Breaking Out of a Circle of Scarcity

Summer 2010

Oregon Business Plan’s Challenge for the 2010s and Beyond

Overview

• The Circle of Prosperity: The Foundation of the Oregon Business Plan agenda

• The Circle of Scarcity: The reality of Oregon since 1997

• Framing the Challenge for the next decade

• Getting to Work: The OBP agenda for 2010

The Circle of ProsperityHow it’s supposed to work

The Circle of Prosperity Starts with a Strong Economy: So where Does

Oregon Stand?

Oregon prospers in the 1970s, fueled by a strong timber

economy1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

80%

85%

90%

95%

100%

105%

110%

Oregon Washington

Per Capita Income Expressed as a Share of the U.S. Average, 1969-1979

The 1980s hit the Northwest hard

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

80%

85%

90%

95%

100%

105%

110%

Oregon Washington

Per Capita Income Expressed as a Share of the U.S. Average, 1969-1988

During the early to mid-1990s, Northwest economies diversify and

outpace US growth1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

80%

85%

90%

95%

100%

105%

110%

Oregon Washington

Per Capita Income Expressed as a Share of the U.S. Average, 1969-1997

Since 1997, Oregon’s income has fallen off the US pace

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

80%

85%

90%

95%

100%

105%

110%

Oregon Washington

Per Capita Income Expressed as a Share of the U.S. Average, 1969-2008

Per capita incomes in our metro areas lag their peers…

Personal income per capita, percentage of the national average, 1969 to 2008

Source: BEA; metropolitan counties are Benton,Clackamas, Columbia, Deschutes, Jackson, Lane, Marion, Multnomah, Polk, Washington, and Yamhill

Non-metro Oregon, once an income leader, has never recovered from the

1980s.Personal income per capita, percentage of the national average, 1969 to 2008

Source: BEA; metropolitan counties are Benton,Clackamas, Columbia, Deschutes, Jackson, Lane, Marion, Multnomah, Polk, Washington, and Yamhill

Washington’s workers brought home an average of $9,400 more than Oregon’s

workers in 2008

1977

1995

2008

$- $10,000 $20,000 $30,000 $40,000 $50,000 $60,000

$44,396

$40,436

$47,624

$50,247

$47,070

$57,025

Average Employment Earnings per Working Resident (in 2008 dollars)

Washington Oregon

…unlike the past, a lower share of Oregonians worked in 2008.

2008

1995

1977

35% 37% 39% 41% 43% 45% 47% 49% 51% 53%

48%

50%

44%

50%

48%

41%

Share of Total Population Employed, Oregon and Washington, Selected Years

Washington Oregon

Oregon residents earned an average of $1,187 less in investment income in

2008

1977

1995

2008

$- $2,000 $4,000 $6,000 $8,000 $10,000

$4,089

$7,294

$7,295

$3,900

$6,444

$8,482

Annual Investment Earnings per Capita(in 2008 dollars)

Washington Oregon

If Oregonians earned like Washingtonians…

…at Washington's earnings rate

…at Washington's investment returns rate

…at Washington's employment rate

Total additional income

$0 $5 $10 $15 $20 $25 $30

$17.2

$4.5

$3.4

$25.1

Additional amount of income that would accrue to Oregon (in billions)

Add it up: Oregon’s fallen off the West Coast pace.

Per capita income, 2008 dollars, 1976 to 2009

Sources: BEA; Census Bureau

What about public services?What About Public

Services?

For 30 years, public sector revenues have remained a roughly constant

share of personal income

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2002

2004

2005

2006

2007

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Selected Government Resources, Expressed as a Share of Personal Income, Oregon, 1977-2007

General Own Source Revenue (S&L) Taxes (S&L)

General/Lottery Fund (State Only)

State & Local Revenue

State & Local Taxes

General/Lottery Fund (State Only)

So, declining incomes leave less revenue for public revenues

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2002

2004

2005

2006

2007

80%

85%

90%

95%

100%

105%

110%

115%

120%

State and Local Revenue Per Capita, Expressed as a Share of the US Average, Oregon and

Washington, 1977-2007

Oregon Washington

Declining personal income leads to low spending on government services

Source: Urban-Brookings Tax Policy Center

And within a smaller pie, some slices of are growing faster than others

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2002

2005

2007

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Education and Medicaid/Human Services/Corrections Operational Expenditures, Expressed as a Share of Per-

sonal Income, Oregon, 1977-2007

Medicaid, human services, and corrections

…meaning others have to decline.

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2002

2005

2007

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Education and Medicaid/Human Services/Corrections Operational Expenditures, Expressed as a Share of Per-

sonal Income, Oregon, 1977-2007

Education operations less tuition (all levels)Medicaid, human services, and corrections

Tradeoffs: In the state’s General Fund, the crowding out of education has been pronounced during the past

decade…

Total GF/Lottery Spending

All Other

Public Safety

Human Services

PreK, College Grants

Community Colleges

Higher Ed

K-12 SSF

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0%

3.9%

5.1%

4.8%

5.9%

5.3%

1.1%

0.8%

2.9%

Annual Average Growth, FY 2000-2011 in Se-lected General/Lottery Fund Areas

Three decades in review

• Oregon’s income per capita income did not keep pace with the US or peer states over the past thirty years.

• As a share of total personal income, government revenues and expenditures have remained roughly constant for the past thirty years despite many changes in taxes and fees.

• Because Oregon’s personal income has declined, public spending per capita has declined.

• Medicaid and corrections spending have grown as a share of personal income; Education spending has declined as share of income.

• All other public services—police, fire, parks, highways etc.—have remained a roughly constant share of income.

What About the Next Decade?

Demographics add to the challenge

Fewer workers to pay for an aging population

2000 2010 2020 2030 20400.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

3.43.2

2.4

2.01.9

Prime Working Age Adults Per Aged OregonianN

um

be

r o

f W

ork

er

Ag

ed

25

-54

Div

ide

d b

y

the

Po

pu

lati

on

Ag

e 6

5 a

nd

Old

er

Retiring boomers will be replaced by a considerably more diverse

population…

Costs of an Aging Population will Hit Soon

Projections indicate public employee retirement and Medicaid costs could demand an additional 1.1% point

of total personal income.

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 20180.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

0.3%

1.0%0.9%

1.3%

Medicaid (State Share) and PERS Employment Payments Expressed as a Share of Total Personal Income, Oregon,

2008-2018

PERS Employer Payments Medicaid (State Share)

Source: ECONorthwest calculations using data from Mercer, Kaiser Family Foundation, and Health Affairs

Anticipated slow job recovery will curb revenue growth…

1 ye

ar o

ut

1 ye

ar o

ut

1 ye

ar o

ut

1 ye

ar o

ut

1 ye

ar o

ut

1 ye

ar o

ut

2 ye

ars ou

t

2 ye

ars ou

t

2 ye

ars ou

t

2 ye

ars ou

t

2 ye

ars ou

t

2 ye

ars ou

t

3 ye

ars ou

t

3 ye

ars ou

t

3 ye

ars ou

t

3 ye

ars ou

t

3 ye

ars ou

t

3 ye

ars ou

t-10%

-5%

0%

5%

10%

No change July 1981 July 1990 March 2001 December 2007

Baseline Forecast Optimistic Pessimistic

Ch

an

ge in

Em

plo

ym

en

t

Change in Oregon employment starting…

Sources: U.S. Bureau of Economic Analysis; Oregon Office of Economic Analysis

Oregon’s expected budget deficit 2009-2019

A Preview of Coming Events?

General/Lottery Fund Resources and Expenditures (in millions)

    2009-11 2011-13 % ChangeResources        General/Lottery 14,422   Stimulus/Reserves 1,584      Total Resources 16,006      Expenditures    K-12 SSF 6,181   OUS, CCWD, PreK 1,903   Human Services 4,450   Public Safety 2,520   All Other 964   PERS Increase -       Total Expenditures 16,018

The state will have roughly the same amount of tax revenue for 11-13 as it did for 09-11

General/Lottery Fund Resources and Expenditures (in millions)

    2009-11 2011-13 % ChangeResources        General/Lottery 14,422 16,019 11%  Stimulus/Reserves 1,584 - -100%         Total Resources 16,006 16,019 0%         Expenditures        K-12 SSF 6,181   OUS, CCWD, PreK 1,903   Human Services 4,450   Public Safety 2,520   All Other 964   PERS Increase -       Total Expenditures 16,018

but PERS alone will take up $431 million

General/Lottery Fund Resources and Expenditures (in millions)

    2009-11 2011-13 % ChangeResources        General/Lottery 14,422 16,019 11%  Stimulus/Reserves 1,584 - -100%         Total Resources 16,006 16,019 0%         Expenditures        K-12 SSF 6,181   OUS, CCWD, PreK 1,903   Human Services 4,450   Public Safety 2,520   All Other 964   PERS Increase - 431           Total Expenditures 16,018

…even if we could hold human services growth to 10% (it grew by 20% last year)

General/Lottery Fund Resources and Expenditures (in millions)

    2009-11 2011-13 % ChangeResources        General/Lottery 14,422 16,019 11%  Stimulus/Reserves 1,584 - -100%         Total Resources 16,006 16,019 0%         Expenditures        K-12 SSF 6,181   OUS, CCWD, PreK 1,903   Human Services 4,450 4,895 10%  Public Safety 2,520   All Other 964   PERS Increase - 431 na          Total Expenditures 16,018

…and public safety spending growth to 6%

General/Lottery Fund Resources and Expenditures (in millions)

    2009-11 2011-13 % ChangeResources        General/Lottery 14,422 16,019 11%  Stimulus/Reserves 1,584 - -100%         Total Resources 16,006 16,019 0%         Expenditures        K-12 SSF 6,181   OUS, CCWD, PreK 1,903   Human Services 4,450 4,895 10%  Public Safety 2,520 2,671 6%  All Other 964   PERS Increase - 431 na          Total Expenditures 16,018

…and K-12 education spending constant

General/Lottery Fund Resources and Expenditures (in millions)

    2009-11 2011-13 % ChangeResources        General/Lottery 14,422 16,019 11%  Stimulus/Reserves 1,584 - -100%         Total Resources 16,006 16,019 0%         Expenditures        K-12 SSF 6,181 6,181 0%  OUS, CCWD, PreK 1,903   Human Services 4,450 4,895 10%  Public Safety 2,520 2,671 6%  All Other 964 964 0%  PERS Increase - 431 na          Total Expenditures 16,018

Higher education could see cuts of 54%

General/Lottery Fund Resources and Expenditures (in millions)

    2009-11 2011-13 % ChangeResources        General/Lottery 14,422 16,019 11%  Stimulus/Reserves 1,584 - -100%         Total Resources 16,006 16,019 0%         Expenditures        K-12 SSF 6,181 6,181 0%  OUS, CCWD, PreK 1,903 877 -54%  Human Services 4,450 4,895 10%  Public Safety 2,520 2,671 6%  All Other 964 964 0%  PERS Increase - 431 na          Total Expenditures 16,018 16,019 0%

And now, (with no sales tax), Oregon is ever more reliant on income tax

Nevada

Texas

Washington

Wyoming

South Dakota

Florida

Tennessee

United States

California

Massachusetts

Maryland

DC

Oregon

New York

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0%

Income Taxes Expressed as a Share of Personal Income, Selected States, 2007

M 66 & 67

Will we circle into a drain?

• Low investments in education and high income tax rates threaten further erosion of personal income levels

• The U.S. and Oregon economies appear poised for a slow, jobless recovery.

• Aging of the Baby Boom generation will increase the age 65+ population by 46% during 2010-2020, putting upward pressure on Medicaid spending.

• High health inflation will continue, which will drive up the costs of Medicaid and public employee compensation.

• Legacy costs of a poorly managed/conceived public employee pension system have come due.

How Can Oregon Turn Things Around?

Two Possible Paths Going Forward

Replay the debate of the 2000s

“Taxes are inadequate; businesses and wealthy

Oregonians pay too little.”

vs.

“Public employees are underproductive,

overcompensated, and protected during

economic downturns.”

Refocus the debate

• Grow jobs and income

• Reinvent the state budgeting process and

delivery of state services.

• Reform the tax system to promote stability and provide incentives for high-wage job growth.

Step 1: Grow jobs and incomes

Oregon’s budget deficit on the current trajectory

Oregon’s budget deficit if we return to 97% of U.S. average per capita income

How Can We Grow Jobs and Income?

• Agree that it is important, in GOOD times, not just bad.

• Agree that increasing incomes is the best way we can support families, public services and non-profits.

• Build community culture that respects business and responds to needs. (Attitude of public officials is important).

Grow Income: Welcome High Wage Jobs in Good Times and Bad

Listen to our key industry clusters

• Most high wage jobs come either directly or indirectly from traded-sector (export) industries.

• These industries compete on innovation.

• Traded sector success isn’t random– Traded sector companies cluster

• Similar and related businesses draw advantages from proximity

• Places specialize

Oregon Industry Clusters

• High Tech– Semiconductors

and electronic components

– Software– Bioscience

• Advanced Manufacturing– Metals– Machinery– Transportation

Equipment– Wood products

• Footwear, sports apparel and outdoor gear

• Natural Resources– Forestry and Wood

Products– Ag– Food processing– Tourism

• Clean Technology– Solar

manufacturing– Environmental

Technology and Services

– Electric vehicles– Green building and

design– Wind energy

Listen to all regions of Oregon

• Two rounds of regional meetings: spring and fall

• Astoria, Baker City, Bend, Burns, Clackamas, Corvallis, Eugene, John Day, Klamath Falls, Medford, Pendleton, Salem

• Bring business and community leaders together to discuss the facts about Oregon’s economic and budgetary trajectory.

• Work with local leaders to understand how Oregon can remove barriers and take advantage of opportunities to create jobs and raise incomes

From this…develop industry specific agendas

For example

Forestry and Wood Products - improve federal land practices and increase utilization of biomass energy.

High technology – increase number of engineering graduates from Oregon universities.

Food processing – meet aggressive energy efficiency goals to enhance global competitiveness

Biosciences – improve access to startup capital

And develop cross-cutting initiatives and set priorities among them.

• Improve public finance and budgeting

• Strengthen education and workforce development

• Reduce health care cost and improve quality

• Enhance transportation infrastructure

• Strengthen our capacity for economic innovation (research, commercialization, product and process innovation)

• Ensure reliable, affordable and clean energy

• Address water and sewer access and price

• Strengthen business finance and access to capital

• Ensure the availability of shovel-ready, industrial land.

• Streamline regulatory and permitting processes

Step 2: Reinvent state budgeting and public service

delivery

Reinvent Public Services

The Foundation• 10-Year forecasts of

revenues, expenditures, key client populations, and per unit spending.

• Outcomes-based budgets

• Design labs

Implementation • The Oregon Health

Policy Commission• Oregon Education

Investment Board– Transparent budgeting– Higher education

governance– Progression through

demonstrated proficiency

– Incentives for perpetual innovation

• Right size prisons

FROM

Debates about agencies

Arguments about a single number

Budgeting on the margins

Debating the level of funding

Funding agencies

TOFocus on people served by

agencies

Discussions about investments and outcomes

Budget the use of all resources

Debating how to get better results

Investing in services for clients

New Budgets Will Transform Policy Discussions

Remember our budget deficit

Reducing Medicaid spending growth by 2% reduces the 10-year deficit by 1/3

Step 3: Revamp the tax structure to encourage

stability and income growth

Revamp the tax structure and encourage income growth

• Bolster the state savings account by diverting corporate and personal kickers to a reserve fund.

• Reduce capital gains and income taxes selectively to encourage investment in promising Oregon companies.

• Adjust the new corporate sales tax that punishes high sales/low margin businesses

• Seek the opportunity for comprehensive tax reform in the wake of tough 2011 session and unwinding federal timber payments

With no sales tax and average property tax, Oregon relies heavily on income

taxes

Nevada

Texas

Washington

Wyoming

South Dakota

Florida

Tennessee

United States

California

Massachusetts

Maryland

DC

Oregon

New York

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0%

Income Taxes Expressed as a Share of Personal Income, Selected States, 2007

M 66 & 67

Tax Policy-Tweaks and OverhaulsIs it time to address an over-reliance on the income tax?

All Other Taxes

Total Sales & Gross Receipts

Property Taxes

Total Income Taxes

Total Taxes

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%

0.9%

3.7%

3.2%

2.9%

10.7%

1.2%

0.8%

3.0%

4.6%

9.6%

Selected Taxes Expressed as a Share of Personal Income, Oregon and US Average, 2007

OR

US

Tax Policy-Tweaks and Overhauls

Tax packages, discussed by the Revenue Restructuring Committee (RRC) and others, increase net revenues between 0.2% and 0.4% of personal income; Stand-alone sales taxes, with no personal income offsets, could add more.