The School Finance Outlook for 2010-11 and Beyond Legislative Revenue Office April 2010

Generic State Fiscal Outlook “Even if the economy enters a sustained recovery, the tight fiscal squeeze on public services is certain to persist for several years. Over the long term, an aging population and an outdated tax structure means that ______, like other states, is expected to face a mounting structural deficit, where annual growth in revenue is incapable of keeping pace with the annual cost of funding basic public services.” State Tax Notes (3-22-10)

Oregon’s Fiscal Situation: Remainder of 2009-11 Biennium Impact of the Great Recession on the U.S. and Oregon economies Short term economic outlook The revenue and budget outlook for the remainder of 2009-11 biennium

The Great Recession: Impact on the National Economy Longest contraction since 1929-33 (Dec 07 to July 09?) Real GDP declined $490 billion or 3.7% between the fourth quarter of 2007 and the second quarter of 2009 Employment declined by 6.7 million or 4.9% during the recession Housing starts fell to 25% of pre-recession level CPI declined in 2009—first time since 1955 Personal income fell 1.7% in 2009—biggest drop since 1938 and only the second annual decline of the post World War II period

The Great Recession: Impact on the Oregon Economy 148,000 jobs lost between December 2007 and December 2009 40,00 lost manufacturing jobs 30,000 lost construction jobs Oregon’s unemployment rate went from 5.2% in December 2007 to 11.6% in June of 2009 The number of unemployed in Oregon increased from 100,917 in December 2007 to 228,342 in May 2009 Statewide housing starts dropped from 30,900 in 2005 to 7,600 in 2009—a decline of 75%.

Impact of Great Recession on State and Local Taxes State & Local Tax Collections 2007: Q4 (in billion of $) 2009:Q2 (in billions of $) Percent Change All State Taxes 759.9 712.5 -6.2% Individual income 271.8 243.9 -10.3% Corporate Income 50.5 43.7 -13.5% General Sales 240.5 229.5 -4.6% Property Taxes 12.7 12.8 +0.9% All Local Taxes 514.9 533.5 +3.6% Individual Income 20.0 18.6 -6.9% 9.0 6.1 -31.8% 64.7 63.0 -2.6% 390.4 415.0 +6.3%

Oregon Among Hardest Hit by Current Recession (April-June 2009 Compared to 2008) % CHANGE IN TAX REVENUE RANK AMONG THE STATES All States -16.6 -- Alaska -86.5 50 New Mexico -30.8 49 Oregon -27.3 48 Arizona -26.7 47 Nearly all states have suffered considerable revenue loss in the severe 2007-09 recession. Oregon’s reliance on the personal income tax makes it especially vulnerable to economic downturns. For the period covering the most severe part of the recession, second quarter of 2008 to second quarter of 2009, Oregon state tax revenue declined 27.3%, only two states experienced a larger percentage decline.

Oregon’s Short Term Outlook: Slow Recovery

General Fund Revenue Trends (in millions by fiscal year)

Rise & Fall of Lottery Revenue (in millions)

*Includes $200 million trigger 2009-11 General Fund/Lottery Budget Balanced with New Revenue & ARRA Funds (in millions) *Includes $200 million trigger

State Reserve Fund Position: 2009-11 Biennium (in millions) Reserves February Forecast Projected Allocations Projected Ending Balance Rainy Day Fund $135 $126 $9 Ed Stability Fund $183 $77 $106 Total Reserves $318 $203 $115

Outlook for the 2011-13 Biennium Slow recovery out of deep hole Baseline revenue forecast Early estimates on 2011-13 budget gap Economic risks to outlook Specific budget risks

Long Road Ahead for Oregon Job Recovery (Quarterly in Thousands)

Early Look at 2011-13 General Fund/Lottery Budget (Current Law Projections in Millions)_ Source: DAS

Early Look at 2011-13 General Fund/Lottery Budget (Current Law Projected Change in Millions)_ Source: DAS

Projected 2011-13 General Fund/Lottery Budget (% Change from 2009-11 Total Base) Source: DAS

2 Scenarios for U.S. Economy with Huge Implications for Oregon’s Economy “New Normal” “New Mix” Economic recovery is slow and weak Heavy debt and lost wealth keeps consumer weak Business investment remains restrained because of tight credit Feds begin pulling back stimulus limiting recovery Economy eeks out real annual growth of 1.5-2% Recent strong productivity gains improve U.S. competitive position Emerging countries provide growing market for U.S. exports Businesses respond with increased capital investment Growth returns to near historical norm of 2.5 to 3%

Conclusions Economic recovery not yet on firm sustainable ground February rebalance leaves little margin for error for remainder of 2009-11 biennium. Baseline 2011-13 revenue growth roughly sufficient to maintain current reduced service level adjusted for “normal” expenditure growth factors Backfilling reserves and federal stimulus money presents biggest challenge to 2011-13 budget Reduced financial market earnings forces up PERS costs adding to already large current law 2011-13 budget gap