Oregon Rainy Day Fund Could Get Wall Street's Attention

With Oregon's state coffers full from a buoyant economy and revenue forecasts no longer hemorrhaging red ink, Treasurer Randall Edwards says it is a good time to prepare Oregonians for future economic downturns.

State Treasurer Randall Edwards Photo: State of Oregon

(SALEM) - Oregon’s state treasurer, after years of stymie by economic downturn, is renewing calls to state lawmakers to approve legislation to create a rainy-day fund to hedge against future budget shortfalls, a move that analysts say could help to improve the state’s mediocre bond rating.

Eager to make Oregon paper more attractive to investors, state Treasurer Randall Edwards, a Democrat, wants lawmakers to divert nearly $300 million scheduled for return to C-corporations this year, and instead use the money to create a structural budget reserve.

The House is likely to vote Tuesday on the proposal, outlined in House Bill 2707.

With forecasters expecting revenues to continue surging, potentially leaving a $1.4 billion surplus, now is the time to start saving, Edwards said in a lengthy interview.

“New York is watching us,” he said. “If we get a rainy-day fund, we’ve got a story to tell the bond rating agencies.”

Specifically, Edwards, who manages the state’s pension funds and public debt, wants legislators to suspend Oregon’s so-called corporate “kicker” law, which benefits nearly 34,000 companies that do business in the Beaver State.

Since its inception in 1979, Edwards said, $529 million has returned, mostly to out-of-state companies, including the state’s largest private employer, Santa Clara, Calif.-based Intel Corporation, which manufacturers computer chips.

The kicker law, unique to Oregon, requires that when tax receipts exceed official projections by two-percent or more, unanticipated gross revenues must be returned to taxpayers at the end of the two-year budget cycle. In the case of individuals, rebate checks are given; corporations, however, receive a credit toward the following year’s tax bill.

The wildly popular personal income tax kicker, which is not on the chopping block, could this year return $1.1 billion to individuals, according to revenue officials.

An uncommitted budget reserve, Edwards explained, could give Wall Street analysts the assurances they need to upgrade the state’s general obligation bond ratings, which in the past have been downgraded.

Among the reasons: the lack of a state budget reserve and an over-dependence on personal income tax receipts, which accounted for 87-percent of FY 2004 general fund revenues, according to Rosemary Hardin, a spokesperson for the state Department of Revenue.

“We’ve always had a volatile tax structure, but we’re working on that. We’ve cut our budget and reformed our pension system,” Edwards said, noting that analysts have yet to respond favorably and upgrade the state’s credit rating.

“Oregon is being short shrift by rating agencies. We are not getting full credit for what we’ve done,” Edwards said. “Once we get a budget (passed) and a rainy-day fund established I’ll go to New York in July to see if we can’t get an upgrade.”

An improved bond rating could save taxpayers $10 million a year in borrowing costs, he added. Over the 20-year life of a bond, for instance, a better bond rating could translate into substantial savings.

In 2003, Oregon’s creditworthiness was downgraded by the three major rating agencies. Since that time, Standard & Poors has assigned a AA- rating, three designations from its premium AAA rating. Fitch Ratings has assigned a similar AA- rating. Moody’s Investor Service has recently given Oregon its A1 rating, a “stable” one, citing sustained job growth and the state’s debt ratio

Gabe Petek, director of the state and local government group at Standard & Poors, said that Oregon’s kicker law is an “impediment” to the state’s financial stability. In tough economic times, he said, Oregon gets a beating because of its over-dependence on state income tax receipts, and the lack of a state sales tax. Then, when good economic times arrive, like this year, and the state has a surplus, the money has to be returned back to taxpayers.

“Oregon has done a good job managing its finances with some structural difficulties,” Petek said, referencing the kicker law, which he said has “limited the state’s ability to save.”

Standard & Poors analyst Rob Williams agrees. He said establishing a reserve would be “beneficial” to the state’s credit quality, especially given Oregon’s “volatile” revenue profile.

In rating $66.7 million in certificates of participation to finance primarily new prison construction, Fitch Ratings recently assigned an A+ designation, saying that while Oregon’s debt is “moderate,” it has tripled since 2000 because of pension and deficit borrowings.

Oregon’s tax-supported debt now sits at $5.5 billion, equal to $1,504 per capita, according to official numbers.

A reserve, supporters contend, would also create a cushion to lessen the effects of leaner economic times like Oregon experienced during a deep recession in 2002-03 when state income tax receipts dipped 12 percent forcing lawmakers to make significant cuts to public services and borrow $450 million to keep programs operating after voter rejected a temporary tax increase.

“The last recession showed us the importance of planning,” said Jake Weigler, a spokesperson for Gov. Ted Kulongoski. “No state fell further, faster than Oregon.”

Kulongoski, a Democrat, supports a one-time suspension of the rebates, Weigler said, adding that possibly repealing the kicker law should be part of a “broader discussion” later.

Now, with state coffers full from a buoyant economy and revenue forecasts no longer hemorrhaging red ink, he said, it only makes sense to prepare Oregonians for future economic downturns.

“We should have been setting money aside in the 90s, but the challenge was how do you do that when there were current needs to be met?” Edwards said. “Oregon is on much more sound footing now.”

Ultimately, the governor and Edwards would like $1 billion dollars socked away by the end of this two-year budget cycle.

To get there, they want to deposit $440 million from the state’s lottery-fed Education Stability Fund, $275 million in surplus corporate taxes, and a $120 million budget ending balance. Money also left unspent at the end of this and subsequent bienniums would be deposited into the newly created reserve account. This legislative session, the idea of suspending the kicker rebates has attracted an unusual coalition of Democrats, Republicans and business leaders who say they share Edwards’ vision, but would also like the state’s corporate capital gains tax reduced from 6.6-percent to five-percent. For individuals, they want the rate cut from nine percent to seven percent.

Republican lawmakers say they support the idea of creating a budget reserve, insisting though that any reserve not become a government slush fund, and only be tapped in tough economic times. They also want corporations that make less than $500,000 to remain eligible for kicker rebates. That, they say, will benefit small businesses.

While two-thirds of lawmakers can vote to suspend the payments, only voters could approve an outright repeal.

If Democrats cannot muster the nine House Republican votes needed to cancel the payments, they could opt to place a permanent repeal on the May 15th ballot. For that, only a simple majority vote is needed, so Democrats, who have control of both houses of the Legislature, would not need any Republican support. The Legislature must refer the proposed constitutional amendment by March 15th.

*********************************************************** Editor's note: We are pleased to announce that Chris Rizo has joined the team at Salem-News.com. Look for more of his reports from the Oregon State Capitol. Chris Rizo's background involves several years covering the California Legislature and we look forward to his