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 Over the long term, an aging population and an outdated tax structure means that ______, like other states, is expected to face a mounting structural deficit, where annual growth in revenue is incapable of keeping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

• 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 National 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%.

The Great Recession: Impact on the Oregon Economy

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%

Corporate Income 9.0 6.1 -31.8%

General Sales 64.7 63.0 -2.6%

Property Taxes 390.4 415.0 +6.3%

Impact of Great Recession on State and Local Taxes

Oregon Among Hardest Hit by Current Recession

(April-June 2009 Compared to 2008)

% CHANGE IN TAX % CHANGE IN TAX REVENUEREVENUE

RANK AMONG THE RANK AMONG THE STATESSTATES

All StatesAll States -16.6-16.6 ----

AlaskaAlaska -86.5-86.5 5050

New MexicoNew Mexico -30.8-30.8 4949

OregonOregon -27.3-27.3 4848

ArizonaArizona -26.7-26.7 4747

7

Oregon’s Short Term Outlook: Slow Recovery

-6%

-4%

-2%

0%

2%

4%

6%

2007 2008 2009 2010 2011 2012

OREGON PERSONAL INCOME

PORTLAND AREA CONSUMER PRICES

OREGON PAYROLL EMPLOYMENT

General Fund Revenue Trends(in millions by fiscal year)

Rise & Fall of Lottery Revenue(in millions)

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

1500

1550

1600

1650

1700

1750

1800

PAYROLL EMPLOYMENT

PRE-RECESSION LEVEL

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

“New Normal”

• 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%

2 Scenarios for U.S. Economy with Huge Implications for Oregon’s

Economy“New Mix”

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