Oregon Governor Signs Rainy Day Fund Legislation

Senate Minority Leader Ted Ferrioli of John Day argued it is unfair to build a reserve fund on the backs of already-struggling businesses in the state.

Photo by: Tim King

(SALEM, Ore.) - Delivering on a campaign promise, Gov. Ted Kulongoski signed legislation Friday creating a rainy-day fund aimed at stabilizing Oregon’s notoriously unpredictable cash flow and providing a cushion during the next economic downturn.

Proponents of the Democratic governor’s plan, including a broad coalition of business and industry leaders, said with tax revenues far exceeding expectations this year, a one-time suspension of Oregon’s so-called corporate kicker law is the prudent thing to do to help stave off the type of crippling cuts lawmakers made during the 2002-03 recession.

At that time, income tax receipts fell 12-percent, forcing lawmakers to pare public services -- including money for schools -- and to borrow $450 million from investors to keep state programs operating after voters rejected a temporary statewide tax increase.

“Today, we built a roof over our heads, and when the next storm comes we’ll be ready,” Kulongoski said at a packed signing ceremony in his ceremonial Capitol office, the first one the session.

He added, "Our business community understood that a rainy-day fund is absolutely critical to the long-term economic future of Oregon.”

Without a structural reserve, the state would be on a “financial rollercoaster,” said Rep. Peter Buckley, D-Ashland. “And that is no way to run a government.”

Amid strong opposition from most Republicans, who believed that the proposal was tantamount to a $290.3 million tax increase, the House-drafted measure just narrowly cleared the Senate, with the help of two GOP votes: those of Sens. Frank Morse of Albany and David Nelson of Pendleton.

The bipartisan compromise in the House grew out of intense and protracted negotiations to secure the nine Republican votes necessary to muster the super-majority needed to advance the bill to the Senate. Among other things, Democrats allowed $24.8 million in kicker rebates to small businesses with less than $5 million in-state sales.

“Last week, we had an opportunity to put aside our differences, and focus on a common goal: to create stability for our critical public services and more fairness in our tax system,” Kulongoski said of the House compromise.

In the Senate, Minority Leader Ted Ferrioli of John Day argued it is unfair to build a reserve fund on the backs of already-struggling businesses in the state.

The Eastern Oregon Republican called the legislation “an improper means to a good end,” explaining that while he favors the creation of a statutory reserve, he wants it financed differently than Democrats had proposed.

“The end doesn’t justify the means,” he said of the proposal to tamper with the kicker. “This is a tax increase, and there is no way around it.”

Along with most of his caucus, Ferrioli supported a competing measure that would have funded a state savings account instead by socking away three-percent of the state’s general fund budget each biennium, leaving the kicker alone.

Now, with the governor’s signature Friday, $290.1 million that would have otherwise gone back to C-corporations will go into a new account along with one-percent of this and future general fund budgets. Money will continue to be squirreled away until a nest egg of 7.5-percent of the prior biennium’s general fund revenues is in reserve.

Additionally, money unspent at the end of this and subsequent biennia will be deposited into the savings account, with earned interest devolving back into the general fund.

State Treasurer Randall Edwards, a Democrat, argued vehemently that an uncommitted budget reserve would give Wall Street analysts what they need to upgrade the state’s mediocre 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.

Standard & Poors, a Wall Street credit rating firm, has assigned Oregon a AA- credit score, three rungs from its premium AAA rating. That lackluster bond rating costs the state taxpayers millions of dollars each year in increased borrowing costs, Edwards said.

“We’re better prepared for the inevitability of the next economic downturn,” Edwards said in a statement. “I have been looking forward to this day for a long time.”

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

Specifically, the kicker law, unique to Oregon, requires that when tax receipts exceed official projections by at least two-percent, the unanticipated gross revenues be returned at the end of the two-year budget cycle, adding to Oregon’s “economic instability,” according to S & P analyst Gabe Petek.

The Senate’s Democratic point man on tax and revenue policy said in debate that the kicker is bad tax policy, one which leaves Oregon with a volatile revenue stream, second only to Alaska’s, which depends heavily on natural resource extraction.

“Economists agree that there is no better way to waste our money than the structure of the corporate kicker,” state Sen. Ryan Deckert of Beaverton told his colleagues during lengthy debate in the Senate.

Still, Senate Republicans argued suspending the kicker would be a tax increase for business, no matter how much supporters try to say otherwise.

“We can put lipstick on the lips of a sow and at the end of the day it’s still a pig,” said state Sen. Doug Whitsett of Klamath Falls.

-Chris Rizo covers state government for Salem-News.com. He can be reached at csrizo@hotmail.com