Unlike the 2015 and 2016 sessions which started at an explosive pace, the 2017 session returned to historical norms with a slow and cautious start.
The two critical issues of the 2017 legislature were the need to balance a state budget that started in a $1.8 billion deficit as well as the need to pass a major transportation funding package.
By the opening gavel, there was no “master plan” to deal with the state’s $1.8 billion budget deficit. Although Democrats held substantial majorities in both the House and the Senate, they didn’t have the votes to pass either the necessary cuts, spending reforms, or potential taxes without Republican support. Bipartisan dealmaking was needed.
In OSCC’s view, the commitment to bipartisanship, particularly in the Senate, was the defining theme of 2017. From the beginning, Senate President Peter Courtney (D-Salem) committed the Senate to bipartisanship in 2017 that had the effect of derailing many partisan issues that could have harmed sensitive negotiations around balancing the budget and passing a transportation funding plan.
Here’s what happened:
State budget gets balanced with no business taxes; PERS left off the table
The $1.8 billion budget deficit rapidly improved over the course of the session. Due to positive revenue forecasts in February and again in May, the state realized an additional $400 million in tax revenue, lowering the effective budget deficit to $1.4 billion.
But it was the solving of Oregon’s Medicaid budget shortfall ($900 million) that allowed the legislature to get out of session without any general tax increases on businesses or the public. HB 2391 levied a variety of taxes on hospitals, medical providers and health insurance premiums that would raise nearly $600 million in new revenue and leverage additional federal dollars to lower the overall budget gap to less than $500 million.
The bill represented a significant sacrifice by hospitals and other health care providers and consumers. It effectively paved the way for the legislature to balance the budget without additional revenue or the need for any special sessions.
In the wake of HB 2391, the legislature balanced the budget through modest program reductions, mostly by way of reducing the costs of 2016 voter-approved ballot measures on Career & Technical Education funding and Veterans’ services funding.
Finally, the legislature passed a cost reduction measure – SB 1067 – which responded to demands from the business community to reduce long term costs. SB 1067 stopped the practice of including automatic inflation increases for services and supplies in state budgets, capped state government employment at 1% of the general population, and eliminated jobs left vacant more than six months. All told the savings were projected near $200 million.
What was conspicuously absent from the budget resolution was any additional reductions to the Public Employee Retirement System (PERS). Although the Senate deliberated on proposals to reduce PERS costs for over two months, the system remained untouched.
The closest that the legislature came to PERS reform was SB 1068, which would have redirected 2% of employee contributions from the Individual Account Program to shore up the unfunded liability of the pension program. The bill was scored as a $400 million biennial cost savings to the program.
But at the end of the day, Democrats would only agree to support SB 1068 if Republicans would agree to raise business taxes. No deal was made.
Business avoids a major tax increase
Very early in session, Senate Revenue Chair Mark Hass (D-Beaverton) signaled his desire to pass a major tax reform bill that would replace Oregon’s corporate income tax with a gross receipts tax.
Business groups had just scored a decisive victory in November with the defeat of Measure 97 – a $6 billion gross receipts tax on large businesses. But Chair Hass was still intrigued by the prospect of a scaled down gross receipts tax measure that might avoid the economic pitfalls of Measure 97.
HB 2830 was the vehicle for Hass’ tax reform effort. It would have created a gross receipts tax on all businesses with $3 million or more in Oregon sales and would have raised a little less than $1 billion in additional revenue for the upcoming 2017-19 budget. It took until early June for House Speaker Tina Kotek (DPortland) to endorse the proposal. Up until that point, she had been holding out in the hopes for a tax plan that would raise closer to $4 billion.
But a comprehensive tax increase proposal needs a 3/5th supermajority approval from the legislature, meaning that at least one Republican was needed in each chamber to support the bill.
Chair Hass abandoned his effort to pass HB 2830 in late June when it became clear that there were no Republican legislators willing to vote for the bill.
The House Leadership quickly responded by passing a bill to increase taxes by $196 million on small business. HB 2060 eliminated the ‘small business tax cut’ passed by the 2013 legislature and passed by a bare majority in the House. But the Senate did not follow suit. By this time, the Senate had decided to balance the budget without additional revenue.
Transportation funding package passes against all odds
Rarely has there been an issue that combined such a universally acknowledged need (transportation infrastructure funding) with such massive political headwinds and pitfalls.
Although nearly everyone acknowledged the need for added investment in Oregon’s transportation infrastructure, nearly every interest group was prepared to defeat legislation if it did not meet their needs.
Prior to the 2017 legislative session, the Legislative Assembly created the Joint Committee on Transportation Preservation and Modernization (JTPM) to develop a transportation policy and funding package for introduction during the 2017 session. The JTPM committee spent five months holding hearings across the state to take testimony from the public and local elected officials and to tour transportation facilities in preparation for assembling the legislation. Once the 2017 session began, the committee created five work groups to develop recommendations for highway preservation, traffic congestion, public transit, public safety, multimodal transportation, and accountability.
Their work product was embodied in HB 2017 which threaded the needle – a 7-year, $5.3 billion transportation funding plan which addressed major maintenance and seismic needs, multi-modal investment, traffic congestion relief and public transportation funding.
The bill passed both chambers in the last days of session with bipartisan majorities.
Going forward … what we are watching for
- Will the balanced budget hold? Any significant reversal of economic fortunes or fluctuation in revenues could wreak havoc on the 2017-19 budget. Remember, the 2017-19 budget was balanced on the strength of record high revenues.
- The 2017-19 budget may still yet be in trouble. At least one lawmaker is preparing a referendum on the hospital taxes and health insurance premium taxes in HB 2391. A statewide special election would be called in January 2018 if enough signatures are gathered to force an election.
- Will the legislature start planning now for the 2019-21 budget cycle? OSCC believes the 2017 legislature largely postponed the major budget calamity for another two years. The painful decisions will come in 2019.
- What will the public employee unions do on taxes? They are already collecting signatures for a “Son of 97” gross receipts tax ballot measure. But will they double down on a losing 2016 effort and a failed attempt to raise taxes in 2017?
- How will the Hospitals react to being treated so poorly in 2017? After voluntarily agreeing to tax themselves to help solve the budget gap, lawmakers doubled down and implemented price controls on services rendered to public employees. The shoe may be on the other foot in 2019 as Hospital cooperation is needed to extend the hospital tax for another tough budget cycle.
- Will the bipartisan cooperation in the Oregon Senate continue to hold? While the bipartisan tone produced some meaningful outcomes for the 2017 legislature, it also risks causing some severe backlash among traditional democratic constituencies that want more action on progressive policies.
- The organized business community is undergoing significant transformation. Associated Oregon Industries and the Oregon Business Association are now merged under the Oregon Business &
Industry (OBI) name. It could result in significant business unification, or conversely, fracturing of the business community if OBI is perceived as too Portland-centric. The jury is out.
The 2018 legislative session will convene again February 5th
The 2018 session is Constitutionally limited to 35 days. Session will convene Monday, February 5th with a legal end date of 11:59 pm on Sunday, March 11th. In the meantime, the legislature will convene for “legislative days” and committee meetings on September 18 – 20, November 13-15, and January 10-12.
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