Coronavirus is bad news for Oregon’s state budget ‘on every front’

Gov. Kate Brown and Nik Blosser, her chief of staff, listen in during a phone call with Vice President Mike Pence and other governors on Monday, April 20. Brown last week told a business group that state agency revenues are cratering due to COVID. (Amanda Loman/Salem Reporter)

Revenue wise, the Oregon Lottery has fallen off a cliff.

Video poker is bust until bars and other outlets reopen. Its new sports betting app has little for customers to wager on. And draw games are so weak that the multi-state Powerball and Mega Millions commissions lowered jackpots to assure ongoing solvency.

The upshot: The agency expects transfers to the state will decline by 20% to 40%, or $250 million to $500 million below forecasted levels, depending on the length of the coronavirus downturn and recovery.

That shortfall, in turn, will shortchange schools, economic development, state parks, veterans’ affairs and the Oregon Health Authority, all of which receive dedicated revenues from the lottery.

The lottery is both a microcosm and an outlier of what’s happening across the state’s agencies. A microcosm because Oregon faces sudden and severe, across-the-board declines in revenue – from personal and corporate income taxes to capital gains, lottery revenues, lodging and fuel taxes and program fees.

All state agencies are being hit, but no two identically. Some, such as the Oregon Health Authority, the Employment Department and the Department of Human Services, face a surge in demand for their services, whether it’s expanded COVID-19 testing, increased Medicaid spending or the needed hiring to process unemployment claims.

Others – the Lottery, State Parks, Travel Oregon – depend on revenue sources that have suddenly evaporated. Still other agencies are reliant on appropriations from the state general fund, which gets 85% of its receipts from personal income taxes. With unemployment surging, economists expect those revenues to drop precipitously.

The $484 billion federal aid package passed Thursday included no budget relief for states, despite a plea from the National Governors Association for $500 billion to backfill their coffers. It’s unclear much will be forthcoming either, as Senate Majority Leader Mitch McConnell has said he’s not interested in backfilling states’ underfunded pension plans, and that states should be allowed to pursue bankruptcy.

The lottery is an outlier, meanwhile, because its managers have a jumpstart on a plan to deal with it, while many state agencies are largely operating in a modified business as usual mode, without yet implementing systematic statewide cost-cutting or other contingency planning.

Indeed, as Portland and other local governments announce layoffs, furloughs and austerity measures to prepare for expected budget shortfalls, and as nearly one in six Oregonians in the private sector has already lost their job, Gov. Kate Brown has taken a relatively laissez-faire financial approach to state operations.

She knows state revenues are dropping. As she told an audience of business leaders Wednesday, “crater is probably the appropriate word.” But she said the states’ normal response mechanism – suspend technology purchases, freeze hiring and cancel travel – isn’t working at a time when demand for safety net service is surging.

Brown asked the business leaders for suggestions on streamlining state government. But she added she’ll wait for the next revenue forecast on May 20 to take action, at which point she’ll call a special session of the Legislature to make budget cuts.

That’s not to say nothing has changed. Indeed, agencies have closed facilities, programs and parks across the state. A vast portion of the state’s 40,000 employees is apparently working from home, while other “essential” employees continue to go to the office and see the public “by appointment only.”

Whether those employees all have something productive to do remains a mystery.

Either way, there has been little impact on the state workforce so far, save perhaps 50 vehicle inspection workers for the Department of Environmental Quality. They were put on paid administrative leave when the inspection stations were shuttered last month, and will be paid under an inclement weather clause in their union contract until May 1.

Meanwhile, the lack of systematic contingency planning by the state, and the seeming lack of urgency in all but a few agencies, is making some lawmakers anxious.

 “The May revenue forecast is going to be catastrophic and its incumbent on all of us involved in the management of this state to begin to think about how to prepare for a long-term economic downturn,” said Sen. Betsy Johnson, D-Scappoose, one of the Legislature’s budget chiefs, and one who has lived through previous scorched-earth special sessions to identify budget cuts.

 “Whether that means suspension of not-yet-implemented programs, or actual cuts, we have to prepare ourselves for a grim budget outlook,” she said. “We should be doing every possible thing to preserve resources and curtail expenses right now.”

Forced into action

The Oregon Lottery’s managers aren’t necessarily more proactive than other agency leaders. They have to make cuts. The Oregon constitution limits the agency’s administrative expenses to 16% of revenues, and it will soon cross that threshold without big expense reductions.

In a memo to lottery commissioners, Barry Pack, the agency’s director, said it had identified $20 million in one-time savings or spending deferrals through the fiscal year that ends June 30.

But he told commissioners that “there is too much unpredictability in this pandemic crisis to do normal business planning.” So, he said, the agency was conducting scenario planning to weather a protracted crisis “and recognizing a decision made today may change tomorrow.”

The agency has no idea how much of its retail base will even survive a downturn, pointing at potentially longer-term financial problems for the lottery, and in turn, the agencies that depend on that funding.

The Oregon Parks and Recreation Department is one such agency. The agency relies on the lottery for a little less than half its revenues, and those transfers are expected to drop.

The state park system was closed March 23, and park visitor revenue dropped to zero. Projections aren’t available yet, but its revenues from recreational vehicle registrations, ATV permit sales, and ATV fuel purchases are also expected to fall.

Chris Havel, associate director for the department, said the agency has delayed hiring seasonal workers, who account for about half of its park workforce. Meanwhile, the department is spending down cash reserves to fund operations. There have been no layoffs or furloughs among its 524 full-time employees.

“We’re not expecting any help,” he said. “We’re relying on resources in the department. We can go to three to six months before we have to start implementing layoffs.”

Travel Oregon doesn’t have that luxury. Its $40 million annual budget and 64 employees rely exclusively on lodging taxes, and those receipts are vanishing. Flights are down 90% at PDX. Most hotels are closed around the state. And as the state prepares for what it is typically peak tourist season, destinations are telling travelers to stay home.

Even when the economy reopens, it’s unclear how quickly Americans will be comfortable or be able to afford traveling. Those decisions are up to individuals, not the governor.

Travel Oregon leaders have told staff they’re looking to cut 30% to 40% of the budget. Its executive team, including chief executive Todd Davidson, whose nearly $400,000 pay package makes him one of the best paid public employees in the state, took a 20% pay cut. Marketing campaigns are being put on hold.

 “Currently there haven’t been any job cuts or furloughs, but we don’t know what that looks like going forward,” said agency spokeswoman Linea Gagliano. “Our CEO told staff at the beginning of April that our jobs would be safe through April, but there was no guarantee after that.”

Economy in freefall

Tim Duy, a University of Oregon economist, says downturns usually arrive after a year of deteriorating data, and economists finally determine the economy is officially in recession.

 “This time, the state economist’s office is going to deliver a lot of bad news on every front all at once,” he said. “We all know where this is going.”

In that context, it may be reasonable for Brown to hold off any immediate cuts to avoid exacerbating the state’s already dire employment picture, he said.

It’s also reasonable, he said, “for state agencies to start thinking about ‘Okay, what if I have to cut my budgets 5%, 10% or 20%? What does that look like?’”

There is little hard data available yet on how deep the hit to state revenues will be. State economists model recession scenarios as part of their regular revenue forecasts. In the March forecast, they looked at mild and severe scenarios. The latter projected a 4.7% decline in personal income statewide in 2020, down from the 4.6% growth that state economists were forecasting prior to the pandemic.

Because more than 85% of state general fund receipts come from personal income taxes, that translated to a 22% decline in general fund revenues off the baseline forecast. For the biennium, the modeling showed revenues would be down by $2.7 billion for the current two- year budget cycle.

That scenario was roughly equivalent to the 2008 recession, according to Josh Lehner, a state economist who creates the forecast.

 “There’s a good chance that’s a reasonable scenario, if not something more severe than that,” said John Tapogna, president of ECONorthwest. “It will be worse than the Great Recession. We could rival for some time the unemployment rates in the Great Depression.”

Oregonians have already filed 330,000 unemployment claims, more than double the level in the Great Recession. If those claims rival levels in the Great Depression, they would flirt with 25% unemployment. Meanwhile, other employees are facing unpaid furloughs and pay cuts, which will drive tax receipts lower.

When recovery comes, it will not be full throttle, Tapogna says. With potentially 18 months until a vaccine is widely available, the virus will be in the background. Many Oregonians are likely to be timid about going into restaurants, theaters, sporting events, concerts and travelling.

 “Once we have a version of the vaccine, the recovery really starts to come,” he said. “But it’s at least a year after that before you start to pull that unemployment rate back to 5 or 6 (percent).”

Brown does have a few cards up her sleeve. The state is sitting on $2.5 billion in rainy day funds and agency reserves. The new corporate activities tax will bring in more receipts, though doubtless less than forecast. Businesses, meanwhile, are pushing for a suspension of the tax during the downturn.

Oregon’s share of the federal stimulus package passed in March is $2.45 billion, though two thirds goes to local jurisdictions, and the rest is earmarked for specific purposes, with a specific prohibition against backfilling the state budget.

Business as usual

A variety of state agencies – the Oregon Treasury, the Secretary of State’s office, the Department of Environmental Quality – say they’re essentially operating normally, albeit with restriction on who can access their offices and with a big chunk of their workforce operating from home. And while their various revenue streams are under pressure, they haven’t taken any specific personnel or cost-cutting actions. And there is no statewide direction to do so.

The primary source of revenue for Oregon’s Department of Transportation is motor fuel taxes, weight-mile taxes, and driver license and vehicle registration fees.

An analysis by the agency said traffic volumes were down by 40% in the first three weeks after the governor’s March 23 stay at home order. The data provided a first best-guess on the virus’ impact on its revenues: a reduction in state highway fund revenues of around $120 million, or about 6% of receipts forecast for the two-year budget cycle. But that assumes travel restrictions are lifted this spring and traffic patterns quickly return to normal, and forecasters noted the number was highly uncertain.

The same holds true for other sources of revenue. Vehicle sales have plummeted, so registration fees are likely down. Trucking activity will decline as the economy slows. DMV activity will continue, but be delayed due to a grace period on expired licenses and registrations, the forecast said.

Assistant Director of finance Travis Brouwer says ODOT will issue a new forecast in July, when it has more numbers to work with and a better idea of the duration of the crisis. In the meantime, it’s pretty much business as usual, though 2,000 of the agency’s 4,700 employees are working from home. Projects are going forward. And the agency doesn’t anticipate any cash flow issues, as it can dip into reserves if necessary.

The Department of Human Services is the behemoth of state agencies. It has a biennial budget of $12.5 billion and more than 9,000 employees. Like several other agencies, it has seen demand for many of its safety net services surge. Online applications for food stamps, which are federally funded, are up 400%, for instance.

Lisa Morawski, a spokeswoman, said the agency was working with the governor’s office and the legislature on COVID-19 expenditures, which include increased demand for employment-related day care, technology for staff to work from home and additional funding for foster parents and the Oregon Food Bank.

The Oregon Health Authority faces similar budget demands. It’s public health division recently made a $25 million request to the Legislature for COVID-19 response during the next six months. That includes hiring additional staff for contact tracing and supporting local hospitals and boosting capacity at state testing laboratories.

At a meeting Wednesday with business leaders, Brown was asked what she was doing to cut state expenditures. She didn’t have a direct answer, but said the state was in a quadruple bind. Revenues are cratering. Public health needs are costly. Families across the state are in dire financial circumstances, and need support for housing, food and health care. Yet the state is still constitutionally required to balance the budget.

She said governors around the country were in total alignment that federal aid needs to come with less strings attached, and more flexibility to supplant lost state revenues. Yet she acknowledged that the money appropriated to date can’t serve that purpose.

 “I will continue to advocate for changes to federal guidance that will allow states to use CARES Act funding to supplement lost revenue, or for additional funding sources that could be used in this way, Brown said in a news release Friday. “Without these critical dollars, the state will be forced to make difficult budget cuts at a time when Oregonians need state services more than ever.”

– Ted Sickinger; [email protected]; 503-221-8505; @tedsickinger

This story is published as part of a collaborative of news organizations across Oregon sharing stories in the public interest. The Malheur Enterprise is part of the collaborative.