Public OfficialsCompensation Commission

July 9, 2008

George Naughton

Department of Administrative Services

(503) 378-5460

Lessons from our History:

Strong Economic Growth during the 1990’s

3

1990’s: State enjoyed huge economic growth and diversification

• Total gross state product increased by 98% from 1991-2001.

• High-tech industry growth.

• Population growth – 11th fastest growing state.

• Personal income grew at annual rate of 5.6%, exceeding the nation.

• Exports increased by a compound annual rate of 5.8%.

• State General Fund grew from $4,628.1 million in 1989-91 to $10,121.8 million in 1999-2001 – dollars primarily went to K-12, Oregon Health Plan, and Public Safety.

• Kicker returned for personal income tax filers 4 times, totaling about $1.1 billion; for corporate tax filers 2 times, totaling about $400 million.

4

Decennial Population Growth (in percent): 1990 – 2000

CLATSOP

WASHINGTON

MULTNOMAH

COLUMBIA

DOUGLAS

LANE

LINCOLN

POLK

YAMHILL

TILLAMOOK

MARION

COOS

DESCHUTES

MALHEURHARNEYLAKEKLAMATHJACKSONJOSEPHINE

CURRY

HOOD RIVER

BENTON LINN

JEFFERSON

CROOK

WALLOWAUMATILLAMORROW

GILLIAM

WASCO

SHERMAN

WHEELER

GRANT

BAKER

UNION

> 20 %

Source: U.S. Census Bureau, 1990 and 2000 Censuses

CLACKAMAS

Office of Economic Analysis

Population Change

10 – 20 % Less than 10 %

Oregon: 20.4%

5

State and Local Resources for K-12 School Funding

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0 Local

State

Bil

lio

ns

of

Do

lla

rs

6

-

1,000

2,000

3,000

4,000

5,000

6,000

Jan

-95

Jan

-96

Jan

-97

Jan

-98

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Jan

-10

Jan

-11

Jan

-12

Jan

-13

Jan

-14

Jan

-15

Jan

-16

Jan

-17

Ad

dit

ion

al In

mat

es

Direct Impact

Indirect Impact

Historical October 2007 Forecast

Office of Economic Analysis, October 2007

Estimated Impact of Measure 11 on Oregon's Prison System

7

1989-91 General & Lottery Fund ExpendituresTotal: $4,804.6 Million

Public Safety/Judicial

$631.013%

All Other$898.919%

Other Education

$308.76%

State School Fund

$1,176.125%

Higher Education

$693.314%

Human Resources$1,096.6

23%

2001-03 Legislatively Approved General Fund & Lottery Funds Budget - End of Biennium

Total: $10,426.7

Higher Education

$761.27%

Human Resources$2,480.3

24%State School

Fund$4,200.9

40%

Other Education$730.4

7%

All Other$618.4

6%

Public Safety/Judicial

$1,635.516%

Approved General Fund & Lottery Funds

Impact of 2001-03 Recession on State Budget

9

2001-03

• Close of Session forecast projects $12.1 billion General Fund/Lottery Funds ($11.45 GF/$0.65 LF). Legislature approves expenditures of $12 billion. Preliminary 2003-05 forecast is approximately $13 billion (GF plus Lottery).

• Quarterly General Fund forecasts demonstrate effects of recession:

2001-03 2003-05

September 2001 11,159.4 12,313.0

December 2001 10,747.5 11,944.8

March 2002 10,604.0 11,973.9

June 2002 10,098.2 11,528.3

September 2002 9,718.6 11,392.5

December 2002 9,585.6 10,880.5

• Five special sessions plus a rebalance during the 2003 regular session to rebalance the budget using one-time resources, program reductions, and additional revenues.

10

Poverty Rate, 1999

CLATSOP

WASHINGTON

MULTNOMAH

COLUMBIA

DOUGLAS

LANE

LINCOLN

POLK

YAMHILL

TILLAMOOK

MARION

COOS

DESCHUTES

MALHEURHARNEYLAKEKLAMATH

JACKSON

JOSEPHINE

CURRY

HOOD RIVER

BENTON LINN

JEFFERSON

CROOK

WALLOWAUMATILLA

MORROWGILLIAM

WASCO

SHERMAN

WHEELER

GRANT

BAKER

UNION

> 15 %

Source: U.S. Census Bureau, Census 2000

CLACKAMAS

Office of Economic Analysis

% of personsunder poverty

10 – 15 % Less than 10 %

Oregon: 11.6%

11

Estimated Poverty Rate, 2004

CLATSOP

WASHINGTON

MULTNOMAH

COLUMBIA

DOUGLAS

LANE

LINCOLN

POLK

YAMHILL

TILLAMOOK

MARION

COOS

DESCHUTES

MALHEURHARNEYLAKEKLAMATH

JACKSON

JOSEPHINE

CURRY

HOOD RIVER

BENTON LINN

JEFFERSON

CROOK

WALLOWAUMATILLA

MORROWGILLIAM

WASCO

SHERMAN

WHEELER

GRANT

BAKER

UNION

> 15 %

Source: U.S. Census Bureau, Data Integration Division, Small Area Estimates Branch

CLACKAMAS

Office of Economic Analysis

% of personsunder poverty

10 – 15 % Less than 10 %

Oregon: 12.9%

Economic Recovery in 2003

13

Highlights of Oregon Economy

• After the recession of 2001-03, Oregon experienced three years of strong economic growth. During this period, Oregon’s economic indicators exceeded national averages.

• Employment picture in Oregon was extremely strong beginning in 2003– 2.3% annual growth in calendar year 2004– 3.4% annual growth in calendar years 2005 and 2006– For all three years, Oregon’s employment growth was between one and one-and-a-half

percentage points higher than the national average.

• Oregon’s basic strengths– Diverse economy with substantial international presence– Relatively lower energy costs – A high quality of life– Well-educated workforce– Affordable housing– Business cost advantages– Pacific Rim orientation– Strong population growth due mainly to in-migration

14

Non-Farm Employment Growth(Annual Percentage Change)

-3%

-2%

-1%

0%

1%

2%

3%

4%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Oregon U.S.

Long-Term Employment Trends

Oregon’s overall employment trends have mirrored the U.S. with slightly more job loss during the recession but stronger recent and projected growth

Source: Office of Economic Analysis

• The Oregon economy follows the path of the national economy• Job growth turned positive in July 2003• Oregon’s employment growth will continue to be fueled by strong exports, population

growth and business investment

Projected

15

Lottery Resources Available to the State (Millions)

Office of Economic Analysis

Note: Resources do not include Video Lottery proceeds dedicated to the Counties. Beginning balance is included. 2003-09 debt service figures do not reflect any Education Endowment Fund or reserve earnings designated for debt service on education bonds .

$ 0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

85-87 87-89 89-91 91-93 93-95 95-97 97-99 99-01 01-03 03-05 05-07 07-09Proj.

09-11Proj.

11-13Proj.

Resources Available for Allocation

Parks (15%) & Other Dedicated Programs

Education Stability Fund (15-18%)

Debt Service

16

2007-09 Legislatively Approved BudgetTotal Funds

Budgeted Resources Total: $48,328 Million

Lottery Funds2%

Federal Funds19%

Other Funds50%

General Fund29%

ExpendituresTotal: $48,328 Million

Other Education5%

Higher Education10%

Public Safety/Judicial

7%All Other40%

Human Services25%

State School Fund13%

17

2007-09 Legislatively Approved Budget General Fund and Lottery Funds

* Includes beginning balance & carry forward

Resources BudgetedTotal: $15,275 Million

Insurance1.0%

Personal Income Tax71.5%

All Other3.6%

Cigarette/Tobacco Taxes0.8% Corporate Income Tax

5.8%

GF Beginning Balance9.7%

Lottery*7.6%

ExpendituresTotal: $15,121 Million

Other Education7.0%

Higher Education6.0%

Public Safety/Judicial15.8%

All Other7.2%

Human Services22.7%

State School Fund41.3%

18

Expenditures by CategoryGeneral Fund and Lottery Funds

Special Payments

69%

Services and Supplies

8%Capital Outlay

0%

Personal Services

20%

Debt Service3%

2007-09 Legislatively Approved BudgetTotal: $15,121 million

19

• Continued growth of the Education Stability Fund – 18% of biennial net Lottery revenues are dedicated to this reserve account

• Establishment of a Rainy Day Fund in the 2007-09 Budget– Seeded with Oregon’s projected 2005-07 Corporate Kicker of $319.3 million– All interest earnings on the Rainy Day Fund are retained in the Rainy Day Fund– Automatic transfer to the Rainy Day Fund of one percent of Oregon’s General Fund expenditures from the State’s ending fund balance at the completion of each biennium

• $921 million budgeted reserve for 2007-09 biennium is approximately 6.6% of anticipated biennial general fund expenditures

Increasing Oregon’s Budget Reserves

(1)Reflects Ending Balance after distribution of $1.2 billion in personal “kicker” distributions(2)Reflects $319.3 million in initial corporate “kicker” deposit and interest earnings

Budgeted Reserves

($ Millions)

2005-07 2007-09

Education Stability Fund $ 236 $ 396

Rainy Day Fund --

341(2)

Ending Balance/Emergency Fund __319(1) 184

TOTAL $ 555 $ 921

20

The State’s reserve funds are now legally required and a permanent component of the State’s balance sheet

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

99-01 01-03 03-05 05-07 07-09 09-11 11-13

18% Lottery Revenues to

ESF

RDF Created in 2005-07

($ in millions)

6.6%

8.7%

0.2%

4.3%

7.4%

2.7%

Rainy Day Fund Education Stability Fund Projected Rainy Day Fund Deposit Undesignated, Unreserved Fund Balance Reserves as % of Biennial GF Revenues

0.0%

Undesignated Fund Balances andProjected Reserves

Looking Forward at Budget Drivers

22

Revenue Drivers

• Revenue Growth Factors– Employment– Wage Rates– Investment Returns– Profit Levels

• Long term risks– Burgeoning retirement income erodes taxable

income base.

23

What has caused General Fund expenditure growth?

• Primary– Population– Voter Approved Initiatives– Legislative Policy decisions– Federal Budget Adjustments

• Secondary– Inflation– Lawsuits

24

Num

ber o

f per

sons

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

1980 1985 1990 1995 2000 2005 2010 2015 2020

Ages 5-17

Ages 0-4

Office of Economic AnalysisSources: U.S. Census Bureau; CPRC/PSU; OEA

Young-age Population:1980-2020

25

Num

ber o

f per

sons

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1980 1985 1990 1995 2000 2005 2010 2015 2020

Ages 18-24

Ages 25-44

Ages 45-64

Office of Economic AnalysisSources: U.S. Census Bureau; OEA

Working-age Population:1980-2020

26

Num

ber o

f per

sons

0

100,000

200,000

300,000

400,000

500,000

600,000

1980 1985 1990 1995 2000 2005 2010 2015 2020

Ages 85+

Ages 65-74

Ages 75-84

Office of Economic AnalysisSources: U.S. Census Bureau; Office of Economic Analysis

Elderly Population:1980-2020

Other Significant Issues

28

K-12 School Funding per ADMw(State School Fund and School Improvement Fund)

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

1990 1995 2000 2005 2007 2008

School Year

Actual

Inflation-Adjusted(1990-91 Dollars)

29

K-12 School FundingClosing the QEM Gap

(“State EBL” only includes State School Fund Base)

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

03-05 05-07 07-09 09-11 11-13 13-15

Biennium

61% Target

10% Growth

State EBL

Local Revenue

QEM

30

Higher Education FundingPercent of General Fund and Lottery Funds

1983-85 through 2007-09

12.8% 12.9%

15.3%

13.1%

11.7%

9.7%

6.4% 6.3%7.0% 6.9%

6.0% 5.8% 6.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

1983-85Adopted

1985-87Adopted

1987-89Adopted

1989-91Adopted

1991-93Adopted

1993-95Adopted

1995-97Adopted

1997-99Adopted

1999-01Adopted

2001-03Adopted

2003-05Adopted

2005-07Adopted

2007-09Adopted

31

0%

5%

10%

15%

20%

25%

1990 1992 1994 1996 1998 2000 2002 2004 2006

Oregon Health CareUninsurance Rates: 1990-2006

Source: Office for Oregon Health Policy and Research, Oregon Population Survey 2006.

Adults 18-64

Children 0-17

32

Other Issues

• Economic Downturn

• Federal Budget Adjustments

• Additional Lawsuits

• Potential Voter Approved Initiatives

– Mandatory Minimum Sentences for Property Crimes: Full biennial costs could be between $275 and $430 million.

• Pent-up Budget Demand

– Deferred Maintenance: Outstanding deferred maintenance costs for state and University owned facilities exceed $800 million.

– Seismic: Rehabilitation costs could exceed $750 million depending on approach.