Governor pushes proposal for state savings account.

Byline: David Steves The Register-Guard

SALEM - Oregon is enjoying some of its bluest skies in years.

That's the budget outlook, not the weather forecast.

State general fund dollars are up 20 percent from where they were two years ago as Gov. Ted Kulongoski and the Legislature prepare to allocate billions of dollars to education, health care and public safety.

That puts state lawmakers a world away from the stretch in 2002-03 when they presided over the loss of more than $2 billion, triggering the layoff of state troopers, the reduction of school days, increased tuition and the fraying of Oregon's safety-net programs for the sick and elderly.

But memories of those difficult days are fresh enough that Kulongoski and others are talking about more than just buying back what was lost to the recession. They're also preparing Oregon for the next economic downturn.

For the first time since the last recession, lawmakers will come to Salem with a proposal in hand - Kulongoski's to put corporate income-tax surpluses into a new reserve fund - that would help stave off future program cuts.

"Look, I understand that what goes up must come down," he said during Monday's unveiling of his budget plans for 2007-09.

Kulongoski said his savings proposal would give the state the biggest reserve in decades. But it will take months for some of the details and political consensus to be in place to enact it.

Many of same big questions that have hindered past attempts to establish such a fund remain. How much money is needed? Where should it come from? Should saving for the future come at the expense of spending now?

Noting that "economic downturns are inevitable," Kulongoski has proposed canceling next year's projected $275 million in corporate kicker rebates, with the blessing of some top business executives. That money instead would be used to start a rainy day fund for general fund programs.

In addition, Kulongoski has called for an ending balance that's about $30 million higher than usual, according to his budget administrator, George Naughton. Add up everything that could be considered reserve dollars under the governor's plan - the growing lottery-fed school stability fund ($452 million), the total ending balance and emergency fund ($175 million) and the proposed rainy day account - and the state would enter 2007-09 with $902 million in savings.

Out of the $15.2 billion in spending Kulongoski has proposed in his discretionary budget through current revenue and his recommended tax increases, that total savings represents about 6 percent.

And that would be good, if fiscal policy thinking hadn't been altered by states' experiences during this decade's recession, said Matt Gardner of the Institute on Taxation and Economic Policy.

Before that slowdown caused states' revenue from income and sales taxes to plummet, it was commonly held that a reserve of 5 percent of spending was an adequate hedge, said Gardner, the Washington, D.C.-based institute's state tax policy director.

"But there are plenty of people now who look at what states had to do to get through the last economic slowdown and are finding that 5 percent just wasn't enough," he said.

Wall Street firms continue to hold up that 5 percent standard as one of several indicators in determining the credit worthiness of governments that borrow through bonding and other means, while other groups have set the new rule of thumb much higher, National Conference of State Legislatures' fiscal analyst Arturo Perez said.

Another national think tank, the Center on Budget Policy Priorities, produced a study several years ago that found the average state would have needed 18 percent in reserve to get through a recession. The Government Finance Officers Association recommends reserves of 15 percent.

For Oregon to set aside 15 percent would require a rainy day fund plus other savings totaling $2.3 billion.

In Oregon, the sense that Kulongoski's recommendation is a good start that needs more follow-through seems to come from across the political spectrum.

Both the House's and Senate's Republican leaders, who will represent the minority in the 2007 session, said the push to ramp up spending by 20 percent - even in the wake of recession-triggered service reductions - is a big reason why Kulongoski's set-aside is too little.

"I've got to believe that maybe we should try and not spend so much that it's a 20 percent increase," said House Republican Leader Wayne Scott of Canby. He faulted the governor's plan for limiting its additional savings almost entirely to the one-time windfall of surplus corporate taxes.

Senate Republican Leader Ted Ferrioli of John Day was more specific. He said leaving half of the revenue growth from the current budget cycle in reserve would bring the rainy day savings to about $2.1 billion.

On the other end of the spectrum are those who say the answer isn't to perpetuate cuts from years past at the expense of today's seniors, schoolchildren and sick Oregonians.

Instead of putting restraints on spending available revenue in order to save, Chuck Sheketoff of the Oregon Center for Public Policy said the state has a ready-made solution: Go ahead with the governor's plans for the corporate kicker, but do the same with the personal kicker.

It's projected to send $1.1 billion back to taxpayers, with the median, or typical, household receiving a rebate check next fall of $272.

"Both sources of unanticipated revenue should be saved for the rainy day," said Sheketoff, whose Silverton-based center studies and makes recommendations on state policies that benefit low-income and middle-income households.

Kulongoski has considered such a move, saying last spring he'd personally favor a six-year "timeout" for both kickers. Since then, he's made clear that he doesn't want to touch the personal kicker.

"It's good politics for the people in the building - the legislators - not to do anything" with the kicker, he said.

SAVING FOR A RAINY DAY Here's how Gov. Ted Kulongoski's budget would set dollars aside for 2007-09, with comparable figures for the current biennium in parentheses: Ending balance/emergency fund: $175 million ($105) Education Stability Fund: $452 million ($232 million) Rainy day fund: $275 million ($0) Total: $902 million ($337 million)