By Tim Nesbitt, Oregon Capital Chronicle
Gasoline prices and grocery bills highlighted the immediate effects of rising inflation on household budgets. But inflation has downstream effects that will also overwhelm public budgets, eroding the ability of state and local revenues to support vital services.
In Oregon and neighboring states, consumer prices rose 8.8% year over year in June, according to the US Bureau of Labor Statistics. Gas prices have increased by 52%. The price of food at home has increased by 13%. These are the volatile components of the consumer price index, which are subject to ups and downs over the course of a year.
The cost of other items, such as medical care and housing, is more difficult to reverse. These have increased by around 6%, incorporating a new trend of higher costs in sectors of the economy that are highly dependent on public spending (health care) and public policy interventions (homelessness ).
Almost all policy responses to inflation have focused on short-term mitigation measures, like gasoline tax exemptions, or medium-term strategies to fix the supply side of the economy. A thoughtful compilation of the best answers was recently posted by Gary Conkling on the Oregon Way website.
But not enough attention has been paid to the implications for government budgets and public services as we move from a decade of steady growth, low inflation and easy money to a time when costs are growing faster than incomes, money is getting tighter, and demands for government services and responses are increasing.
This is by no means a problem unique to Oregon. But Oregon’s structure of public finances creates unique vulnerabilities for our state.
First, we limited local property tax revenues with a strict 3% cap on annual increases, thanks to the combined effects of measure 5 (1990), measure 47 (1996) and measure 50 ( 1997). As wages rise to keep up with the rising cost of living in the labor-intensive operations of schools, cities, and counties, incomes will not keep pace and the purchasing power of local budgets will shrink.
This effect was highlighted as a major concern by the state’s Comprehensive Revenue Restructuring Task Force in 2009. It is an issue that will first affect Oregon’s schools and local governments; but it will also put more pressure on the state to fill school budgets and help cities and counties maintain public safety and health.
Second, state and local governments will feel the inflationary effects of higher borrowing costs, higher health care costs and, more tellingly, the costs of the still massively underfunded public employee retirement system.
Legislation enacted in 2019 stemmed rising PERS retirement costs for Oregon government employees to an average of about 25% of payroll, fully paid for by their public employers. But this year’s inflation-induced stock market declines have again decimated the fund’s reserves to pay future benefits. And if wages exceed the system’s assumed 3.5% trend line, the cost of benefits, which are tied to wages, will rise in parallel. This is a double whammy that, absent further corrections, will almost certainly force the system’s demands on public budgets to 30% of the wage bill or more by 2025 and beyond.
Oregon has some advantages in dealing with the tsunami-like effects of inflation. Its income tax system only partially offsets the effects of inflation on its top brackets. So as wages and incomes rise, even if they are lower than inflation, government revenues will also rise.
In addition, there are record levels of reserves in state coffers. But the state will need those reserves to help schools maintain enrollment, adjust to higher costs for Oregon health plan providers, protect service levels for public safety, and maintain its own level of services for Oregonians.
Inflation rarely lifts boats; more often, it overwhelms the most vulnerable households and stalls the progress of government programs. This is the new challenge for our elected leaders, especially the new generation of legislators who have grown up in the more lenient fiscal climate of the past dozen years.
An era of rising revenues and expanding public services may be coming to an end, and an era of cuts and bailouts may just be beginning.
Tim Nesbitt, a former Oregon labor leader, served as an adviser to Governors Ted Kulongoski and John Kitzhaber and later helped craft Measure 98 in 2016, which provided targeted supplemental funding to Oregon high schools. Oregon Capital Chronicle (oregoncapitalchronicle.com) is a nonprofit, professional news organization focused on in-depth and helpful reporting on Oregon state government, politics and politics.