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Sunday, July 25, 2010 11:02 PM

Edge of Financial Chasm

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Here is an interesting story with an Oregon slant that reflects problems all states now face. Please consider Oregon budget stands at precarious crossroad.

Oregon government stands at the edge of a financial chasm as precarious as any in its 151-year history, hemmed in by the global recession, questionable spending decisions and a budget-draining combo of skyrocketing expenses and sluggish growth.

Consider this sobering fact: State expenses, including payroll, health and retirement benefits, and debt payments, are slated to rise by nearly $4 billion over the next two years -- a 26 percent jump. During the same period, however, revenues to pay those expenses are expected to increase by a little less than $2 billion, or about 14 percent -- and that assumes a return to a robust economy.

Oregon simply can't keep up.

Lacking a substantial tax increase, which appears unlikely, the state won't have the money to offer the same level of services, pay and benefits to the same number of people.

The state has faced tough times before, but this crisis is a game changer, economists and political leaders agree. Past budgetary tricks, such as borrowing or sweeping money from other state funds, won't cut it.

The only way out, they say, is to make dramatic, permanent changes. The choices that lie ahead affect not only the state budget, but the kind of place Oregon will become: What kind of schools will we have? Which criminals will go to prison? Who gets help when they need it? What kind of business climate do we want? And how much do we all pay in taxes?

"The public is going to have to understand that we will have a very different Oregon in 2020 than we did in 2010," says John Tapogna, president of ECONorthwest, one of the state's top economic consulting firms.
There is much more in the article including a lengthy discussion of four problems Oregon faces.

  • Problem 1: Our income is shrinking
  • Problem 2: We have more people in need
  • Problem 3: We've locked up a lot of money
  • Problem 4: We can't grow our way out

Email Anecdotes

Here are some anecdotes from reader Denise in response to Oregon's Public Employee Retirement System (PERS) in Deep Trouble, Taxpayers on the Hook
Hello Mish

I Read your post on Oregon's Public Employee Retirement System's troubles with interest. We just returned from visiting a friend on the Oregon coast - and have spent many vacations in the state over the years.

The coast is struggling badly. There are homes for sale everywhere. Available commercial properties abound.

We saw housing developments with only a few completed homes, most empty, and often surrounded by empty lots with weeds many feet high. One condo complex located in the Florence marina has 30+ units available. Only two have sold despite a list of enticements. I wouldn't want to be one of the two owners - it was practically screaming bank foreclosure coming.

And despite that this is their high season - do or die for many coastal businesses - the roads were practically deserted, hotels available everywhere - and miles of empty beaches. We spoke with many restaurant and lodging owners and they all agreed that it's never been worse.

Hard to be optimistic for the economy of the beautiful Oregon Coast.

Universal Problems

Those are problems all states face, not just Oregon.

It is one hell of a list of problems and states will face those even if the economy starts to grow at a fair pace.

Problem 3 is the crucial one. The "locked up" category includes pension promises that cannot be met and public union salaries way out of line with private sector salaries.

End of the Line for Meaningful Can-Kicking Delays

When it comes to state budgets, the low lying fruit has been picked. Indeed all the fruit has been picked and next year's harvest has been spoken for as well. Thus it's the end of the line for state's ability to kick the can down the road in a meaningful way, if employment does not dramatically pick up soon.

Here's a hint: it won't.

The only question is how long the administration and the Fed can keep this mess from flying apart like a pile of straw in a tornado. Obama's goal of course, is to delay that tornado until after the election. However, people are so fed up with Obama now, that election-wise it probably does not matter.

Obama is likely to lose the House in the upcoming election and enough seats in the Senate that he will not be able to pass his agenda. Hopefully, republicans will start doing a better job than they did under president Bush. Arguably that is a long shot. However, people have had enough of Obama's offering the worst possible combination of corporatism, socialism, and war-mongering that either side has to offer.

Mike "Mish" Shedlock
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