


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Step 3: Keep School Employees In Step With State Employees

STEP 3: KEEP SCHOOL EMPLOYEES IN STEP WITH STATE EMPLOYEES

Ensure that the states payments to K-12 schools and community collegesreflect the states limit on compensation increases for state employees


Chart 6:Keep School Employees In Step With State Employees

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Align K-12 Employee Growth

The state provides approximately two-thirds of the operating funds for Oregons 197 school districts andapproximately two-fifths of the funds for Oregons 17 community college districts, in addition to thesupport provided by local property tax payers.

Although governed by local boards, both the K-12 and community college systems respond to goalsand policies set by the legislature and the state Board of Education. Also, their share of the statesgeneral fund budget now amounts to more than 40 percent.

Employees of community college and school districts are covered by the Public Employees RetirementSystem (PERS). As a result, all of these districts, like the state, now face steep increases in payrollcosts due to increases in PERS contribution rates that take effect on July 1, 2011.

All of these factors have heightened the need to address labor cost controls when the state cuts acheck to these districts.



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NEW DEVELOPMENTS

Since release of the Reset Cabinet report, payroll cost increases have materialized as the reportexpected, but discussions with educators have generated new ideas for structuring the states fundingfor K-12 schools.

Retirement Cost Increases

The PERS Board has announced that its contribution rates for K-12 and school districts will rise by sixpercent of payroll in 2011-13, raising costs for those districts by $395 million. Some $222 million ofthese increased costs will be reflected in the states payments to these districts.

Health Benefit Cost Increases

School districts have begun to pool their employee health care programs through the Oregon EducatorsBenefit Board (OEBB). OEBB covers 185 school districts, 13 charter schools, 19 Education ServiceDistricts and 16 community colleges, with close to 55,000 employees and another 83,000 dependentsenrolled in its medical plans.

In general, school employees, unlike state employees, share in their health care costs through premiumpayments, deductibles and co-pays. This can have a positive effect on costs in the selection ofcoverage options. Although OEBB had expected its medical premiums for members to increase by 11percent in the coming year, the actual average premium for 2010-11 was 6.8 per cent. OEBB staffattribute this improvement to their efforts at educating members on the benefits of a lower premium witha higher deductible versus a higher premium with a lower deductible.

Consolidated Bargaining or Conditional Funding

The Reset Cabinet report recommended that the state consider moving to statewide or regionalcollective bargaining for K-12 employees or set conditions on its funding for K-12 districts in order tocontrol the labor cost components of budgets for which it provides the lions share of funding.

Discussions with educators and education advocates since then have generated a new idea forconditional funding to begin to address this issue. This new idea for a maintenance of effortrequirement is presented in the updated Reset recommendations under Education Through HighSchool below (see Step 6: Implement Phase 1 Reset Recommendations).

Conclusions

For school employees, as for all employees, rising health care costs are an ongoing issue. But they arenot the outsized issue they have become for state employees.

PERS, on the other hand, looms just as large as a major cost driver for schools both for district

budgets and the state budget and their ability to meet educational needs of the families they serve.

Given the magnitude of the states contributions to school districts and their mutual challenge in dealingwith dramatically higher payroll costs because of rising retirement cost, the state should set limits onthe compensation increases it will pay for. This can be done by quantifying those limits in its budgetprocess and by specifying expectations for how its funds will and will not be used by local districts.

The principle that state employees should stay in step with all working Oregonians when it comes topay and benefits is equally valid for school employees. Whether teachers should be paid more ingeneral or paid in ways that are tied to educational outcomes are separate matters to be determined by


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policy decisions and the availability of funds to achieve such goals. But when it comes to setting abaseline for funding compensation increases for school employees, staying in step with the states ownworkforce and, in turn, with all working Oregonians provides a reasonable guide post for determiningthe states support for education budgets.

Recommendations

The state should restructure its funding for K-12 and community college budgets to reflect the threepercent annual increases in total compensation targeted for state employees and expected for allworking Oregonians over the next two years. Doing so would reduce the states general fund deficit by$252.6 million in 2011-13.


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Step 4: Include Retirees In Solutions To Keep PERS Costs Affordable

STEP 4: MODIFY RETIREE BENEFITS TO KEEP PERS COSTS AFFORDABLE

Modify tax benefits and cost-of-living increases for PERSretirees to contribute to the rebuilding of the PERS investment assets that

support their retirement benefits


Chart 7: Modify Retiree Benefits To Keep PERS Costs Affordable

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Align State Employee GrowthAlign K-12 Employee Growth

Include Retirees in Solution

The total cost of the increase in PERS contribution rates will exceed one billion dollars in the nextbiennium when applied to all state agencies (supported by general fund, other funds and federal funds),the university system, all K-12 and community college districts and the cities, counties and specialdistricts that participate in PERS.

PERS has calculated that fully one-third of all additional retirement contributions to be paid by publicemployers in Oregon in 2011-13 is attributable to the replenishment of funds needed to guaranteebenefits to retirees and inactive members (those who have separated from employment with vestedclaims to collect their retirement benefits at later date). These legacy costs stem from benefitspromised to those already retired (who now represent 57 percent of PERS total liabilities) and inactivemembers (whose claims on the system now represent eight percent of total liabilities). Total legacycosts will continue to show up in the PERS contribution rate increases over the next six years andaccount for more than $400 million per year in additional payments to PERS by all public employerswhen the higher rates are fully implemented.



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Step 4: Include Retirees In Solutions To Keep PERS Costs Affordable


These costs arose after PERS determined that it had fully funded its guaranteed benefits for retirees,following reforms enacted by legislation in 2003 and strong stock market returns for several yearsthereafter. When PERS lost 27 percent of the value of its assets in the market meltdown of 2008, PERSemployers were told they would have to pay more into the system to help fund benefits they hadthought were already fully funded including those for former employees and retirees. In 2011-13, thefirst payments toward these obligations for retirees and former employees come due, amounting tomore than $350 million and increasing to more than twice that amount over the next two biennia.

As was the case during the PERS funding crisis of 2003, the issue for policy makers is whether toexamine benefits paid to those already retired to help cover the extra payments that public jurisdictionswill have to make to fully fund their benefits for a second time. Arguably, retirees should share in theeffort to keep their basic benefits funded, if mechanisms can be devised to protect those least able todo so. But legal questions will arise as to whether all benefits promised are guaranteed anduntouchable.

Conclusion

Given the magnitude of the refinancing required to keep PERS able to meet its obligations to retirees,retirement benefits should be included in solutions to make this refinancing more affordable for public

employers and lessen the squeeze on public services that will otherwise result from this diversion ofscarce resources to the retirement system.

Recommendations

The Reset Cabinet recently endorsed the following three approaches.

1) Eliminate tax remedy payments for non-Oregon residents. Out-of-state residents now receiveenhanced benefits to make up for the taxation of PERS benefits by the state. But those who liveoutside of Oregon are not subject to Oregon taxes. Eliminating this benefit would save $5.9million for state general fund agencies and $17.9 million in the states support for K-12 andcommunity college districts in 2011-13. For all PERS employers, the savings would amount to

$72 million in the biennium.

2) Require ten years of service to qualify for annual cost-of-living adjustments (COLAs). COLAsare a costly feature of the PERS system, amounting to approximately 17 percent of totalliabilities. Currently, employees qualify for COLAs when vested, and seven percent of newretires retired with less than ten years of service in 2009. Establishing a ten-year threshold forCOLAs would save $7.4 million for state general fund agencies and $22.4 million in the statessupport for K-12 and community college districts in 2011-13. For all PERS employers, thesavings would amount to $90 million in the biennium.

3) Limit COLAs to the first $2,000 per month of a retirees benefit. This would protect low-incomeretirees and still give those with higher benefits some increases for inflation. This change would

save $47.3 million for state general fund agencies and $143.5 million in the states support forK-12 and community college districts in 2011-13. For all PERS employers, the savings wouldamount to $576 million in the biennium.


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Step 5: Hold The Line On Spending For Services And Supplies

STEP 5: HOLD THE LINE ON SPENDING FOR SERVICES AND SUPPLIES

Assume no inflationary increases for what the state spends onsupplies and payments to third-party providers.


Chart 8: Hold The Line On Spending For Services And Supplies

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Align K-12 Employee GrowthInclude Retirees in Solution

Eliminate Inflation

As part of the current service level projection, state expenditures for non-personnel costs are generallyincreased by an inflationary factor to recognize that the costs of goods and services increase over time.For the 2011-13 biennium, the general inflation factor was 2.4 percent for the two year period, or about1.5 percent per year.

This general inflationary factor is applied to the purchase of services and supplies and specialpayments. Services and supplies include the purchase of physical items like office supplies and desks.Special payments include the amount of money budgeted by agencies to pay contractors for servicesor providers for serving Oregonians, from county governments to assisted living facilities.

With a constrained revenue environment in 2011-13, and low inflationary pressures expected during thenext two years, eliminating inflationary growth in the next biennium does not seem unreasonable. Thiswill translate into agencies needing to purchase more efficiently, or find other ways to manage withlower resources.



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Step 5: Hold The Line On Spending For Services And Supplies


Recommendation

The state should hold the line on budgeted payments for services and supplies by eliminatinginflationary increases for these expenditures. Doing so will reduce projected expenditures by about$124.7 million General Fund in the 2011-13 biennium.


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Step 6: Implement Reset Report Recommendations

STEP 6: IMPLEMENT RESET REPORT RECOMMENDATIONS

Implement Reset Report recommendations whichcan be initiated in the next biennium


Chart 9: Implement Reset Report Recommendations

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Revenues (11/2010)ExpendituresContinue Allotment CutsAlign State Employee GrowthAlign K-12 Employee GrowthInclude Retirees in Solution

Eliminate InflationOther Reset Recommendations

The Reset Cabinet report released in June contained 38 recommendations, of which ten appeared tobe feasible to implement in whole or in part in the 2011-13 biennium and likely to generate quantifiablesavings in that period and beyond.

These recommendations are summarized in the following sections and updated where applicable withnew information and recommendations from the Reset Cabinet.

The total savings for all of these recommendations are estimated at $295.6 million, excluding thesavings from the labor cost recommendations described in Steps 2 through 4 above.

The full list of recommendations from the Reset Cabinets June 2010 report are attached asAppendix D.

EDUCATION THROUGH HIGH SCHOOL

Following release of the Reset report, the Governors Office convened a work group of educators andeducation advocates to review the original recommendations of the Reset Cabinets subcommittee on



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K-12 education, with particular attention to its recommendations for shared services and consolidationsof school districts and Education Service Districts (ESDs). The work group also debated a variety ofproposals to improve teaching and learning and generated a discussion by the Reset Cabinet regardingnew conditions to be tied to the states funding for K-12 districts. Its full report can be found inAppendix A.

In addition to the work group, a committee of the Joint Boards of Education conducted a budget-writingexercise for all levels of the Pre-K through 20 education continuum. A summary of its conclusions canbe found inAppendix B.

Shared Services and ESDs

The work group advanced the discussion regarding shared services and ESDs by focusing on thepotential for moving beyond the historic place-based services model, geared to geographically definedESDs, to a model that encourages the provision of shared services on a regional and statewide basisand options for school districts to shop for certain services from other ESDs and, potentially, otherschool districts.

The work groups research and discussions confirmed the potential savings from shared services andthe consolidation of functions, although not necessarily the outright merger of ESDs . A budget-based

approach to motivate reform could begin with a reduction in ESD funding from 4.75 percent of the StateSchool Fund to 4.0 percent by the second year of the 2011-13 biennium along with the phase-out ofsubsidies for small ESDs.

Improvements in Teaching and Learning

The work group was unable to reach unanimity on education reforms beyond the need for continuedinvestments in mentoring and professional development. There was substantial interest in moving to anappointed Superintendent of Instruction. The most difficult issue involved the scope and design of asystem to use student achievement data to inform the evaluation of teachers.

The work group noted the soon-to-be completed recommendations of the House Bill 3619 (2010) task

force whose focus is to build stronger connections between the institutions of higher education that trainteachers and the schools the employ them.

Conditions for K-12 Funding

Discussions at the work group generated a new proposal from the Reset Cabinet to establish a state-defined maintenance of effort requirement, keyed to minimum hours of instruction that school districtsmust meet to receive their full share of state funding.

The state Board of Education has defined and set in rule minimum hours of instruction for K-12 districtsfrom 810 hours per year in Grades 1-3 to 990 hours in Grades 9-12. These minimums are low bynational standards and are routinely waived for districts seeking to balance their budgets. Four Oregon

school districts reported falling below these minimums in the 2009-10 school year, and others haveinquired about the process for waivers of the requirement in the current school year.

Available data suggest that Oregon has one of the lowest, possibly the lowest, school year in thecountry.

This proposal arose from concerns about the diminished school year in Oregon and the Governorsinterest in enhancing the budget debate about K-12. The Governor has asserted that the states fundingfor K-12 has been overly focused on the number in isolation from the states educational objectives.He has also expressed concern about the states inability to control labor costs in school district


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budgets. Finally, what crystallized the Reset Cabinets thinking on this subject was the report ofdiscussion at the last meeting of the Governors education work group, in which superintendentsexpressed a strong aversion to any further reductions in the school year.

The Cabinet concluded that the states funding for K-12 should be made contingent on a maintenanceof effort requirement to meet the minimum hours in the Board of Educations required instructionaltime rule, with no exceptions. If a district were to reduce instructional time below the required level tosave $100,000, it would lose $100,000 in state funds. The Cabinet recognized that this would force adistricts budget-balancing cuts into program, class size, administrative expenses and employeecompensation. But the Cabinet concluded that this single-factor approach was focused on the mostimportant educational benchmark and would be a step in direction of tying a deliverable to the statesfunds.

Further, the Cabinet recognized that this requirement could be viewed as a stick, rather than acarrot. But the carrot could emerge from ongoing discussions initiated by the Governor-elect whichhave been focused on guaranteeing a minimum funding level for K-12 in the next decade. Thus, thebaseline funding would be keyed to instructional time, but additional funding above the baseline couldbe viewed targeted to expanding programs, reducing class sizes and to innovations and improvements.The Cabinets recommendation can be summarized as follows.

Establish a state-defined maintenance of effort requirement, keyed to minimum hours ofinstructions, which school districts must meet to receive their full share of state funding. TheReset Cabinet recommends that future funding from the State School Fund be conditioned oneach districts compliance with the minimum school year requirement set by the state Board ofEducation, with no further approval of waivers from this requirement and penalties for non-compliance in the form of proportionate reductions in state support for districts that fail to complywith this condition.

The decade of deficits is certain to constrain education funding going forward, making the need toidentify and achieve a long-term baseline for K-12 funding both more challenging and more compelling.Still, the enforcement of minimum instructional hours could prove to be a viable path to that goal.

Further, it should give the legislature a sense of what they are buying with their allocations for K-12and set up useful discussions about the use of additional dollars, when they are available.

The P-20 Budget

The Joint Boards of Education budget committee in September and October to fashion an EducationEnterprise budget, from pre-K through post-graduate programs, at three different levels of potentialfunding for 2011-13. In setting its priorities at each level, the Committees recommendations focused onkeeping the state moving towards its 40-40-20 education attainment goals, support of the commoncore standards, productivity in education delivery, and commitment to need-based aid for students incollege.

A detailed report of their recommendations is presented inAppendix B.

Recommendations Relevant to 2011-13

The recommendations for which savings are projected for the next budget period and beyond are:

Develop a shared services model across all school districts; Replace ESDs with fewer regional providers; Create a statewide virtual learning system.


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EDUCATION BEYOND HIGH SCHOOL

Since release of the Reset subcommittees report on post-secondary education, a joint legislative workgroup, co-chaired by Sen. Mark Hass and Rep. Tobias Reed, has been holding hearings on many of itsrecommendations, including the adoption of the 40-40-20 goal for four-year degrees, two-year degreesand high school diplomas and the development of a new compact between the Oregon UniversitySystem and the state.

Further, both OUS and the states community colleges have reported record enrollments in the 2010-11school year, which have in turn generated additional tuition revenues that have buffered the effects ofinterim budget reductions since June.

Finally, OUS continues to plan for a budget reduction of 15 percent below its projected current servicelevel for next biennium, provided the labor cost savings detailed in Step 2 are achieved and itscompact with the state allows more autonomy in managing its budget.


The recommendations for which savings are projected for the next budget period and beyond are: The reduction to 15 percent below current service level for OUS; and, Savings to be shared by the state and OUS from a reduction in state assessments to OUS

under the new compact.

HEALTH AND HUMAN SERVICES

Since release of the Reset Cabinet report, the Oregon Health Authority has been preparing a report tothe 2011 legislature regarding the establishment of an insurance exchange and plans for costcontainment in the Oregon Health Plan and the larger health care delivery system.


The recommendations in these program areas for which savings are projected for the next budgetperiod and beyond are:

Limiting the growth of expenses in the Oregon Health Plan to five percent per year; and, Reducing foster care utilization.

A recommendation to reduce the forensics population at the Oregon State Hospital is not expected toproduce significant savings until the 2013-2015 biennium.

PUBLIC SAFETY

The Public Safety subcommittee of the Reset Cabinet made a variety of recommendations that werestructured around controlling Oregons reliance on incarceration for certain categories of lower-riskoffenders, thus lowering the overall costs of corrections, while at the same time using enhancedcommunity corrections approaches that would provide the same level of public safety at less cost.

However, the passage of Ballot Measure 73 on the November ballot has complicated theserecommendations, making achievement of their longer-term savings goals even more challenging.Measure 73 will result in the incarceration of an additional 340 to 470 offenders, to house DUIIoffenders who would otherwise serve local misdemeanor jail and probation sentences. As a result, thismeasure sis expected to cost the state between $61.5 million and $92.7 million over the next five years.


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These costs have not yet been included in this reports projections for the 2011-13 biennium andsubsequent biennia.

Notably, there is confusion over the intent of portions of Measure 73. The measure states that thereshall be a 90-day minimum sentence for a third DUII conviction within ten years. However, themeasures provisions activate a statute (ORS 813.012) that imposes a presumptive 13-30 month prisonsentence for such offenders. A two-thirds vote of the legislature will be required to correct this conflictand make the 90-day sentence operative. But, if done, the Criminal Justice Commission estimates thatthe cost of the measure could be cut in half from the high-end cost estimates cited above.

Establish a task force on sentencing guidelines involving all three branches of stategovernment. However the conflicting provisions of Measure 73 are resolved, the measure willcompound the challenge of devising more cost-effective and more flexible sentencing guidelinesfor Oregons criminal justice system. In recognition of this challenge, the Governor supports thecreation of a task force representing all three branches of state government (executive, judicialand legislative) to develop proposals for the 2012 legislature.

The Governor intends to launch this task force by executive order later this month.


The public safety recommendations for which savings are projected for the next budget period andbeyond are:

Continuing the suspension of Measure 57; Adopting the federal earned time system; and, Selectively adjusting Measure 11 sentences.

The Reset Cabinet notes that the Oregon Association of Community Corrections Directors hasendorsed these and other approaches to reducing the cost of corrections in Oregon. Their positionpaper is attached asAppendix C.

SUMMARY OF RECOMMENDATIONS

The recommendations detailed above are summarized in the following table.

Table E: Recommendations Totaling Savings Through 2019

2011-13 2013-15 2015-17 2017-19

EducationDevelop a shared services model across school districts 47.0 94.0 103.4 113.7Replace ESD's with fewer regional structures 14.0 28.0 30.8 33.9Create statewide Virtual Learning system 58.0 116.0 127.6 140.4OUS: 15% CSL cut for new compact between State and OUS (excludes Labor

costs) 68.8 76.4 84.8 94.1OUS: No state assessments under new compact 6.2 6.4 6.6 6.8

Human Services

Health Care: Limit growth to 5% per year 83.7 91.3 104.2 124.2

Mental Health: Reduce OSH forensics population - 14.8 15.4 16.0Reduce Foster Care utilization 10.0 20.0 20.8 21.6

Public Safety

Continue to suspend M57 5.0 44.0 65.0 71.0Adopt federal earned time system 2.3 35.2 64.6 96.0Selectively adjust M11 sentences 0.6 6.3 20.8 42.8

TOTAL 295.6 532.4 644.0 760.5

Net GF/LF Expenditure ImpactReset Recommendations



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In addition to implementation of these recommendations, the Reset Cabinet recommends continuedwork on the following initiatives cited in its June report.

Education

Continue efforts to expand dual credit offerings to enable high school students to earn collegecredits while also meeting graduation requirements.

Pursue the consolidation of school districts;

Refine and implement a student success initiative for post-secondary students to accelerate theircompletion of degrees.

Build on Oregons shared responsibility model for financial aid to students pursuing two-year andfour-year degrees in Oregon institutions.

Health and Human Services

Supporting the Oregon Health Policy Boards strategies for reducing health care costs.

Regionalize public health services and shift to an emphasis on prevention.

Improve Oregons Substance Abuse Prevention and Recovery System.

Better meet the needs of high-need youths ages 15 to 25 in the child welfare system.

Implement the Wraparound Initiative for children with complex behavioral and health needs.

Reduce the utilization of nursing home care by expanding lower cost alternatives.

Create incentives for more individuals to secure and maintain long-term care insurance.

Public Safety

Move to a modern sentencing guideline approach with selective modifications of Measure 11sentences and greater use of community supervision programs.

Exploring the use of enhanced home detention systems.

Consider incentives and performance goals for counties to achieve increase efficiencies in thestatewide criminal justice system.


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The Need To Balance Other Commitments


THE NEED TO BALANCE OTHER COMMITMENTS

The preceding sections have dealt with the 93 percent of the states general fund budget thataddresses the core responsibilities of education, human services and public safety. The remainingseven percent of the general fund budget cannot be ignored, nor should it serve as the default budgetbalancer for the big three program areas.

The remainder of the general fund budget is evenly divided between administrative and programmaticfunctions. Administrative functions are those that steer the ship (the Legislature and the Governorsoffice), provide below-decks support (computers and payroll, for example) and keep it fueled (taxcollections). The programmatic functions include those that protect the environment and manage ournatural resources, support business and community development and, in modest amounts, promote thearts and culture.

The Reset Cabinet report noted that general fund support for these programs declined from 18 percentin 1990 to just seven percent in the current budget. Since that report was issued, two successiverounds of interim budget cuts reduced these programs even further. With the exception of the Dept. ofRevenues tax collection functions, these programs have had to cut their General Fund budgets by anadditional 7.7 percent this year. These cuts, which will disproportionately impact functions in these

program areas, will become part of the 2011-13 budget under Step 1 described above. For thesereasons, new approaches and priorities must be considered for this area of the budget.

Modifications of Measure 76

Since release of the Reset Cabinet report, voters approved a permanent dedication of a portion oflottery funds for parks and habitat restoration (Measure 76). Prior to the vote, however, legislativeleaders announced an agreement with sponsors of the measure to put forward to the voters in 2011 animmediate modification of the measures provisions. This modification would allow for the temporarydiversion of the measures lottery proceeds to other state programs in times of state fiscal crisis.

This is a reasonable and necessary recognition of the reality that locking commitments into the state

constitution, even for what voters deem to be the most worthy purposes, can create budgetarystraightjackets and limit the ability to balance competing priorities in difficult financial times.

Alternatives for Supporting Natural Resource Programs

As the Reset Cabinet report noted, many of the natural resource functions that were formerlysupported by general funds are now supported by user fees paid largely by regulated business (e.g.water quality permit and food safety inspection fees) or individuals (e.g. fishing license and state parkentry fees). The Cabinet noted further shifts from general funds to fees to support these services wouldbe considered in future budgets.

This issue is now being examined by the Governors Natural Resources Cabinet. One possibility is for

agencies like the Dept. of Agriculture to become completely fee supported in exchange for acommitment by the Legislature not to sweep any fund balances that are needed to manage theprogram and keep faith with the fee payers in future biennia.


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The Need To Balance Other Commitments


Continued Support for the Arts and Heritage Programs

In 2007, the Governor initiated the CHAMP program to establish modest state support for culture,heritage, arts, movies, historic preservation and public broadcasting programs.

Funding for these programs was set at $6.2 million in 2007-09 and at $3.4 million in the current budgetperiod.

The Governor recommends continuing funding for these programs at $7.5 million in 2011-13, including$5 million to create an endowment for the Pendleton Round-up conditioned on $10 million to be raisedin private funds.

The details of the CHAMPS III proposal are contained in Appendix E.


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Sustainable Solutions Are Needed To Resolve The Remaining Deficit

SUSTAINABLE SOLUTIONS ARE NEEDED TO RESOLVE THE REMAINING DEFICIT

This report acknowledges that a deficit of about $1.3 billion dollars will remain to be solved in the nextbiennium even after the adoption of the recommendations outlined in Steps 1 through 6 above. Thatlast billion dollar gap will pose the toughest problem of all for rebalancing the 2011-13 budget.

Some of the solutions to that problem will be found in the Budget and Management Divisions agencycuts lists, which will outline reductions for the Governor-elect to be addressed in his RecommendedBudget for 2011-13. Some of these solutions have been included in this report; others will bedetermined by the Governor-elect.

Still, in the face of difficult choices in the next budget, it is tempting to resort to wishful thinking ordeferred decisions. This report urges that state budget writers reject such solutions, as they are likely toworsen the states fiscal crisis in the remainder of the decade.

In its June report, the Reset Cabinet challenged the wishful thinking that the economy can be countedon to outperform expectations and deliver higher revenues in the next biennium. The fallacy of thatthinking was confirmed in the states last two revenue forecasts, which lowered the expected generalfund revenues for 2011-13 by $908 million.

Further, the likelihood of a better performing economy is no greater than the likelihood of anotherdownturn, as illustrated in the following chart showing the best and worst eight-year experiences of thelast two decades.

Chart 10: Best And Worse 8-Year Revenue Experience

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Best 4 Biennia

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This is not to suggest that the state abandon its best efforts to improve the economy nor to downplaythe possibility of doing raising the economic and revenue trend lines in the years ahead. To thecontrary, these efforts should be paramount for state policy and investment. But the likelihood of raisingthose lines and reaping a revenue windfall in the 2011-13 biennium is small.



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Sustainable Solutions Are Needed To Resolve The Remaining Deficit

For this reason, this report recommends against borrowing to solve the remaining shortfall in the nextbudget period, which would create additional debt service costs of approximately $580 million perbiennium on top of continuing program costs deferred to future biennia. The States Debt AdvisoryCommission has determined that the state is now above its recommended debt ceiling. And, based onthe most recent forecast, the state is not likely to gain access to additional debt within that limit until latein 2013.

But, if an exception to this policy were made and the state did borrow to cover a $1.3 billion dollarshortfall in 2011-13, the effects of that decision would compound if budget problems from 2013-15forward, as shown in the following projection.

Chart 11: Long Term Cost Of Borrowing

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28,000

30,000

2009-11 LAB 2011-13 2013-15 2015-17 2017-19

Revenues (11/2010)ExpendituresContinue Allotment CutsAlign State Employee Growth

Align K-12 Employee Growth

Include Retirees in SolutionEliminate InflationOther Reset RecommendationsDebt Finance Remainder

This report also cautions that borrowing against the future can occur in other guises. For example, thelegislature could by law extend the period for amortizing the unfunded liabilities of PERS from 20 yearsto 25 or 30 years. But such extensions will have the effect of increasing the systems unfunded liabilityand increasing the contribution rates of the state, its school districts and local governments to evenhigher percentages of payroll than now projected.

This report repeats the obvious that the state should reject solutions that kick the can down the roadand stay focused on solutions that will not only balance the budget in 2011-13 but bring the remainderof the decade back into balance.



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Revenue Stability Remains A Critical Goal


REVENUE STABILITY REMAINS A CRITICAL GOAL

The new normal projected for the economy over the next decade is also likely to be more volatile. Therevenue trend line portrayed in the preceding charts will almost certainly show peaks and valleys overthe years, possibly steeper and more frequent that we have seen in prior decades.

This makes the Reset Cabinets earlier recommendation to modify the revenue kicker provision of thestate constitution all the more compelling. Even in the face of a $3.5 billion deficit in the next biennium,the state economist predicts that the state will have to return $23.6 million to corporate taxpayersbecause of an underestimation of corporate revenues in the current biennium.

It is important to recognize that the thrust of this recommendation is not to grow government or enablethe state to expand spending with revenues that would otherwise be returned to the taxpayers. Rather,its primary purpose is to stabilize revenues and spending, by allowing the state to set aside higher-than-expected revenues in good years to make up for lower-than-expected revenues in bad years. Thepoint is to keep the states revenue and expenditure trend lines even, not to bend them upward.

The benefits of such stability will go far beyond budgeting. Stable funding has become a perennial goalof school superintendents, university presidents and state administrators who are hard pressed to

manage well or achieve improvements in their service models when faced with inconstant andunpredictable resources. Modifying the kicker to achieve this goal will also facilitate better planning andsmarter spending.

This report reiterates the key points for a constitutional amendment to be referred to the voters, asoutlined by the Governor earlier this year:

Establish an Emergency Reserve Fund (ERF) in the Constitution; Direct a specified amount of excess revenues to the Fund, e.g. a 50/50 division of kicker

revenues, with half going to the ERF and half continuing to go back to the taxpayers; Continue to return kicker refunds to taxpayers above the amount that goes to the Fund, i.e.

when the ERF reaches a sufficient amount; Set strict rules for when the Fund can be used; Make the ERF an interest bearing account, so that the taxpayers get added value for their

savings; Ensure that the ERF can never be depleted in a single budget period; and, Continue the existing dedication of ending balance to the ERF.

As recommend by the Reset Cabinet, the state should place a constitutional amendment on the ballotbefore the end of the current biennium.


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Sources And Terminology


SOURCES AND TERMINOLOGY

Sources

The Reset Cabinet report was released by the Governor in June 2010. The full report is available onthe Governors website at:http://governor.oregon.gov/Gov/governor_reset_cabinet/reset_state_govt.shtml

The states revenue forecasts are prepared by the Office of Economic Analysis (OEA) of the statesDept. of Administrative Services. The most recent forecast for December 2010 was released on Nov.19, 2010 and is available on the OEAs website at: http://egov.oregon.gov/DAS/OEA/index.shtml

Budget data and cost savings estimates for this report were developed by the Budget and Management(BAM) Division of the Dept. of Administrative Services. Its website is:http://www.oregon.gov/DAS/BAM/index.shtml

Terminology

Biennium refers to the states two-year budget periods, beginning on July 1 of odd-numbered years

and continuing through June 30 of the next odd-numbered year.

Current service level (CSL) represents the cost of continuing current services from one biennium tothe next. The CSL encompasses all expected increases in costs for providing services the state isobligated to provide under federal mandates and state law.

Federal funds are funds provided by the federal government to state government and state agenciesin the form of grants, matching funds and funds for specified programs and purposes.

Federal stimulus funds refer to funds provided to the states under the American Recovery andReinvestment Act (ARRA), enacted in February 2009 and successor legislation enacted in August2010.

General Fund refers to funds that can be used for general purposes of state government. Most ofthese funds come from personal and corporate income taxes, with smaller amounts from taxes onliquor, tobacco and other products. In this report, we use the term general fund (lower case) to refer toboth General Funds and the unrestricted portion of Lottery Funds that are used for general purposes.

General Fund budget refers to the services and programs financed by the states general fundrevenues and unrestricted lottery funds. In budget shorthand, this is often referred to as the GF/LFbudget. In this report, we use the term general fund budget to refer to the GF/LF budget.

The kicker refers a revenue limitation measure first enacted by state legislation in 1979 and amendedinto the Constitution (Article XV, Section 4) by voters in 2000, whereby excess revenues are returned

to taxpayers when they exceed budget estimates in a given biennium by two percent or more. Thekicker is calculated separately for personal income taxpayers and corporate income taxpayers.

Lottery Funds refer to the proceeds from state-sponsored lottery games. Constitutional provisionsdedicate 15 percent of these funds to parks (7.5 percent) and salmon/stream restoration (7.5 percent)and another 18 percent to the Education Stability Fund. There are also

Documents

Updated Reset Cabinet Report