1. The School Finance Outlook for 2010-11 and Beyond Legislative Revenue Office April 2010

2. Generic State Fiscal Outlook “Even if the economy enters a sustained recovery, the tight fiscal squeeze on public services is certain to persist for several years. Over the long term, an aging population and an outdated tax structure means that ______, like other states, is expected to face a mounting structural deficit, where annual growth in revenue is incapable of keeping pace with the annual cost of funding basic public services.” – State Tax Notes (3-22-10)

3. Oregon’s Fiscal Situation: Remainder of 2009-11 Biennium Impact of the Great Recession on the U.S. and Oregon economies Short term economic outlook The revenue and budget outlook for the remainder of 2009-11 biennium

4. Longest contraction since 1929-33 (Dec 07 to July 09?) Real GDP declined $490 billion or 3.7% between the fourth quarter of 2007 and the second quarter of 2009 Employment declined by 6.7 million or 4.9% during the recession Housing starts fell to 25% of pre-recession level CPI declined in 2009—first time since 1955 Personal income fell 1.7% in 2009—biggest drop since 1938 and only the second annual decline of the post World War II period The Great Recession: Impact on the National Economy

5. 148,000 jobs lost between December 2007 and December 2009 – 40,000 lost manufacturing jobs – 30,000 lost construction jobs Oregon’s unemployment rate went from 5.2% in December 2007 to 11.6% in June of 2009 The number of unemployed in Oregon increased from 100,917 in December 2007 to 228,342 in May 2009 Statewide housing starts dropped from 30,900 in 2005 to 7,600 in 2009—a decline of 75%. The Great Recession: Impact on the Oregon Economy

6. State & Local Tax Collections 2007: Q4 (in billion of $) 2009:Q2 (in billions of $) Percent Change All State Taxes759.9712.5-6.2% Individual income271.8243.9-10.3% Corporate Income50.543.7-13.5% General Sales240.5229.5-4.6% Property Taxes12.712.8+0.9% All Local Taxes514.9533.5+3.6% Individual Income20.018.6-6.9% Corporate Income9.06.1-31.8% General Sales64.763.0-2.6% Property Taxes390.4415.0+6.3% Impact of Great Recession on State and Local Taxes

7. Oregon Among Hardest Hit by Current Recession (April-June 2009 Compared to 2008) % CHANGE IN TAX REVENUE RANK AMONG THE STATES All States -16.6-- Alaska-86.550 New Mexico -30.849 Oregon-27.348 Arizona-26.747 7

8. Oregon’s Short Term Outlook: Slow Recovery

9. General Fund Revenue Trends (in millions by fiscal year)

10. Rise & Fall of Lottery Revenue (in millions)

11. 2009-11 General Fund/Lottery Budget Balanced with New Revenue & ARRA Funds (in millions) *Includes $200 million trigger

12. State Reserve Fund Position: 2009-11 Biennium (in millions) ReservesFebruary ForecastProjected Allocations Projected Ending Balance Rainy Day Fund $135$126$9 Ed Stability Fund $183$77$106 Total Reserves $318$203$115

13. Outlook for the 2011-13 Biennium Slow recovery out of deep hole Baseline revenue forecast Early estimates on 2011-13 budget gap Economic risks to outlook Specific budget risks

14. Long Road Ahead for Oregon Job Recovery (Quarterly in Thousands)

15. Early Look at 2011-13 General Fund/Lottery Budget (Current Law Projections in Millions) Source: DAS

16. Early Look at 2011-13 General Fund/Lottery Budget (Current Law Projected Change in Millions) Source: DAS

17. “Projected 2011-13” General Fund/Lottery Budget (% Change from 2009-11 Total Base) Source: DAS

18. “New Normal” Economic recovery is slow and weak Heavy debt and lost wealth keeps consumer weak Business investment remains restrained because of tight credit Feds begin pulling back stimulus limiting recovery Economy eeks out real annual growth of 1.5-2% Recent strong productivity gains improve U.S. competitive position Emerging countries provide growing market for U.S. exports Businesses respond with increased capital investment Growth returns to near historical norm of 2.5 to 3% 2 Scenarios for U.S. Economy with Huge Implications for Oregon’s Economy “New Mix”

19. Conclusions Economic recovery not yet on firm sustainable ground February rebalance leaves little margin for error for remainder of 2009-11 biennium. Baseline 2011-13 revenue growth roughly sufficient to maintain current reduced service level adjusted for “normal” expenditure growth factors Backfilling reserves and federal stimulus money presents biggest challenge to 2011-13 budget Reduced financial market earnings forces up PERS costs adding to already large current law 2011-13 budget gap