BY SARAH ROSS

SALEM- With just over a week to go before the August 26 revenue forecast, State Economist Tom Potiowsky and Governor Ted Kulongoski let slip that the $577 million budget shortfall projected back in May likely will be increasing by an additional $200 to $500 million.

“Given the information available, we estimate that the general fund revenue forecast will be down between $200 and $500 million,” wrote Potiowsky in a memo sent to Gov. Kulongoski on August 11. “We stress this is a likely outcome and the final numbers could be outside the range.”

Kulongoski followed up by sending his own letter to the Legislative leadership, Senate President Peter Courtney, D-Salem, and Speaker of the House Dave Hunt, D-Clackamas, explaining the situation.

“After nine negative forecasts over the past 27 months, it will be prudent to expect and to plan for continuing challenges ahead of us,” wrote Kulongoski.

Eileen Norcross, Senior Research Fellow at the Mercatus Center, said that most states are having the same problems as Oregon in terms of growing deficits.

“They have had some sustained increases in spending in the 1990s and into the 2000s,” said Norcross.

The drivers of spending, she said, are increases in Medicaid enrollment, education spending, and deferred public sector pension payments.

In his letter to Courtney and Hunt, Kulongoski wrote, “I am hoping we can come to an agreement on how to resolve the deficit if the forecast materializes as expected, so we can bring the state budget back into balance for the biennium.”

“With nine months remaining in this biennium, we still have time to implement reductions; but if we wait much longer, that opportunity may not be available,” he wrote.

Norcross noted that in spite of receiving federal stimulus funds, most states are still facing these large deficits.

“Basically states have now received stimulus funds and, in spite of that, these gaps continue,” she said. “It doesn’t look like these revenues will recover for a couple of more years. They’re projecting of revenues not recovering, in some cases, until 2015.”

Some states, Norcross said, have been using several “short term fixes” like issuing debts, deferring pension payments, “one shot” revenue sources, and fund transfers to fill these budget gaps.

She added that until the revenues recover, states are left with few options, including raising taxes, cutting spending, and taking a deeper look at the cost drivers and considering reforms of those cost drivers.

Kulongoksi said in his letter that he remains opposed to using reserve funds and using federal Medicaid resources to increase current spending levels.

Kulongoski made no mention of calling a special session, but Republicans jumped at the chance to call for one in light of the added shortfall.

“There is no doubt that the out-of-control appetite for spending has created this mess, but our most important services should be protected in spite of those decisions,” said Sen. Bruce Starr, R-Hillsboro, in a press release sent Tuesday. “I hope Democrats have the courage to do the right thing this time and call us into special session. We were elected to do a job that includes balancing the budget.”

Tom Potowski and Josh Harwood from the Office of Economic Analysis present their forecast to the Joint Revenue Committee

BY SARAH ROSS

SALEM- Oregon’s leaders were caught by surprise Tuesday morning upon learning that the State now must endure a $560 million budget shortfall for the current biennium.

A presentation by Tom Potowski and Josh Harwood from the Office for Economic Analysis showed that the state’s revenues are short $560 million for the 2009-2011 biennium.

Before unveiling the large budgetary gap, Potowski urged the committee to see the positive signs that his office found.

“I’ve just given you a picture that I think is hopeful in that we’re starting to see the recovery and moving forward,” said Potowski. Yet, he acknowledged the disconnect between those signs and the reported shortfall.

The most noticeable difference between this forecast and the one given at the end of February was the decrease in personal income tax revenue by $798.1 million, adding to an overall decrease of $876.5 million for General Fund revenue.

Harwood added that the State’s Capital Gains income tax went down in 2009 by almost half, going from just under $4 billion to under $2 billion.

“We are not alone. All the states have seen this sort of situation where the final payments in the April period were down much farther then what they actually expected,” said Potowski.

He added that Oregon differs from other states in that it has not been able to cushion its decline, as many other states have with their sales taxes. He went on to say that Oregon’s situation therefore may look worse than other states because it is so dependent on the very volatile personal income tax.

Legislative leaders were taken aback by this news which, according to Senate President Peter Courtney, they didn’t see coming.

“This has been a sobering morning for us,” said Senate Revenue Committee Chairwoman Ginny Burdick, D-Portland. “We can’t put ourselves through this anymore and it really is time to do kicker reform.”

The shortfall will add an additional $200 million to the 2011-2013 projected budget shortfall of $2.6 billion, projected in the March forecast.

In Tuesday’s press conference, House Speaker Dave Hunt reinforced that the shortfall would be even greater if the tax measures 66 and 67 had not passed.

However, Hunt’s declaration did not stop House Minority Leader Bruce Hanna from issuing his own statement blaming the shortfall on Legislative leadership.

“Rather than working with the private sector to encourage job growth, Oregon’s businesses have been stifled by job-killing taxes and mandates. It’s no surprise that April’s tax collections were ‘dismal,’ because the Democratic supermajority has done nothing to improve our private sector economy,” wrote Hanna.