OREGON STATE ECONOMIC STATUS

The latest Oregon Economic Forecast is at best deceptive. The state economist forecasts a $62 million increase in state revenue for the fourth quarter of 2010. This allegedly breaks an uninterrupted string of nine consecutive quarters of declining state revenue.

Unfortunately, the so-called increase in state revenue is entirely the result of an accounting gimmick. That accounting trick should result in jail time if attempted by any private sector businessman or accountant.

The explanation is somewhat convoluted.

 The Oregon Department of Revenue increased the percentage of state
income tax withholding to begin January 1st. This is not a tax increase. It is a change in the timing of when the tax is collected. The action was allegedly taken because not enough money was being withheld, resulting in the need for too many taxpayers to write a check on April 15th.

 Most of those affected by the income tax withholding increase will be
taxpayers earning less than $50,000 per year. They will receive less net pay each
month allowing the government to use those funds during the tax year. Excess withholdings will be refunded when their tax returns are filed.

The State will now withhold approximately $200 million more per year from Oregonians’ paychecks. That means they will collect about $100 million more during the first half of 2011, which is the last quarter of the current 2009-11 budget cycle.

The accounting gimmick is to count that withholding as revenue in this budget cycle even though the money represents tax revenue for 2011 that is due and payable April 15, 2012.

The further deception is that much of the increase in withholding must be refunded to taxpayers after they file their 2011 tax returns in 2012. Those projected refunds will be deducted from the revenue for the next budget cycle for 2011-13.

In the absence of this accounting smoke and mirrors, the economic forecast would have projected a tenth consecutive quarter of yet another $40 million reduction in state revenue.

The close of session revenue forecast for June 2009 estimated general fund revenue for this budget cycle at $13.6 billion. That estimate is now calculated at $12.3 billion after ten consecutive quarters of reduced state revenue. The cumulative loss in state general fund revenue for this budget cycle now totals more than $1.3 billion. That revenue loss computes to about $1,200 for each Oregon family of four.

The primary cause of the continuing loss in state revenue is the ongoing loss in Oregon private sector jobs. All of the state revenue used to pay for services and public employee compensation originates from the private sector economy.

During this recession, the private sector has lost more than 150,000 jobs, while state government has added more than 4,000 jobs. We do not have to be economists to understand that equation is not sustainable.

A FIVE BILLION DOLLAR GENERAL FUND BUDGET DEFICIT

Smoke and mirrors forecasts and deceptive accounting will not change the facts. The Oregon Legislature is faced with a daunting task in order to balance the next budget.

The current budgets used about $1.6 billion of one time revenue from federal grants, state reserves, and transfers of agency ending fund balances. Those sources of revenue are unlikely to be available for the next budgets.

Another $2.2 billion is needed to maintain Oregon current service levels under current budgeting policies. These “roll-up” costs include increases in public employee compensation through salary step increases, cost of living increases, higher cost of medical insurance  and higher cost of retirement benefits; increased cost of new debt service,  expanded projected case loads, and the cost of any new or expanded services.

 The state economist is actually predicting higher general fund revenue for the next budget cycle. However, the ongoing loss of $1.3 billion of state revenue in the current budget cycle must first be replaced before general fund revenue can actually grow. My concern is that after ten consecutive quarters of general fund revenue decline that reversal appears unlikely to occur and is more likely to continue.
The sum of these projected shortfalls is $5.1 billion. This means that Oregon appears to have at least $5.1 billion less general fund revenue available than is required to continue state government business as usual. That shortfall equates to about $5,300 dollars for each Oregon family of four.

We often joke about California’s absurd budget deficits. Unfortunately, Oregon faces a much larger budget problem than California when computed on a per capita basis.

It is apparent that the money is not available to continue Oregon state government as it is currently run. The time has come when your state government must live within its means. Even Governor Kulongoski’s bipartisan Reset Cabinet Report made that crystal clear.

That Reset Cabinet calculated that three out of every four general fund dollars are currently being spent on public employee compensation. Your state legislature must identify and fund core government services, find ways to reduce the cost of those core services, combine state services wherever possible, privatize other services and even privatize entire agencies, as well as simply eliminating many discretionary services. 

What needs to be done is unmistakable. The question is will the Governor and the Legislators have the fortitude to get it done?

MORE SPECIFICS ON THE “GREEN JOB ECONOMY”

  Oregon is making an all out effort to shift to a green-based economy. Unfortunately, the nearly two decades of political effort has netted only about 50,000 green jobs. Moreover, a preponderance of those green jobs is held by government and utility employees, and most of those green jobs are subsidized with taxpayer or utility ratepayer dollars.

 The more than 98 percent of Oregonians working at non-green jobs are subsidizing the 50,000 employees that are working at green jobs. Further, the higher tax and utility rates that are necessary to create and sustain these subsidies cause tens of thousands of private sector jobs not to be created.

 A grand example of this process is outlined in a recent “White House memo on Renewable Energy Loan Guarantees and Grants” written by White House advisors Larry Summers, Carol Browner and Ron Klain. The eight page memo describes, and summarizes, the financing for the Shepherds Flat wind farm to be located on thirty square miles of private land adjacent to the Columbia River Gorge near Arlington.

 The immense Shepherds Flat project will consist of 338 General Electric wind turbines, capable of maximum generation of 845 megawatts. The project is estimated to cost about $1.9 billion. It will employ about 400 workers during construction. When completed, it will add about $16 million to Oregon’s annual economy in the form of property taxes and land owner royalties.

The rest of the storey is less encouraging.

After construction, the entire project will provide only about 35 green jobs. The average generation capacity will be about one third of the projected 845 megawatt hours because the wind is a variable resource. When the wind does not blow the wind generation stops and must be replaced with back-up generation sources such as hydro and thermal generation.

The memo states that the electricity to be generated by the Shepherds Flat project has already been contracted to Southern California Edison so it will not directly benefit Oregonians.

 The project owners will invest a maximum of about $200 million into the project. They expect to earn an annual return of 30 percent on that equity investment calculating to about $60 million of profit each year.

At the same time, taxpayers and ratepayers will be paying $1,238,000,000 (one billion two hundred thirty eight million dollars) of the project construction and generation costs in the form of grants, tax credits, accelerated depreciation, loan guarantees, and in the premiums paid for the renewable wind power.

 The White House memo explains these costs in some detail.

 The federal 1603 Grant provides 30 percent of the project construction cost. It is calculated to equal the value of a 30 percent investment tax credit and is provided as a grant at the start of the project. That Grant is equal to $500 million for the Shepherds Flat project.

 The Oregon Business Energy Tax Credit provides a separate $18 million dollars to the project from Oregon tax revenue.

 The project will be allowed to accelerate the depreciation of the project assets thereby increasing the tax deduction for both state and federal income tax. That accelerated deduction will save the project another $200 million dollars.

 The federal government will guarantee that the project loans are repaid in a timely manner. The cost of that $1,300,000,000 (one billion three hundred million dollar) loan guarantee is estimated to be $300 million dollars.

 The total of more than one billion dollars of grants, tax credits, accelerated depreciation and loan guarantees will all be paid by taxpaying citizens.

 The Oregon Renewable Portfolio Standard requires utilities to purchase electricity from renewable energy generation sources. According to the memo, the Renewable Portfolio Standard premium to be paid for wind power generated at Shepherds Flat will cost ratepayers $220 million dollars. That subsidy is necessary because the project cannot generate electricity at a competitive cost; therefore, it requires cost adjustment in order to be sold on the open utility market. Project owners and utilities are immune from these costs because the Renewable Portfolio Standard mandates that the costs to be transferred to the ratepayers.

The estimated sixty million dollar per year, thirty percent return on
equity investment expected by the project owner is possible only because of the
tax credits, grants, guarantees and subsidies that will be paid by taxpayers and utility ratepayers. The project cannot, and will not, produce electricity at competitive rates. Taxpayers and utility ratepayers will continue to bear the excess costs while the company is profiting.

The Shepherds Flat project alone will suck more than one and a quarter billion dollars out of the private sector economy. The incredible number of private sector non-green jobs that will never be created as a direct result of this project, and its thirty five green jobs, is an exercise for an economist to calculate.

  The project is expected to reduce carbon dioxide emissions by about eighteen million tons through the year 2033. Some people may believe that the project’s cost is worth the alleged environmental benefits. However, the White House memo points out that the carbon reduction would have to be valued at nearly $130 per ton of CO2 for the alleged climate benefits to equal the cost to taxpayers and ratepayers. That amount is more than six times the current value of the maximum CO reduction-climate-benefit estimated by the U.S. Government.

In this instance, it certainly appears that big government is paying big business to build and operate uncompetitive energy generation facilities using taxpayer and ratepayer funding to insure that big business profits.
 
The White House memo is available on line at: “Summers renewable energy memo”.

It should be downloaded and studied by every citizen because it clearly delineates the economic absurdity of some of these renewable energy investments.

Please remember that if we do not stand up for rural Oregon no one will.

Best regards,
Doug