After four years when Oregon received almost $4 billion extra in federal aid during the coronavirus pandemic and set records for income tax collections, the Legislature’s chief budget writers have laid out a framework for the next two years that would spend less than what Gov. Tina Kotek has proposed.

Their framework, which they announced Thursday, March 23, still proposes a two-year state budget of $31.6 billion from the tax-supported general fund and lottery proceeds, the two most flexible sources for state spending. (Other state spending draws from federal grants and earmarked sources such as fuel taxes.) That budget target is more than the projected $29.3 billion for the current two-year cycle, which ends June 30 – but less than the $32.1 billion that Kotek unveiled as a new governor on Jan. 30.

Kotek, herself a legislator for 15 years and House speaker for a record nine years, had this reaction:

“We share a mission-focused vision. Rather than scores of new programs, we need to prioritize investments that will deliver meaningful results on housing and homelessness, behavioral health, and education. As the budget process moves forward, I urge the Legislature to exhaust every possible funding option in order to make the visible and measurable progress that Oregonians are demanding on these issues of statewide concern.”

The framework will be the basis for legislative subcommittees that do the detailed work on individual agency budgets, which are supposed to be completed by July 1. Unlike the governor, who proposes a single budget, lawmakers approve a series of agency bills that match the framework of what is known as a “co-chairs budget.”

Like Kotek’s budget, the co-chairs’ proposal does not require new taxes, and it does not touch the record $4 billion kicker rebate that individual taxpayers will get in the form of credits against their 2023 tax returns that they file in spring 2024. The exact amount of the kicker will be known in late summer, after the end of the current two-year budget cycle.

It does take into account the millions that lawmakers have already approved — or are on the verge of approving — for Kotek’s initiatives to aid unhoused people and avert homelessness, and to aid businesses and others seeking a share of billions in federal money available for expansion of domestic semiconductor manufacturing. The first package cost $217 million, although $30 million was redirected from the current budget, and the second is projected at $210 million.

‘Not a lot of room’

But Sen. Elizabeth Steiner and Rep. Tawna Sanchez, Democrats from Portland who lead the Legislature’s joint budget committee, say that spending leaves relatively less available for other new or expanded programs that Kotek and others advocate.

“What you see here is a balanced budget that protects ongoing services, requires some reductions, includes the early investments in housing and the semiconductor industry – but does not have a lot of room for extras,” Steiner told reporters beforehand. “We really focused on what we are required to do.”

“People have become accustomed to having lots and lots of resources. The combination of an uncertain economy and inflation are putting us in a different place than where we were two or four years ago.”

Sanchez said that while their framework includes a pot of $325 million for other new priorities, the money will not fund them all fully.

“We deprioritized new things,” she said. “We’re not going to move into new things right now because we don’t know where we are going to be and we don’t know what the May forecast is going to look like. We want to make sure we can take care of the basic things going forward.”

Though much of the $4 billion in federal aid in 2020 and 2021 went to one-time spending, including around $500 million to balance the proposed 2023-25 budget, Sanchez said lawmakers have boosted spending on education, health and housing during the past four years. “They are things we put into place and now we have to figure out paying for them,” she said. “We are following through with what we said we are going to do.”

Record tax collections also helped, but state economists have said they are unlikely to continue, because capital gains – profits from the sale of assets such as stocks — are expected to tail off. Unlike the federal tax code, Oregon taxes capital gains at the same rates as ordinary income; the top rate is 9.9%.

The state’s next economic and revenue forecast is May 17. Lawmakers will await that forecast from the Oregon Office of Economic Analysis before they make final decisions on big budgets.

Small pot, long waiting list

Aside from housing/homelessness and semiconductor aid, Sanchez and Steiner listed other issues that lawmakers will have to resolve in the next budget cycle.

Among them: A pending redetermination of eligibility for the 1.4 million recipients of the Oregon Health Plan, which covers one-third of the state’s population, and their enrollment in a new Basic Health Plan to start in mid-2024; the shortage of legal representation for indigent criminal defendants entitled to counsel; Kotek’s initiatives for early learning centers ($100 million), reading skills programs ($100 million) and 2023 summer school programs ($50 million), and additional spending on behavioral and reproductive health. Lawmakers and interest groups have other spending proposals.

Kotek proposed $40 million for indigent defense, and the co-chairs’ budget includes $67 million, but a work group involving all three branches of government has not yet concluded its work.

Steiner, a family practice physician, said the health care work by the Oregon Health Authority and the Department of Human Services is the most complex task and has already taken months, given that federal restrictions against paring Medicaid recipients from coverage will end this month.

“It is important for us to provide protection for Oregonians who are determined to be no longer eligible and to ensure that they maintain access to high-quality care,” she said.

The co-chairs’ budget does propose a state school fund of $9.9 billion, equal to Kotek’s recommended amount. Advocates led by the Oregon School Boards Association seek a fund of $10.3 billion. The latest economic and revenue forecast projects $1.55 billion in excess corporate income taxes, which under a measure that voters approved in 2012 go into the state school fund, but the excess money is excluded from future calculations.

It proposes $450 million for employee pay and benefit increases that have yet to be negotiated with unions, plus $65 million for increases for non-state employees such as home-care workers. The larger figure includes $120 million for recruitment and retention of workers in high-demand fields.

“We are particularly concerned about places where we require 24/7 service,” Steiner said, such as the Oregon State Hospital in Salem and other mental health crisis units, state prisons and Youth Authority facilities.

A point of difference

One point where the co-chairs and Kotek differed is on Kotek’s proposed suspension of the legal requirement for 1% of the state budget’s ending balance to go into a reserve fund, as specified in the 2007 law that created the fund. Kotek did so to secure more money for her recommended budget.

The co-chairs would scrap that proposal in favor of a 2.5% across-the-board cut in agency budgets that rely on the tax-supported general fund and lottery proceeds. Steiner said agencies can do so through actions such as holding open vacant positions or trimming services and supplies.

“We are working to ensure those reductions occur in areas that do not affect program delivery for Oregonians,” she said.

Steiner, however, didn’t completely rule out going back to Kotek’s proposal, which would require only simple majorities in both chambers to change the law.

The across-the-board cut does not apply to debt repayments, which cannot be reduced, or to other funding sources such as user fees.

Neither Kotek nor the budget writers propose to tap the general reserve fund or the education stability fund, which consists of 18% of Oregon Lottery proceeds. Either withdrawal would require specific economic triggers plus approval by 60% supermajorities in the Legislature, where Democrats are one vote shy of in each chamber. The reserves already are at a record $2 billion.