SALEM - Oregon's budget outlook took another hit Friday.

It's now expected to come in $855 million short this year and $3.1 billion less than originally expected for the 2009-11 biennium.

State economist Tom Potiowski delivered the news to a crowded House chamber, taking the unusual step of announcing the March revenue forecast in February to give lawmakers more time to balance the expected shortfalls.

Co-chairs of the Joint Committee on Ways and Means released a proposed list of cuts earlier this week - including more than $167 million to K-12 education - but the plan only assumed an $800 million hole this year. Where the additional decline will be made up remains unclear, House and Senate leaders said after the announcement.

Potiowski said the nation's deepening recession, largely driven by the financial crisis, has dropped Oregon's revenues way below expected levels. State lottery funds are also down, he added. Potiowski said he expects the recession to "bottom out" in mid-2009, not showing signs of recovery until the second half of 2010.

"The perfect storm is here, and Oregon is feeling the effect more than many states," he said.

Eastern Oregon legislators reacted somberly to the news. Sen. David Nelson, R-Pendleton, said lawmakers will simply have to do whatever they can to balance the budget this year and next, which is constitutionally required. He said he favors using at least some of the state's reserve funds to offset immediate cuts this year. Rep. Greg Smith, R-Heppner, has also supported tapping reserves now.

But Nelson said that's unlikely to happen, as Gov. Ted Kulongoski has remained steadfast in wanting to save that money for an even bigger budget hole in 2009-11. And raising taxes in a recession creates another problem, Nelson said.

"I don't think the citizens are going to stand for tax increases," he said. "In this economy, I just don't see that happening."

The worsening situation might eventually prompt Oregon to revisit its entire revenue structure, Nelson said. He suggested using the Columbia River as a profitable natural resource, similar to the way Oregon's timber industry used to boost revenue.

"There's got to be a fundamental change in the way Oregon operates and does business," Nelson said.

In the short term, Smith said the only other option, besides the major cuts proposed, is raising the state income tax. When the Legislature tackles the budget next week, he said the plan released by the Ways and Means co-chairs offers a good foundation to work from. But he added he still favors using reserve money to defer any more K-12 education cuts until next year.

"I think what the co-chairs have laid out, aside from the education piece, is a good starting piece," Smith said.

Following Potiowsky's presentation, House Speaker Dave Hunt and Senate President Peter Courtney, both Democrats, addressed the situation along side committee members who helped put together this week's budget plan that included across-the-board cuts and using some federal stimulus money to backfill the immediate deficit.

Courtney, the Legislature's longest-serving member, said he's never seen an economic situation like this one - a situation he described as "Armageddon." He and Hunt emphasized the bigger 2009-11 shortfall as the more serious issue, noting it will take a balanced approach to solve it.

"You can't just cut your way out of these things, and you can't just tax your way out of these things," Courtney said. "You have to do both. We know that."

Potiowski cautioned his projections could change before the next forecast in May, for better or worse. That hinges mostly on the financial crisis, he said.

One of the next steps will be accounting for the extra $55 million hole added to the $800 million expected earlier this week. One of the Ways and Means co-chairs, Sen. Margaret Carter of Portland, ruled out nothing as off limits looking forward.

"Nothing is a holy grail from this point forward," Carter said.

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