Summary

This report updates and expands on a previous Cascade Policy Institute report by Dr. Pozdena. The purpose of this report is to compare Oregon’s state and local spending level against that of other states through benchmarking.

Benchmarking helps Oregon citizens understand the extent to which their state’s spending choices differ from those of other states. Since individual states vary widely in both their ability to pay for public services and in population characteristics that determine the demand for spending, simple ratio comparisons are insufficient to fairly benchmark individual states.

The authors of this report use a multi-factor benchmarking system to account for differences in population characteristics. Specifically, they control for the major demographic and economic factors that affect fiscal capacity and the demand for public services. The resulting information creates a model to determine what would happen if Oregon’s characteristics were confronted by other states’ policy makers. This allows Oregon’s spending to be fairly compared with that of other states.

The most recent data available that allows comprehensive benchmarking is from fiscal year 2000. The years since have been a time of economic weakness for Oregon and the available data offer insights into the likely cause of the current state of Oregon finances. The authors’ basic conclusions are as follows:

  • Spending significantly accelerated in relation to personal income from 1998 to 2000, the final two years of the economic boom
  • Overall spending was 19 percent higher than expected
  • Healthcare spending by the public sector was 57 percent higher than expected
  • Spending on corrections and police was 26 percent higher than expected
  • Welfare spending was 24 percent higher than expected
  • Education spending was six percent higher than expected
  • Highway transportation spending was eight percent lower than expected

Though only benchmark estimates, these results suggest a consistent pattern of greater spending by Oregon at the state and local level than one should expect given the state’s characteristics. The recession that began in 2001 substantially reduced tax revenues to the state. Oregon voters resoundingly rejected subsequent efforts to raise taxes. The reduction in tax revenues led to budget cuts that have brought Oregon’s state and local spending in some areas more in line with economically and demographically similar states.

The recent slowdown in spending was largely a result of revenue constraints, not spending restraint. The authors outline several prescriptions to control government’s prospending bias and to dampen the spend-andcut cycle in government spending associated with a boom-and-bust revenue cycle. These prescriptions include:

  • Cut back programs with small net economic impacts
  • Incorporate flexibility into government operations by reducing wage rigidity and seniority rules in layoff decisions
  • Establish “rainy day” funding to smooth government cash flows
  • Rely on less volatile revenues sources, especially capital gains tax revenues
  • Institute greater accountability and choice in public education
  • Reform the Oregon Health Plan to provide healthcare savings accounts, rather than healthcare
  • Establish a system of charging for roadway use that more fairly targets the users of the roadways who are imposing the greatest burdens on capacity and wear and tear
  • Involve the private sector in policing and corrections
  • Direct welfare efforts toward encouraging work and education
  • Eliminate “prevailing wage” rules in government contracts

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About the authors: Randall J. Pozdena, Ph.D., is a consulting economist in Portland, Oregon. Dr. Pozdena is
a former professor of economics and finance and a former research officer with the Federal Reserve Bank of San Francisco. He is an academic advisor to Cascade Policy Institute and has authored previous Cascade reports on K-12, higher education, Social Security and health care. He has served on numerous public and private boards and commissions, including the Governor’s Council of Economic Advisors, the Oregon Investment Council, the Pacific University Investment Committee and the Symphony Endowment Fund.
 
Eric Fruits, Ph.D., is a consulting economist in Portland, Oregon, and an adjunct professor at Portland State University. Dr. Fruits has conducted numerous economic impact studies and has provided testimony to the Oregon Supreme Court regarding the economic impacts associated with reforming Oregon’s public employee retirement system.

About Cascade Policy Institute: Founded in 1991, Cascade Policy Institute is Oregon’s premier policy research center. Cascade’s mission is to explore and promote public policy alternatives that foster individual liberty, personal responsibility and economic opportunity. To that end, the Institute publishes policy studies, provides public speakers, organizes community forums and sponsors educational programs.

Cascade Policy Institute is a tax-exempt educational organization as defined under IRS code 501(c)(3). Cascade neither solicits nor accepts government funding and is supported by individual, foundation and business contributions. Nothing appearing in this document is to be construed as necessarily representing the views of Cascade or its donors, or as an attempt to aid or hinder the passage of any bill before any legislative body. The views expressed herein are the author’s own. Copyright 2006 by Cascade Policy Institute. All rights reserved.