Gov. Kate Brown is ordering state agencies to plan for nearly $2 billion in budget cuts, as she prepares for a potentially devastating blow to the state’s finances.
In a memo issued to agency directors on April 24, the state’s chief financial officers directed agencies to submit plans for 8.5% cuts in their allotted general fund spending for the two-year budget cycle, a scenario that would reflect what budget officials believe is likely a worst-case outcome for the current two-year budget cycle.
While no one knows precisely what to expect from an upcoming budget forecast, financial officers George Naughton and Kate Nass write in the memo, “we do know it will be a significant drop in state revenues. This impact could be as high as a loss of two to three billion in state resources during the current 2019-21 biennium.”
Agencies have been ordered to submit plans detailing proposed cuts to spending by May 8.
The order — the most notable cost-cutting step Brown has taken to date — occurs against a dramatic change of fortunes for state finances. As recently as March, forecasters anticipated the state would bring in $1.15 billion more than what it planned to spend in the current budget.
That was before the COVID-19 pandemic forced major hits to some of the state’s largest revenue sources: income and business taxes that make up the vast majority of the state’s general fund, lottery revenues decimated by bar and restaurant closures, taxes on fuel and heavy trucks, and user fees that benefit a range of different agencies.
“Clearly the state budget will take a hit, just like all private sector businesses have taken a hit to their revenues [and] workers have taken hits to their paychecks,” Josh Lehner, an Oregon state economist, said in a presentation to the Bend Chamber of Commerce last week. “That translates even more than one-for-one into reductions in-state resources.”
The precise impact is uncertain, but budget officials have bandied about a reduction of up to $3 billion to the tax revenues Oregon had expected this budget cycle — a loss that would wipe out the $1 billion surplus the state had been planning on, and eat into the state’s planned spending. Such a hit, if it came to pass, would eclipse even the “severe recession” scenario state economists present to lawmakers for planning purposes.
The 8.5% percent cut being discussed reflects a $1.847 billion hole in the budget that could be created by such a severe hit. And since the cuts are being ordered in a two-year budget cycle that is nearly half over, they translate to a roughly 17% cut for the fiscal year.
Brown’s order does not take into account factors that could lessen the blow, such as federal aid or tapping the nearly $1.6 billion sitting in the state’s reserve funds. Additionally, agencies have been directed not to include proposals for freezing salaries or furloughing workers in their plan.
“At this point, the reduction plans are a planning exercise that will give the Governor a series of options to consider,” Liz Merah, a spokeswoman for Brown, said in an email. “Whether the state will need to implement this level of cuts will be dependent on ongoing conversations with our congressional delegation about additional federal funding and flexibility in how CARES Act funding can be used; exact details of the May 20 revenue forecast; and continued conversations with legislative leadership on balancing the budget.”
The order is similar to an exercise the Legislature’s top budget writers have been carrying out, where they analyze the impacts of potential 5%, 10% and 15% budget cuts to state agencies.
In recent weeks, Brown and governors from around the country have demanded the federal government provide funding to help them make up for lost revenue due to the pandemic.
To date, federal aid has come with restrictive rules. For instance, $1.6 billion Oregon expects to receive from the Coronavirus Relief Fund recently created by Congress must be used to pay for new initiatives rather than already budgeted items the state can no longer afford.
“We cannot use that to backfill the revenue that we have lost because I shuttered the economy to stop the spread of the disease,” Brown said April 14. “That is a frustration I would say is shared by governors around the country.”
While a clearer picture of the state’s budget hole isn’t expected until May 20, agencies are already bracing for impact.
The Oregon Department of Transportation, which relies on fuel and heavy trucks taxes for much of its funding, said in a recent report that an ongoing steep reduction in driving could result in a $120 million hit to the State Highway Fund. The agency is expected to reveal more about its plans for cutting costs in the coming days.
The Bureau of Labor and Industries announced Monday that managers will be required to take one furlough day a month through the end of the budget cycle in June 2021. The move will save the bureau more than $100,000, spokeswoman Jenny Smith said.
Meanwhile, cuts are going to be far steeper at Travel Oregon, a semi-independent agency that relies on the state’s transient lodging tax for nearly all of its funding.
With travel and tourism halted in the pandemic, stays at hotels and vacation rentals that pay the tax are plummeting, and the speed of any rebound is uncertain. Travel Oregon is planning to lay off 17 of its 64 staff June 1, spokeswoman Sara Morrissey confirmed Tuesday. The cuts were first reported by The Oregonian.
Despite the anticipated onslaught, Brown has so far been largely hands-off about instituting spending cuts. The governor has halted state travel, placed a hiring freeze on “non-critical” positions, and closed some public-facing services. At the same time, agencies that have seen a dramatic surge in demand, such as the Oregon Employment Department, have been trying to quickly scale up staffing levels.
“In this time of crisis, Oregonians rely on state services more than ever, so cutting critical state services will be a last resort,” Merah said.
Lehner, the state economist, predicted last week that the state economy would be severely impacted in the short term, before experiencing a small bounce once businesses open up more fully.
“We’re gonna kind of go from a near depression-level economic situation to a near recession in the months ahead,” Lehner said. “From there we’re going to see slow economic growth.”