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Dear Friends and Neighbors:
Last Thursday morning, the day after the upcoming special session was formally announced by Governor Kitzhaber and legislative leaders, I ran into a constituent who sometimes writes me and occasionally comes to coffees or town halls. (I was walking the dogs, he was doing some touch-up painting on his house.) He’s an older guy from the left side of the political spectrum.
Not surprisingly, we found ourselves talking about the special session package. He did surprise me by being less interested in the specifics of the deal than in the fact that an agreement had been reached. I had expected him to lay into me over the reduction in the PERS cost-of-living adjustment and the business tax cut. Instead, he let me know that he was impressed that we were actually able to reach a framework package that had the potential to do a great deal of good for schools. He shared with me his frustration with the ongoing gridlock in Washington, D.C., the fact that partisan politics appears to be preventing anything positive from occurring there.
He told me he understood that any significant deal must be a compromise, including things he’s going to like and things he won’t like. The important thing for him was that legislators could come together, get something done despite their differences and despite pressure from advocates on all sides. He felt that we were thinking big picture and long term. I really appreciated his saying that, and it helped me put this struggle into perspective.
In this newsletter, I’ll go into some detail on different elements of the package that will be voted on next Monday. I’ll give you some background and a sense of next steps. As I write this, plans are being developed for public hearings on the package later this week. I’ll urge you to let me know your thoughts on the issues raised here, and urge you to attend the town hall that Sen. Jackie Dingfelder, Rep. Alissa Keny-Guyer, and I are holding this Thursday evening at the Hollywood Senior Center.
Like my constituent, there are things in this package that I really like, and other things that I dislike. Overall, I believe that it will do very good things for education and senior programs. It makes very positive changes to the senior medical deduction and to the Earned Income Tax Credit, improving both in a way that will particularly benefit low-income Oregonians who need help.
At this point, I’m likely to support the overall package, though I will likely be a no on one or more individual bills. I’m not being categorical at this point, though, because the final bills are still being drafted this week, and I want to see all the details before I make my final commitments.
Let me say one more thing about the package in general. I agree with my constituent in appreciating that this is a package, a settlement reached by legislative leaders and the Governor. The Governor brought together the Democratic Senate President, the Democratic Speaker of the House, the Republican Senate Minority Leader, and the Republican House Minority Leader, each representing different caucuses and different interests. There was a fair amount of give and take during the sessions.
Remember, in Oregon passing a bill that brings added revenue to the state requires a 3/5 vote in support, thereby requiring at least two Republican votes in the House and two in the Senate. If the package were to involve added revenue for education (which was a core requirement for Democrats, without which there could be no PERS cut), it would necessarily require compromise on issues important to Republicans.
As a member of House Democratic Leadership, I can say that our opinion was sought and to the largest extent possible became part of the mix. There were some surprises and some disappointments. But in the end I believe that the vote counts on all the bills will be bipartisan. Perfect? By no means. But overall it has the potential to be an example of good government. We shall see. I'll share the details of the package below, but first:
Town Hall This Thursday
Join me this Thursday evening (9/26) for a town hall focused on the special session. I'll be joined by Sen. Dingfelder and Rep. Keny-Guyer. The town hall goes from 7:00 - 8:30pm at the Hollywood Senior Center (1820 NE 40th Ave.). See you there.
THE DETAILS
First of all, in case you haven’t seen it, here is a link to the Governor’s press release when he announced the special session and the issues to be covered. Also, here’s a link to the official proclamation.
You’ll see that there is no mention of the I-5 Bridge Replacement Project (CRC) as a topic for the special session. As things stand now, the Governor is still interested in pursuing that project and may call us into a special session sometime in the future for the purpose of approving an Oregon-only project. But as of now, there are be too many outstanding questions to be resolved to move forward with legislation. Also, the Governor wants to keep the focus of the special session on funding for education, mental health, and senior services.
PERS
There will likely be two PERS bills to be voted on The first focuses on further COLA cuts to help reduce the “unfunded actuarial liability” (UAL), the gap between what would be owed to retirees over the next twenty years and the amount on hand. The gap was virtually non-existent in 2008, prior to the Wall Street recession, but by 2012 it had widened to more than $15 billion. It is slowly closing, as a result of better investment earnings and actions taken by the Legislature in April in SB 822. But it is predicted that if we do nothing, the hit on schools and other public services in the near term will continue to be significant.
Action: Reduce the PERS COLA from the 2% annual increase prior to SB 822 to 1.25% for the first 60K in benefit, and .25% on any income above that. This is being referred to as the “UAL bill.” It will reduce the UAL by $4.6 billion, or nearly a third, over the next twenty years. Drafters are working on ways to mitigate the impact on lower-benefit retirees and to create a path for reversing the cuts if the UAL gap closes.
A second bill will make some changes that won’t save much if any money but will address some criticisms of elements of the PERS system:
Action: Remove future legislators from the PERS system, presumably to prevent the perception of conflict of interest. Provide them with an alternate 401-K plan.
Action: In rare isolated cases, employer-provided insurance payments are rolled into the calculation of final average salary in determining retirement benefit. The statute will change to explicitly prohibit this possibility.
Action: If a public employee is found guilty of committing a felony while on the job, their PERS calculation cannot include earnings from having committed that felony. (I’m still waiting to see the actual language on this one.)
The $4.6 billion UAL reduction is much less than had been sought by Republicans and represented a significant concession, requiring some trade-offs in other areas. Until nearly the end, the package included the elimination of Money Match for “inactives,” those who had been out of the system for more than three years but who still had PERS accounts awaiting their retirement. The more we came to understand the implications of this proposal, the more unacceptable it became. This was a particular issue for me, because of the extent of its impact on part-time workers and on university faculty who had been encouraged back in the 1990s to leave PERS and move to an optional retirement plan; even though they were still working, they would be considered “inactive” and would lose most of their promised PERS benefit. I’m extremely relieved that we were able to get this dropped, and I thank all the people who helped me advocate to see it removed.
Finally, I must point out that these changes will be challenged in the courts and some or all of them may well be tossed out. We likely won’t know for at least 18 months.
ADDED REVENUE
There will be a single bill that raises certain rates, cuts other rates, and creates means-testing for certain exemptions and deductions. The net effect of these will be to raise state revenues by $201 million for this biennium. In the next section, I’ll tell you how this money will be spent.
Action: The Corporate tax rate will be increased to 7.6% on profits above $1 million. Currently, that higher rate only applies to corporations with more than $10 million in profit. This is projected to raise $74 million this biennium. ($10 million will be directed into the “Rainy Day Fund,” our state’s reserve fund.)
Action: The Personal Exemption Credit (currently $183 for each taxpayer and dependent) will be means-tested. It will no longer be available to those with personal income of $100K or $200K for the household. This is projected to raise $61 million for the biennium.
Action: The tobacco tax will be increased by ten cents per pack. In effect, this will bring the rate back to where it was a few years ago, when a temporary ten-cent tax was allowed to expire. This is projected to raise $27 million, which will go to mental health programs.
Action: Change the Senior Medical Deduction from a deduction to a subtraction, and means-test it by limiting access to those with adjusted individual income below $100K and household income below $200K. Seniors in all states are able to deduct all medical expenses that amount to more than 7.5% of their adjusted gross incomes. Oregon has a unique program that allows Oregonians age 62 and older—no matter their income--to deduct all their expenses as long as they are in a position to have deductions. This will change.
As a subtraction (front of the tax form), the benefit will now become available to lower-income seniors who aren’t eligible for deductions. All seniors age 62 and above will still be able to take advantage of the deduction for expenses above 7.5% of adjusted gross income. The age of those eligible for the expanded deduction will gradually rise over the next five years from 62 to 66. This change will increase revenues by $82 million this biennium, but it will amount to much higher revenue savings in the future as the population ages.
Action: Create “Small and Family Business Tax Relief” by allowing owners of partnerships and “S Corporations” with income up to $5 million to use federal Schedule E to reduce their taxable income. This new small business tax cut will take effect in January 2015 and will cost the state $38 million. That cost will go up in future biennia when it is fully in use throughout the biennium. Drafters are working on creating sideboards to control its maximum cost.
Action: Create a new business category known as the Oregon Interest Charge-Domestic International Sales Corporation (IC-DISC). Based on a federal income tax category, it creates an incentive for Oregon companies to export their Oregon-made goods to other countries. Creating this new business incentive will cost $5 million this biennium. Taken together, this break and the preceding one will cost $43 million this biennium.
APPROPRIATIONS
So what will the $201 million in net added revenue buy us?
Action: $100 million for K-12 education, which should turn this year’s appropriation into a true no-cuts budget for all school districts.
Action: $40 million for higher education ($15m for community colleges and $25 million for universities), allowing tuition increases to be held down.
Action: $41 million for senior programs. At least half of the savings due to changes in the senior medical deduction must be used to make necessary improvements in senior programs. The specific programs targeted for funding haven’t yet been finalized, but I’m pushing for funds for senior mental health, Project Independence (which allows more seniors to remain in their homes), and one of my personal priorities: funding for public guardianship/conservatorship for indigent Oregonians in need of protection.
Action: $20 million for mental health programs from the tobacco tax. I believe that the target for these funds will be juvenile mental health.
TWO OTHER ITEMS
Action: The Oregon Earned Income Tax Credit (EITC) will be increased by $12 million (moving from 6% to 8% of the federal EITC), with money coming from the ending fund balance. The EITC is a tax credit that gets money into the pockets of low-income working Oregonians. The benefit will double in the next biennium.
Action: SB 633 (2013) will be allowed to come to the floor for a vote. SB 633 passed the Senate but failed to make it out of committee for a vote in the House. This bill would prevent counties from creating their own bans on genetically modified organisms; any policy would have to be implemented on a statewide basis. Its impetus was an initiative petition that qualified for the ballot in Jackson County and is scheduled for a vote next year. It has nothing at all to do with the other elements in the package but was very important to some legislators and became an important part of the deal. As part of the deal, the bill would be modified to ensure that Jackson County is exempted from the prohibition—its vote will be able to proceed next year. In addition, the Governor intends to convene a work group to try to come up with a statewide policy for agricultural GMOs.
So, that’s the package. The plan at this point is to have hearings on the bills later this week, so that any potential changes can be made prior to Monday and the session itself can be completed on that day.
Again, I hope that many of you will be able to attend the town hall on Thursday evening to hear more details. Please let me know your reactions, concerns, and questions.
Michael
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