Best Steps Forward. December A Budget Balancing Path To Reset State Government & Overcome A Decade Of Deficits.

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1 Acknowledgements Best Steps Forward A Budget Balancing Path To Reset State Government & Overcome A Decade Of Deficits December 2010 Governor s Reset Cabinet 2.0 Report 1

2 Acknowledgements I want to acknowledge the ongoing efforts of my agency directors and their management teams, the continuing work of his Reset Cabinet, its staff and resource persons and the engagement of the many Oregonians who joined the debate over the Reset Cabinet s recommendations since release of its report in June Reset Cabinet Bruce Goldberg James Sager Lane Shetterly Doug Stamm Cory Streisinger Max Williams Dave Yaden Director, Oregon Dept. of Human Services Assistant Superintendent, NW Regional Education Service District Attorney, Shetterly Irick & Ozias CEO, Meyer Memorial Trust Director, Oregon Dept. of Consumer and Business Services Director, Oregon Dept. of Corrections Member, Oregon State Board of Higher Education Staff Tim Nesbitt Chief of Staff, Office of the Governor Resource Persons Scott Harra George Naughton Tom Potiowsky Director, Dept. of Administrative Services Administrator, Budget and Management Division State Economist Others I want to acknowledge the work of the many private citizens and individuals from outside of state government who served on the subcommittees of the Reset Cabinet and contributed their time and effort to developing the recommendations contained in the Cabinet s report. I also want to acknowledge the contributions to the research and analysis that informs this report by the Oregon Business Council and its President Duncan Wyse, by ECONorthwest and its President John Tapogna and by the members of the Education Reform Work Group that worked with his office during the past three months. Finally, I want to acknowledge the many citizens who joined in the debate over the Reset report, including Steve Schell, Joe Smith and the many other Oregonians who hosted presentations, convened discussion groups and helped to raise the profile of the findings and recommendations of the Reset report. Theodore R. Kulongoski, Governor Governor s Reset Cabinet 2.0 Report 2

3 Governor s Message To The Citizens Of Oregon Dear Fellow Oregonians: The burdens of this recession on our people and on our state have diminished only slightly since I delivered the report of my Reset Cabinet last June. Even after an encouraging jobs report last month, almost 200,000 Oregonians remain unemployed, and the revenues that support public services and provide help for needy families continue to lag in a still sluggish economy. Economists at the national and state levels have cautioned that the recovery now underway will be slower and more modest than the rebounds we experienced in the past. As a result, the decade of deficits that I warned of earlier this year looks even more daunting now, and the need to reset state government has become all the more compelling. Resetting state government and bringing our future revenue and spending into balance is a project that began with my Reset Cabinet. I am continuing that effort with this report, so that the work of my administration and the many individuals who joined the Reset debate can be handed off in good order to Governor-elect John Kitzhaber and the 2011 Legislature. I began this project with the recognition that state government will emerge from this recession with far less revenues than we need to sustain the services we currently provide. Even in a recovering economy, it now appears that we will be unable to meet the rising costs of our responsibilities if we continue on our current path. Our budget is balanced for now. But our reserves are nearly exhausted, and our borrowing capacity has reached its practical limit. The same prospect confronts almost every state in the nation. Oregon is not alone. But, in rising to meet this challenge, we are very much on our own. Further federal assistance is unlikely. Our success will depend on our own resources, our ability to work together and our determination to create a better future for our people. In this environment, we must play to our strengths in the global economy and build on our well-earned reputation as a center of innovation and sustainability. Recently, major energy and technology companies stepped up to announce new, multi-billion-dollar investments in Oregon, and last month s employment report showed a gain of 7,600 jobs, including 4,100 jobs in the private sector. These investments in Oregon and the new hiring now underway by employers are votes of confidence in our people and in our future. As Oregonians, we must apply that same confidence to the ways in which we manage the finances and meet the core responsibilities of state government to keep us safe, to educate our children and to protect and assist our most vulnerable and needy citizens. As the nation recovers from this recession, I am confident that Oregon can again outpace most states in the creation of new jobs, just as we did after the last recession. But we will not be able to do so in the new economy if we cling to old ways of doing things and rely on outmoded benchmarks to guide our efforts. We must adopt more farsighted approaches to budgeting, apply a laser-like focus to the core responsibilities of our government and redesign the manner in which we meet those responsibilities in an era of more limited resources. As my Reset Cabinet concluded in June, states that succeed in this effort will serve their citizens best in the years ahead. Those that continue on their current paths will struggle and fall behind. Governor s Reset Cabinet 2.0 Report 3

4 Governor s Message To The Citizens Of Oregon The path to a better future will test both our minds and our will. Redesigning how we deliver services, setting aside old models to take advantage of new technologies and looking beyond government to meet the needs of our citizens will require rigorous thinking and a willingness to make hard choices. Examples of the decisions we face can be found throughout this report. Do we have the will to redraw the boundaries that define our school districts, rethink the policies that are swelling our prison population and restructure our social services system? Adjusting to a slower-growth economy will require other changes as well, including the need to revamp our practices for setting employee compensation not to balance the budget on the backs of public employees, but to keep them in step with all working Oregonians. No Governor before me has had to hand off a more difficult fiscal challenge to his successor. But I am able to do so with a roadmap that identifies the best next steps to meet that challenge more than half way. The recommendations presented in this report will, if adopted, close almost two-thirds of the budget shortfall than now confronts us and do so in a way that helps to achieve balanced budgets for many years hereafter. I am confident these best steps forward will put us on a path to realize the full potential of our people and secure the prosperity that we seek in the decade ahead. Governor Governor s Reset Cabinet 2.0 Report 4

5 Table Of Contents Executive Summary...6 A Decade Of Deeper Deficits Confront Us Now...8 Long-Term Deficits Require Long-Term Solutions...14 Step 1: Carry Forward Interim Budget Reductions...15 Step 2: Keep State Employees In Step With All Working Oregonians...18 Step 3: Keep School Employees In Step With State Employees...23 Step 4: Modify Retiree Benefits To Keep Pers Costs Affordable...26 Step 5: Hold The Line On Spending For Services And Supplies...28 Step 6: Implement Reset Report Recommendations...30 The Need To Balance Other Commitments...36 Sustainable Solutions Are Needed To Resolve The Remaining Deficit...38 Revenue Stability Remains A Critical Goal...40 Sources And Terminology...41 Appendices A Report Of The Education Reform Work Group B Report On The Joint Board P-20 Education Budget Exercise C Strategies For Reducing The Cost Of Corrections In Oregon D Recommendations Of The Reset Cabinet, June 2010 E CHAMPS III (Arts And Heritage Programs) Governor s Reset Cabinet 2.0 Report 5

6 Executive Summary EXECUTIVE SUMMARY Decade of Deeper Deficits Oregon faces a decade of even deeper deficits than the Reset Cabinet projected just six months ago. The shortfall for the state s general fund budget in is now estimated $3.5 billion, just shy of 20 percent. The loss of one-time funds supporting the current budget for is accountable for just over half of the deficit. These one-time funds include federal stimulus funds and the state s own reserves, a total of approximately $1.8 billion. The remainder of the deficit results from higher costs (for payrolls, services and supplies) and greater demand (more Oregonians qualifying for safety net services). Deficits in the range of 20 percent are expected to persist through Therefore, short-term or temporary solutions to the immediate deficit are not feasible, and the need to reset state government is all the more compelling. Solutions to the deficits the state is facing must be ones that realign spending and revenues for the decade ahead. Addressing the Deficit in 2011 This report details six steps that can be taken to address the deficit in and continue to narrow the deficit in later years. These steps are as follows. Step Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Recommendation Carry forward interim budget reductions enacted in 2010 Keep state employee compensation in step with that of all working Oregonians Keep school employees compensation in step with that of state employees Modify retiree benefits to keep PERS costs affordable Hold the line on spending for services and supplies Implement Reset Report recommendations Savings in (Millions of Dollars) $1,014.1 $280.7 $252.6 $258.6 $124.7 $295.6 The savings from these recommendations would total $2.2 billion in the next biennium, or almost twothirds of the projected deficit. If all of these recommendations are adopted by the 2011 legislature and the Governor-elect, the shortfall for will be reduced from 20 percent to seven percent. Governor s Reset Cabinet 2.0 Report 6

7 Executive Summary New Policy Recommendations This report builds on the 38 recommendations contained in the Reset Cabinet report and provides detailed estimates of savings from those recommendations that the Cabinet believes are feasible for adoption in It also includes more specific recommendations to modify PERS benefits going forward. Finally, this report includes to following new or modified policy recommendations from the Governor. Employee Compensation Terminate the PERS Individual Account Program (IAP) and the state s payment of the six percent employee contribution to that program. The state can no longer afford to maintain two retirement programs. It is obligated to maintain the pension program and guarantee its benefits, but it is not obligated to continue the IAP. By terminating the IAP, the state will save more than the cost of the PERS rate increase attributable to current employees. Adopt value-based benefits. The Public Employees Benefit Board should establish a lower-cost, value-based benefits plan. The state could then peg its contributions for employee health benefits to the cost of that plan. The benefits, costs and contributions to such a plan should be comparable to those offered by large public and private employers in Oregon and comparable states. Add a public member to PEBB. To ensure that the Public Employees Benefit Board is not subject to labor-management deadlocks, the legislature should add a tie-breaking public member to the board. K-12 Funding Establish a state-defined maintenance of effort requirement, keyed to minimum hours of instructions, which school districts must meet to receive their full share of state funding. Future funding from the State School Fund be conditioned on each district s compliance with the minimum school year requirement set by the state Board of Education, with no further approval of waivers from this requirement and penalties for non-compliance in the form of proportionate reductions in state support for districts that fail to comply. Public Safety Establish a task force on sentencing guidelines involving all three branches of state government. The Governor supports the creation of a task force representing all three branches of state government (executive, judicial and legislative) to develop proposals for more flexible sentencing guidelines for Oregon s criminal justice system. Governor s Reset Cabinet 2.0 Report 7

8 A Decade Of Deeper Deficits Confront Us Now A DECADE OF DEEPER DEFICITS CONFRONT US NOW The state economist has delivered two additional revenue forecasts since the June Reset report. These forecasts found that the hoped-for economic recovery will be slower to materialize and produce more modest gains than previously predicted. As a result, the decade of deficits that the Reset Cabinet warned of earlier this year has turned into a decade of even deeper deficits, beginning July It is now expected that both Oregon and the nation will not regain the jobs lost in this recession until And our state s general fund spending power, as measured by revenues adjusted for inflation and population growth will not reach pre-recession levels until the fiscal year. The bottom line for the state s next general fund budget in has dipped from a projected deficit of $2.7 billion estimated earlier this year to more than $3.5 billion now. This represents a shortfall of almost 20 percent when compared to the costs of current services and obligations projected forward through the next budget period. (See Table A.) Approximately half of this shortfall results from the loss of one-time funds, both federal stimulus funds and the state s own reserves. These funds have been used to sustain services in the current budget period but will have to be replaced in the next budget period. The other half of the shortfall is due to higher costs and more citizens qualifying for safety net services. Further, the decline in revenues in the later years of the decade has become even more problematic. Prior to the recession, state forecasters projected biennial revenues of $28.6 billion in That number was reduced to $23.2 billion in the June Reset report. Now, those same forecasters tell us not to expect more than $20.5 billion in that period. When combined with the projections for higher costs and greater demands for state services, the state s budget shortfall throughout the next decade is expected to persist at approximately 20 percent of current service levels, if nothing is done to bring ongoing expenditures into balance with expected revenues. (See Table B.) Governor s Reset Cabinet 2.0 Report 8

9 A Decade Of Deeper Deficits Confront Us Now Table A: Budget Box Tentative Budget Projections - Including All 2010 Legislative Actions * (December 2010 Forecast) Leg. Approved as of July Current Service Level Percent GF LF Total GF LF Total Change Revenues Projected Beginning Balance Carryforward % Appropriations to Rainy Day Fund/Beginning Balance - - Half Lottery Ending Balance to K-12 Capital Acct - (10.7) (10.7) Projected Revenues 12, , , , , ,990.2 Less Dedications (ESF, County) (224.1) (224.1) (241.6) (241.6) One-time Resources Federal ARRA ESF/RDF: K Other Total Resources 12, , , , , % Expenditures Education - State School Fund 5, , , , % Education - All Other 1, , , , % Human Services 3, , , , % Public Safety 1, , , , % Economic & Community Development % Natural Resources % Transportation % Consumer & Business Services % Administration % Legislative % Judicial % Program Subtotal 13, , , , , % EFund Supplemental State Agency Funding Other Special Purpose Appropriations Total Expenditures 13, , , , , % Ending Balance (892.7) (3.3) (895.9) Net Fiscal Position (3,459.0) (67.4) (3,526.4) * Approximately one-third of the increased costs in the next biennium reflect the loss of one time funds that are sustaining services in the current biennium. These one-time funds, in the form of federal stimulus funds and one-time reserves, amounted to $1.8 billion in Of this $1.8 billion, about $0.4 billion increased General Fund revenues, while $1.3 billion directly reduced General Fund expenditures. In addition to the need to replace these one-time funds, the state faces a $2.4 billion increase in expenditures to maintain its current service levels in all program areas, due to higher unit costs for delivering services and more Oregonians qualifying for those services. Governor s Reset Cabinet 2.0 Report 9 9 _

10 A Decade Of Deeper Deficits Confront Us Now Table B: Decade-long Display Of Biennial Budget Boxes Long-Term Budget Projections December 2010 Forecast Legislatively Approved Current Service Level Tentative Budget Tentative Budget Tentative Budget GF LF GF LF GF LF GF LF GF LF Revenues Projected Beginning Balance % Appropriations to Rainy Day Fund (10.7) Projected Revenues 12, , , , % 15, , % 17, , % 19, ,473.1 Less Dedications (ESF, County) (224.1) (241.6) (256.5) (279.4) (309.4) Total Resources 12, , , , , , , ,163.8 Expenditures Administration % % % Consumer & Business Services % % % Economic Development % % % Education - State School Fund 5, , % 7, % 7, % 8, Education - All Other 1, , % 2, % 2, % 2, Human Services 3, , % 6, % 6, % 7, Judicial % % % Legislative Branch % % % Natural Resources % % % Public Safety 1, , % 2, % 2, % 3, Transportation % % % Total Expenditures 13, , , % 19, , % 21, , % 23, ,073.4 Add'l Debt Service - to Capacity EFund Salary Adjustment Ending Balance (892.7) (3.3) Net Fiscal Position (3,459.0) (67.4) (3,958.8) (113.9) (4,473.9) (137.6) (5,078.0) (116.8) (3,526.4) (4,072.7) (4,611.5) (5,194.9) Total Expenditures 14,434 18,107 20,567 22,881 25,425 Percent Increase 25% 14% 11% 11% Dollar Increase 3,673 2,461 2,314 2,544 Net position (percentage) by fund -6.6% -0.3% -20.2% -7.0% -20.3% -10.7% -20.6% -11.7% -21.0% -9.2% Net position (percentage) combined -6.2% -19.5% -19.8% -20.2% -20.4% Governor s Reset Cabinet 2.0 Report 10 10

11 A Decade Of Deeper Deficits Confront Us Now In its June report, the Reset Cabinet described a recovery that would produce rates of economic and revenue growth in sync with long-term trend lines not the kind of dramatic bounce back gains that Oregon and the nation have enjoyed after prior recessions, but more of a normalizing return to an average rate of revenue growth amounting to six to seven percent a year. Now state forecasters expect a new normal period, in which revenues slow to five to six percent a year. This new normal has profound implications for state government and the people it serves. It bends the state s revenue curve downward when we can least afford it in a period in which the baby boom generation enters retirement, the elderly and the unemployed create greater needs for state-financed services, and the proportion of our population in the workforce begins to decline. Chart 1A: Working-age Population ( ) 1,400,000 1,200,000 Forecast Number of persons 1,000, , , , ,000 Ages Ages Ages Chart 1B: Elderly Population ( ) 600, ,000 Forecast Number of persons 400, , , ,000 Ages Ages Ages Governor s Reset Cabinet 2.0 Report 12

12 A Decade Of Deeper Deficits Confront Us Now It is important to recognize that a slower-growing economy and a more slowly growing cohort of the middle and higher-income Oregonians who provide the greatest support for state services will not be able to match the rapidly growing needs for those services and the higher costs now projected to deliver them. (See Charts 1A and 1B.) Whatever the variations and margins of error in the state s quarterly revenue forecasts, there is an inescapable reality in the story that these forecasts repeatedly portray. Members of the Reset Cabinet have used an aircraft analogy to describe this story in visual terms. It is as if the state has hit an air pocket in its economic and revenue trajectory the same free fall experienced by working families and businesses in what is now called the Great Recession. The climb back from this sudden drop will be long, slow and arduous. We cannot expect to regain our old flight path any time soon. In addition, state government now faces higher costs for fuel (the cost of delivering services) and is taking on more passengers (the greater number of Oregonians who qualify for its services.) In this context, we cannot afford to keep state government on autopilot. We need to devise a course correction that responds to the new circumstances we are facing. Slower revenue growth is one factor in this new environment, reflecting slower growth throughout the economy. But this is not a problem the state can expect to solve to any great degree with higher taxes, nor is it prudent to count on higher economic growth in the distant future to close the budget gap the state faces today. The Reset Cabinet made these points in its June report, and this report expands on those points below (see the section on Sustainable Solutions ). By contrast, higher costs and greater demands for services are just as large a contributor to the decade of deficits and are largely factors within the state s control. An analysis of these cost drivers is presented in Table C. Table C: Cost Drivers Summary Components of Expenditure Increases Beyond Replacement of One-Time Funds (Millions of Dollars) Payroll Cost Increases Phase-in of Collectively Bargained steps added in 2010 $ 42 Restoration of Furloughs and Step Increases $ 130 Maintain state employee health benefits at 2011 cost levels for the remainder of $ 46 Increase state employee health benefits for projected increases that will occur in $ 58 Potential Cost of Living Adjustment for State Employees in $ 118 PERS (Both state and school district costs) State Employee Costs $ 127 School District Costs $ 222 Other K-12 Personnel Services Increases $ 383 Inflationary Cost Increases State Inflationary cost increases (including provider payments) $ 296 K-12 Services & Supplies Inflation $ 20 Funding for projects started midway through $ 239 Higher number of Oregonians qualifying for safety net services $ 466 Increase in Debt Service $ 172 Set aside Emergency Funds for $ 40 Total Increase $ 2,359 Governor s Reset Cabinet 2.0 Report 12

13 A Decade Of Deeper Deficits Confront Us Now These cost drivers took on added significance in discussions with organizations, such as the Oregon Business Council, which focused on a resource-based approach to building the budget going forward. In such an approach, the starting point for budgeting would be the resources identified for the next biennium. These resources are now estimated to be just under four percent less than the total general fund resources sustaining the current budget, including the one-time funds received from the federal government and deployed from the state s reserves. This approach does necessarily lead to different budget balancing solutions, as building the budget from revenue side of the ledger will still leave the state short of sustaining current services on the expenditure side. But it does highlight that the most daunting challenge in the next budget period are the increased costs projected to sustain those services. If the state s general fund programs have only four percent less in total resources to work with in the next biennium after the replacement of one-time resources, why are they facing a shortfall of 19 percent? The answer lies in Table C and the increased costs and demands it represents. The Reset Cabinet took a hard look at these cost drivers to come up with its budget balancing solutions. This report does the same, with a new focus on the next biennium and a continued commitment to address the decade of deeper deficits that confronts us now. Governor s Reset Cabinet 2.0 Report 13

14 Long-Term Deficits Require Long-Term Solutions LONG-TERM DEFICITS REQUIRE LONG-TERM SOLUTIONS This report details what the Reset Cabinet has identified as the best next steps to reduce future obligations, control costs, achieve efficiencies and redesign the delivery of services. It also acknowledges that, as a last but necessary resort, the state will have to cease providing certain services, restrict who is eligible for others and find ways to shift support for some of what it pays for now to other public or private resources. Finally, this report reiterates the need to stabilize revenues and rebuild reserves by amending the state s kicker law. Most importantly, this report places its recommendations in the context of an eight-year planning horizon, from July 2011 through June 2019, in which the state faces persistent deficits in the range of 20 percent per biennium. Chart 2: A Decade of Deeper Deficits Ahead 30,000 28,000 26,000 24,000 22,000 20,000 18,000 16,000 14,000 Revenues (11/2010) Expenditures 12,000 10, LAB This longer-term outlook should convince everyone engaged in the budget balancing process that attempting to solve a recurring deficit by shifting costs to later budget periods can only be counterproductive. In this environment, kicking the can down the road is like planting land mines for those who come after us. Only solutions which help to close the budget deficit over time are put forward in this report. Governor s Reset Cabinet 2.0 Report 14

15 Step 1: Carry Forward Interim Budget Reductions STEP 1: CARRY FORWARD INTERIM BUDGET REDUCTIONS Carry forward the interim budget reductions enacted in 2010 Savings from Current Service Level in = $1,014.1 Million Chart 3: Carry Forward Interim Budget Reductions 30,000 28,000 26,000 24,000 22,000 20,000 18,000 16,000 14,000 12,000 Revenues (11/2010) Expenditures Continue Allotment Cuts 10, LAB As state revenues continued to decline this year, the Governor initiated two rounds of spending cuts amounting to $954.6 million, or 7.7 percent of the current two-year budget. Of this amount, about $330 million in cuts were averted with the use of one-time federal assistance and the state s own reserve funds. State law (ORS ) requires that interim cuts of this kind (known as allotment reductions ) be applied in equal percentages to all state general fund programs across-the-board. Lottery-funded services are excluded from this process, as are debt payments for state bonds. All other general fund services must be cut equally. The Governor has objected to the requirement to enact interim cuts on an across-the-board basis, and his Reset Cabinet recommended giving the Governor the authority to enact targeted allotment reductions in the future. But, as the law now stands, his reductions were initially applied in equal percentages to all general fund services. Subsequent to the Governor s actions, the legislature, in most cases with the Governor s agreement, created exceptions to his across-the-board cuts by tapping reserves or applying new federal funds to save certain services. Governor s Reset Cabinet 2.0 Report 15

16 Step 1: Carry Forward Interim Budget Reductions These exceptions included the following. The Legislative Emergency Board voted in July to cancel $15.4 million worth of reductions to services for seniors and the disabled, including payments to nursing homes, and directed the Dept. of Corrections to hold off on prison closures to avert the early release of prisoners. K-12 schools benefited from $118 million in federal stimulus funds known as Education Jobs funds, enabling the Governor and the Legislative Emergency Board to offset what would have been another round of allotment reductions for schools in September of this year. Health and human services benefited from another $123 million in federal Medicaid funds, which has enabled the Dept. of Human Services to postpone any further reductions from the second round of allotment reductions. Other adjustments and use of one-time funds were arranged to forestall smaller reductions in the Oregon Youth Authority, the Dept. of Revenue s tax collection functions, early childhood programs and the funds that finance District Attorneys salaries. The effects of the interim reductions that did take effect were significant. Education: K-12 schools took reductions of $235 million in July, following an infusion of $200 million in state reserve funds enacted by the Legislature over the Governor s veto in February. Districts that heeded the Governor s advice to hold these extra funds in reserve were better able to weather the July reductions. Others were forced to cut teaching positions and school days. More than 100 districts that responded to a survey by the Confederation of School Administrators reported cutting an average of two student contact days in the current school year. Eugene School District 4J and Lincoln County Schools reported cutting six and ten school days respectively. Public Safety: The Dept. of Corrections closed a minimum security prison in Salem by moving inmates to available beds in other prisons. But it will be all the more difficult for future cuts in the department s budget to be accomplished without releasing inmates. Human Services: The Dept. of Human Services (DHS) reports that the elimination of positions and increased demands for services are taking a toll in child welfare, evidenced by the fact that overdue investigations of child abuse reports are up 30 percent and children are staying longer in foster homes because of inadequate staffing to process adoptions. Similarly, reductions in staffing in services for seniors and persons with disabilities have created a backlog of 1,700 persons seeking disability certifications to qualify for the Oregon Health Plan and delays in licensing inspections of assisted living and residential care facilities. Other Programs: Reductions in agencies which did not benefit from access to additional federal dollars or state reserve funds amounted to 7.7 percent of their biennial budgets. Cuts of this magnitude hit agencies such as the state s Water Resources Dept., which are heavily dependent on general funds, especially hard. Almost all affected agencies eliminated vacant positions or have continued to freeze positions to secure savings from attrition. Many have done both. In these cases, the effects on service levels have yet to be fully felt. Governor s Reset Cabinet 2.0 Report 16

17 Step 1: Carry Forward Interim Budget Reductions It is important to recognize that these interim cuts were devised when labor agreements prevented the implementation of other cost cutting options. However, the cuts that took effect were recommended by the affected agencies and withstood scrutiny by the legislature. Recommendations Given the magnitude of the deficit facing the state, carrying forward these cuts or equivalent reductions is a necessary first step to addressing the shortfall in Doing so will bend the expenditure curve for that biennium by more than one billion dollars and reduce the state s obligations by even greater amounts in the future. Governor s Reset Cabinet 2.0 Report 17

18 Step 2: Keep State Employees In Step With All Working Oregonians STEP 2: KEEP STATE EMPLOYEES IN STEP WITH ALL WORKING OREGONIANS Keep the pay and benefits of state employees in step with those of all working Oregonians Savings from Current Service Level in = $280.7 Million Chart 4: Keep State Employees In Step With All Working Oregonians 30,000 28,000 26,000 24,000 22,000 20,000 18,000 16,000 14,000 12,000 Revenues (11/2010) Expenditures Continue Allotment Cuts Align State Employee Growth 10, LAB Controlling costs in the state budget necessarily involves controlling labor costs. But such controls should not be arbitrary. Jobs should be paid what they are worth in the larger economy, with pay and benefits on par for employees doing similar work in the public sector and the private sector. But when the economy is growing slowly and employees compensation grows slowly in tandem with the economy, the state should align its budget for labor costs to reflect those trends. Such a realignment, which appears at this time to require a slowing of the rate of compensation increases rather than a freezing or reduction of compensation, will go a long way toward solving the projected shortfall for the next biennium. NEW DEVELOPMENTS Since release of the Reset Cabinet report, the Governor continued in effect the freeze on salaries for management and unrepresented employees and asked employee organizations to modify their contracts to follow suit. None agreed to do so. As a result of these actions and the ongoing effect of unpaid furloughs throughout the state workforce, the average pay of represented employees will Governor s Reset Cabinet 2.0 Report 18

19 Step 2: Keep State Employees In Step With All Working Oregonians increase approximately two percent in this biennium, while the average pay of management and unrepresented employees will decline by almost three percent. But pay is only part of the story, as further developments this year have highlighted Compensation Survey The state s Labor Relations Division recently completed an updated survey of total compensation costs for a cross-section of state jobs and their counterparts in the larger labor market. The findings of the new survey were essentially unchanged from the findings of the 2009 survey. Both surveys show that, when looking at an average of the results for all jobs studied, the combined pay and benefit cost of state employees is close to par with the combined pay and benefit cost of their counterparts in the private and public sector. Chart 5: Labor Costs: Findings $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 State Private Public Private The average total compensation of jobs at all levels of state government is slightly ahead of the total for all comparable public and private sector jobs in the larger labor market and slightly behind the total for all comparable private sector jobs. Retirement Cost Increases Pursuant to state law, the Public Employees Retirement System (PERS) must raise employer contribution rates to begin to make up for losses incurred on its investments in 2008 and get back on track to full funding for its promised pension benefits within 20 years. The first rate increase of 6.8 percent of payroll will take effect for state agencies on July 1, 2011, to be followed by further increases, now estimated at five percent and three percent of payroll respectively in 2013 and In addition to these costs, state law provides for a separate retirement savings plan (known as the Individual Account Program or IAP), supported by employee contributions of six percent of payroll. The state and the university system pick up these employee contributions (a practice known as the six percent pickup ) pursuant to the terms of their collective bargaining agreements and management compensation plans. Governor s Reset Cabinet 2.0 Report 19

20 Step 2: Keep State Employees In Step With All Working Oregonians Once adjustments are made for the state s pension obligation bonds, which reduce the state s effective contribution costs, the rates paid by the state for both the PERS pension and the separate IAP retirement savings plan will rise from 15.1 percent of payroll in the current biennium to 21.2 percent in These increases will raise the state s general fund payroll costs by $127.1 million in the next biennium. Oregon s fully-paid pension plan is becoming less common as a standard for state employees around the country. Most states have contributory plans, in which employees share in the cost of funding their retirement benefits. In such plans, employee contribution rates are often increased when unfunded liabilities develop. Fifteen states increased employee contribution rates for their retirement plans this year. The state of Arizona apportions its retirement costs equally with its employees, and raised both employer and employee contribution rates from 9.6 percent this year with additional increases planned for future years. California state employees will have to pay an additional three percent from their paychecks to their retirement plan next year. State employees in Iowa and Minnesota will see their contribution rates increase to 5.25 percent and 6.25 percent respectively in Health Benefit Cost Increases The rates paid by the state for employee health benefits (medical, dental and vision) will increase by 9.9 percent for the 2011 plan year. These increases are the equivalent of three percent of salary for the typical state employee and will increase the baseline costs of health benefits in the state s general fund programs by $46 million in , before any new increases are considered for the 2012 and 2013 plan years. The composite cost for health, dental and vision benefits and a $5,000 life insurance benefit is now estimated at $1,263 per employee per month, including all dependents. This cost is paid in full by the state for all full-time employees. These new rates were adopted by the Public Employees Benefit Board (PEBB) after the four management representatives on the board deadlocked with the board s four employee representatives over changes to benefits that would have reduced costs and boosted reserves for PEBB s self-insured health plans. Oregon is one of two states that pay the full cost of health benefits for employees and their dependents (the other is Alaska) and is the only state to do so in plans with no deductibles. According to the Kaiser Family Foundation, working Americans pay an average of $333 per month toward their health benefit premiums for full family coverage; only five percent of such workers have such coverage fully paid by their employers. Also, most working Americans have deductibles in their employer-sponsored plans, although the incidence of deductibles varies from a high of 77 percent in preferred provider plans (PPOs) to a low of 28 percent in health maintenance organizations (HMOs). The average deductible for single employees covered by PPOs is $675 per year and $601 per year in HMOs. Increases Projected For All Working Oregonians According to the state s Office of Economic Analysis, total compensation (wages and benefits) in the Oregon labor market is expected to increase by 3.2 percent in 2011, 2.9 percent in 2012 and 2.9 percent in Based on these data, this report uses as its working assumption that working Oregonians will see an average increase in their total compensation of three percent per year. Governor s Reset Cabinet 2.0 Report 20

21 Step 2: Keep State Employees In Step With All Working Oregonians What The Budget Assumes The state budget s current service level for assumes the following increases in compensation for state employees. (See Table D.) Table D: Increases in State Employee Compensation Budgeted for General Fund and Compensation Components Lottery Funds Cost (Millions of Dollars) Phase-in of Collectively Bargained steps added in 2010 $42 End of furloughs and restoration of step increases $130 Maintain 2011 health benefit contribution levels $46 Increased contributions to maintain existing health benefits $58 General salary increase of 2.5% and 2.0% $118 PERS rate increase $127 The compensation items listed above, combined with the phase in of new positions, are estimated to increase payroll costs during the biennium by an average of 5.5 percent per year. But the increases measured from the beginning to the end of the biennium for individual employees would be higher. For a typical state employee, these increases, if enacted, would produce an increase in total compensation of more than 13 percent by the end of the biennium on June 30, 2013 an average of 6.5 percent per year. Conclusions Because of PERS cost increases (which are unavoidable) and other pay and benefit increases (which can be controlled by state policy makers), the increase in total compensation budgeted for state employees in (at 6.5 percent per year) is expected to more than double the rate of increase projected for Oregonians in the larger labor market (at three percent per year) over the next two years. Avoiding increases of this magnitude is necessary to keep the pay and benefits of state employees in step with those of working Oregonians and will go a long way toward closing the state s deficit in and beyond. Recommendations The state should limit increases in total compensation (pay and benefits) for its employees to no more than the increases for all working Oregonians, which is expected to total three percent per year. Doing so would shave the general fund deficit by $280.7 million if applied to both employees of state agencies and the Oregon University System. This can be accomplished without reducing employee paychecks, but only if PERS Individual Account Program and the six percent contribution to that program are terminated. Terminate the IAP and the state s payment of the six percent employee contribution to that program. The state can no longer afford to maintain two retirement programs. It is obligated to maintain the pension program and guarantee its benefits, but it is not obligated to continue the IAP. By terminating the IAP, the state will save more than the cost of the PERS rate increase Governor s Reset Cabinet 2.0 Report 21

22 Step 2: Keep State Employees In Step With All Working Oregonians attributable to current employees, leaving funds to help cover health care cost increases or provide a modest raise during the biennium. The Governor has prepared legislation to eliminate the IAP as of January 1, This legislation will be introduced in the 2011 legislature. Controlling health benefits costs is critical to the goal of keeping the cost of state employees compensation in step with that of all working Oregonians. Adopt value-based benefits. The Public Employees Benefit Board should establish a lower-cost, value-based benefits plan. The state could then peg its contributions for employee health benefits to the cost of that plan. The benefits, costs and contributions to such a plan should be comparable to those offered by large public and private employers in Oregon and comparable states. Add a public member to PEBB. To ensure that the Public Employees Benefit Board is not subject to labor-management deadlocks, the legislature should add a tie-breaking public member to the board. The Governor has prepared legislation to add a ninth member with experience in health policy or risk management to the Public Employees Benefit Board. This legislation will be introduced in the 2011 legislature. Governor s Reset Cabinet 2.0 Report 22

23 Step 3: Keep School Employees In Step With State Employees STEP 3: KEEP SCHOOL EMPLOYEES IN STEP WITH STATE EMPLOYEES Ensure that the state s payments to K-12 schools and community colleges reflect the state s limit on compensation increases for state employees Savings from Current Service Level in = $252.6 Million Chart 6: Keep School Employees In Step With State Employees 30,000 28,000 26,000 24,000 22,000 20,000 18,000 16,000 14,000 12,000 10,000 Revenues (11/2010) Expenditures Continue Allotment Cuts Align State Employee Growth Align K-12 Employee Growth LAB The state provides approximately two-thirds of the operating funds for Oregon s 197 school districts and approximately two-fifths of the funds for Oregon s 17 community college districts, in addition to the support provided by local property tax payers. Although governed by local boards, both the K-12 and community college systems respond to goals and policies set by the legislature and the state Board of Education. Also, their share of the state s general fund budget now amounts to more than 40 percent. Employees of community college and school districts are covered by the Public Employees Retirement System (PERS). As a result, all of these districts, like the state, now face steep increases in payroll costs due to increases in PERS contribution rates that take effect on July 1, All of these factors have heightened the need to address labor cost controls when the state cuts a check to these districts. Governor s Reset Cabinet 2.0 Report 23

24 Step 3: Keep School Employees In Step With State Employees NEW DEVELOPMENTS Since release of the Reset Cabinet report, payroll cost increases have materialized as the report expected, but discussions with educators have generated new ideas for structuring the state s funding for K-12 schools. Retirement Cost Increases The PERS Board has announced that its contribution rates for K-12 and school districts will rise by six percent of payroll in , raising costs for those districts by $395 million. Some $222 million of these increased costs will be reflected in the state s payments to these districts. Health Benefit Cost Increases School districts have begun to pool their employee health care programs through the Oregon Educators Benefit Board (OEBB). OEBB covers 185 school districts, 13 charter schools, 19 Education Service Districts and 16 community colleges, with close to 55,000 employees and another 83,000 dependents enrolled in its medical plans. In general, school employees, unlike state employees, share in their health care costs through premium payments, deductibles and co-pays. This can have a positive effect on costs in the selection of coverage options. Although OEBB had expected its medical premiums for members to increase by 11 percent in the coming year, the actual average premium for was 6.8 per cent. OEBB staff attribute this improvement to their efforts at educating members on the benefits of a lower premium with a higher deductible versus a higher premium with a lower deductible. Consolidated Bargaining or Conditional Funding The Reset Cabinet report recommended that the state consider moving to statewide or regional collective bargaining for K-12 employees or set conditions on its funding for K-12 districts in order to control the labor cost components of budgets for which it provides the lion s share of funding. Discussions with educators and education advocates since then have generated a new idea for conditional funding to begin to address this issue. This new idea for a maintenance of effort requirement is presented in the updated Reset recommendations under Education Through High School below (see Step 6: Implement Phase 1 Reset Recommendations ). Conclusions For school employees, as for all employees, rising health care costs are an ongoing issue. But they are not the outsized issue they have become for state employees. PERS, on the other hand, looms just as large as a major cost driver for schools both for district budgets and the state budget and their ability to meet educational needs of the families they serve. Given the magnitude of the state s contributions to school districts and their mutual challenge in dealing with dramatically higher payroll costs because of rising retirement cost, the state should set limits on the compensation increases it will pay for. This can be done by quantifying those limits in its budget process and by specifying expectations for how its funds will and will not be used by local districts. The principle that state employees should stay in step with all working Oregonians when it comes to pay and benefits is equally valid for school employees. Whether teachers should be paid more in general or paid in ways that are tied to educational outcomes are separate matters to be determined by Governor s Reset Cabinet 2.0 Report 24

25 Step 3: Keep School Employees In Step With State Employees policy decisions and the availability of funds to achieve such goals. But when it comes to setting a baseline for funding compensation increases for school employees, staying in step with the state s own workforce and, in turn, with all working Oregonians provides a reasonable guide post for determining the state s support for education budgets. Recommendations The state should restructure its funding for K-12 and community college budgets to reflect the three percent annual increases in total compensation targeted for state employees and expected for all working Oregonians over the next two years. Doing so would reduce the state s general fund deficit by $252.6 million in Governor s Reset Cabinet 2.0 Report 25

26 Step 4: Include Retirees In Solutions To Keep PERS Costs Affordable STEP 4: MODIFY RETIREE BENEFITS TO KEEP PERS COSTS AFFORDABLE Modify tax benefits and cost-of-living increases for PERS retirees to contribute to the rebuilding of the PERS investment assets that support their retirement benefits Savings from Current Service Level in = $258.6 Million Chart 7: Modify Retiree Benefits To Keep PERS Costs Affordable 30,000 28,000 26,000 24,000 22,000 20,000 18,000 16,000 14,000 12,000 10,000 Revenues (11/2010) Expenditures Continue Allotment Cuts Align State Employee Growth Align K-12 Employee Growth Include Retirees in Solution LAB The total cost of the increase in PERS contribution rates will exceed one billion dollars in the next biennium when applied to all state agencies (supported by general fund, other funds and federal funds), the university system, all K-12 and community college districts and the cities, counties and special districts that participate in PERS. PERS has calculated that fully one-third of all additional retirement contributions to be paid by public employers in Oregon in is attributable to the replenishment of funds needed to guarantee benefits to retirees and inactive members (those who have separated from employment with vested claims to collect their retirement benefits at later date). These legacy costs stem from benefits promised to those already retired (who now represent 57 percent of PERS total liabilities) and inactive members (whose claims on the system now represent eight percent of total liabilities). Total legacy costs will continue to show up in the PERS contribution rate increases over the next six years and account for more than $400 million per year in additional payments to PERS by all public employers when the higher rates are fully implemented. Governor s Reset Cabinet 2.0 Report 26

27 Step 4: Include Retirees In Solutions To Keep PERS Costs Affordable These costs arose after PERS determined that it had fully funded its guaranteed benefits for retirees, following reforms enacted by legislation in 2003 and strong stock market returns for several years thereafter. When PERS lost 27 percent of the value of its assets in the market meltdown of 2008, PERS employers were told they would have to pay more into the system to help fund benefits they had thought were already fully funded including those for former employees and retirees. In , the first payments toward these obligations for retirees and former employees come due, amounting to more than $350 million and increasing to more than twice that amount over the next two biennia. As was the case during the PERS funding crisis of 2003, the issue for policy makers is whether to examine benefits paid to those already retired to help cover the extra payments that public jurisdictions will have to make to fully fund their benefits for a second time. Arguably, retirees should share in the effort to keep their basic benefits funded, if mechanisms can be devised to protect those least able to do so. But legal questions will arise as to whether all benefits promised are guaranteed and untouchable. Conclusion Given the magnitude of the refinancing required to keep PERS able to meet its obligations to retirees, retirement benefits should be included in solutions to make this refinancing more affordable for public employers and lessen the squeeze on public services that will otherwise result from this diversion of scarce resources to the retirement system. Recommendations The Reset Cabinet recently endorsed the following three approaches. 1) Eliminate tax remedy payments for non-oregon residents. Out-of-state residents now receive enhanced benefits to make up for the taxation of PERS benefits by the state. But those who live outside of Oregon are not subject to Oregon taxes. Eliminating this benefit would save $5.9 million for state general fund agencies and $17.9 million in the state s support for K-12 and community college districts in For all PERS employers, the savings would amount to $72 million in the biennium. 2) Require ten years of service to qualify for annual cost-of-living adjustments (COLAs). COLAs are a costly feature of the PERS system, amounting to approximately 17 percent of total liabilities. Currently, employees qualify for COLAs when vested, and seven percent of new retires retired with less than ten years of service in Establishing a ten-year threshold for COLAs would save $7.4 million for state general fund agencies and $22.4 million in the state s support for K-12 and community college districts in For all PERS employers, the savings would amount to $90 million in the biennium. 3) Limit COLAs to the first $2,000 per month of a retiree s benefit. This would protect low-income retirees and still give those with higher benefits some increases for inflation. This change would save $47.3 million for state general fund agencies and $143.5 million in the state s support for K-12 and community college districts in For all PERS employers, the savings would amount to $576 million in the biennium. Governor s Reset Cabinet 2.0 Report 27

28 Step 5: Hold The Line On Spending For Services And Supplies STEP 5: HOLD THE LINE ON SPENDING FOR SERVICES AND SUPPLIES Assume no inflationary increases for what the state spends on supplies and payments to third-party providers. Savings from Current Service Level in = $124.7 Million Chart 8: Hold The Line On Spending For Services And Supplies 30,000 28,000 26,000 24,000 22,000 20,000 18,000 16,000 14,000 12,000 10,000 Revenues (11/2010) Expenditures Continue Allotment Cuts Align State Employee Growth Align K-12 Employee Growth Include Retirees in Solution Eliminate Inflation LAB As part of the current service level projection, state expenditures for non-personnel costs are generally increased by an inflationary factor to recognize that the costs of goods and services increase over time. For the biennium, the general inflation factor was 2.4 percent for the two year period, or about 1.5 percent per year. This general inflationary factor is applied to the purchase of services and supplies and special payments. Services and supplies include the purchase of physical items like office supplies and desks. Special payments include the amount of money budgeted by agencies to pay contractors for services or providers for serving Oregonians, from county governments to assisted living facilities. With a constrained revenue environment in , and low inflationary pressures expected during the next two years, eliminating inflationary growth in the next biennium does not seem unreasonable. This will translate into agencies needing to purchase more efficiently, or find other ways to manage with lower resources. Governor s Reset Cabinet 2.0 Report 28

29 Step 5: Hold The Line On Spending For Services And Supplies Recommendation The state should hold the line on budgeted payments for services and supplies by eliminating inflationary increases for these expenditures. Doing so will reduce projected expenditures by about $124.7 million General Fund in the biennium. Governor s Reset Cabinet 2.0 Report 29

30 Step 6: Implement Reset Report Recommendations STEP 6: IMPLEMENT RESET REPORT RECOMMENDATIONS Implement Reset Report recommendations which can be initiated in the next biennium Savings from Current Service Level in = $295.6 Million Chart 9: Implement Reset Report Recommendations 30,000 28,000 26,000 24,000 22,000 Revenues (11/2010) Expenditures Continue Allotment Cuts Align State Employee Growth Align K-12 Employee Growth Include Retirees in Solution Eliminate Inflation Other Reset Recommendations 20,000 18,000 16,000 14,000 12,000 10, LAB The Reset Cabinet report released in June contained 38 recommendations, of which ten appeared to be feasible to implement in whole or in part in the biennium and likely to generate quantifiable savings in that period and beyond. These recommendations are summarized in the following sections and updated where applicable with new information and recommendations from the Reset Cabinet. The total savings for all of these recommendations are estimated at $295.6 million, excluding the savings from the labor cost recommendations described in Steps 2 through 4 above. The full list of recommendations from the Reset Cabinet s June 2010 report are attached as Appendix D. EDUCATION THROUGH HIGH SCHOOL Following release of the Reset report, the Governor s Office convened a work group of educators and education advocates to review the original recommendations of the Reset Cabinet s subcommittee on Governor s Reset Cabinet 2.0 Report 30

31 Step 6: Implement Reset Report Recommendations K-12 education, with particular attention to its recommendations for shared services and consolidations of school districts and Education Service Districts (ESDs). The work group also debated a variety of proposals to improve teaching and learning and generated a discussion by the Reset Cabinet regarding new conditions to be tied to the state s funding for K-12 districts. Its full report can be found in Appendix A. In addition to the work group, a committee of the Joint Boards of Education conducted a budget-writing exercise for all levels of the Pre-K through 20 education continuum. A summary of its conclusions can be found in Appendix B. Shared Services and ESDs The work group advanced the discussion regarding shared services and ESDs by focusing on the potential for moving beyond the historic place-based services model, geared to geographically defined ESDs, to a model that encourages the provision of shared services on a regional and statewide basis and options for school districts to shop for certain services from other ESDs and, potentially, other school districts. The work group s research and discussions confirmed the potential savings from shared services and the consolidation of functions, although not necessarily the outright merger of ESDs. A budget-based approach to motivate reform could begin with a reduction in ESD funding from 4.75 percent of the State School Fund to 4.0 percent by the second year of the biennium along with the phase-out of subsidies for small ESDs. Improvements in Teaching and Learning The work group was unable to reach unanimity on education reforms beyond the need for continued investments in mentoring and professional development. There was substantial interest in moving to an appointed Superintendent of Instruction. The most difficult issue involved the scope and design of a system to use student achievement data to inform the evaluation of teachers. The work group noted the soon-to-be completed recommendations of the House Bill 3619 (2010) task force whose focus is to build stronger connections between the institutions of higher education that train teachers and the schools the employ them. Conditions for K-12 Funding Discussions at the work group generated a new proposal from the Reset Cabinet to establish a statedefined maintenance of effort requirement, keyed to minimum hours of instruction that school districts must meet to receive their full share of state funding. The state Board of Education has defined and set in rule minimum hours of instruction for K-12 districts from 810 hours per year in Grades 1-3 to 990 hours in Grades These minimums are low by national standards and are routinely waived for districts seeking to balance their budgets. Four Oregon school districts reported falling below these minimums in the school year, and others have inquired about the process for waivers of the requirement in the current school year. Available data suggest that Oregon has one of the lowest, possibly the lowest, school year in the country. This proposal arose from concerns about the diminished school year in Oregon and the Governor s interest in enhancing the budget debate about K-12. The Governor has asserted that the state s funding for K-12 has been overly focused on the number in isolation from the state s educational objectives. He has also expressed concern about the state s inability to control labor costs in school district Governor s Reset Cabinet 2.0 Report 31

32 Step 6: Implement Reset Report Recommendations budgets. Finally, what crystallized the Reset Cabinet s thinking on this subject was the report of discussion at the last meeting of the Governor s education work group, in which superintendents expressed a strong aversion to any further reductions in the school year. The Cabinet concluded that the state s funding for K-12 should be made contingent on a maintenance of effort requirement to meet the minimum hours in the Board of Education s required instructional time rule, with no exceptions. If a district were to reduce instructional time below the required level to save $100,000, it would lose $100,000 in state funds. The Cabinet recognized that this would force a district s budget-balancing cuts into program, class size, administrative expenses and employee compensation. But the Cabinet concluded that this single-factor approach was focused on the most important educational benchmark and would be a step in direction of tying a deliverable to the state s funds. Further, the Cabinet recognized that this requirement could be viewed as a stick, rather than a carrot. But the carrot could emerge from ongoing discussions initiated by the Governor-elect which have been focused on guaranteeing a minimum funding level for K-12 in the next decade. Thus, the baseline funding would be keyed to instructional time, but additional funding above the baseline could be viewed targeted to expanding programs, reducing class sizes and to innovations and improvements. The Cabinet s recommendation can be summarized as follows. Establish a state-defined maintenance of effort requirement, keyed to minimum hours of instructions, which school districts must meet to receive their full share of state funding. The Reset Cabinet recommends that future funding from the State School Fund be conditioned on each district s compliance with the minimum school year requirement set by the state Board of Education, with no further approval of waivers from this requirement and penalties for noncompliance in the form of proportionate reductions in state support for districts that fail to comply with this condition. The decade of deficits is certain to constrain education funding going forward, making the need to identify and achieve a long-term baseline for K-12 funding both more challenging and more compelling. Still, the enforcement of minimum instructional hours could prove to be a viable path to that goal. Further, it should give the legislature a sense of what they are buying with their allocations for K-12 and set up useful discussions about the use of additional dollars, when they are available. The P-20 Budget The Joint Boards of Education budget committee in September and October to fashion an Education Enterprise budget, from pre-k through post-graduate programs, at three different levels of potential funding for In setting its priorities at each level, the Committee s recommendations focused on keeping the state moving towards its education attainment goals, support of the common core standards, productivity in education delivery, and commitment to need-based aid for students in college. A detailed report of their recommendations is presented in Appendix B. Recommendations Relevant to The recommendations for which savings are projected for the next budget period and beyond are: Develop a shared services model across all school districts; Replace ESDs with fewer regional providers; Create a statewide virtual learning system. Governor s Reset Cabinet 2.0 Report 32

33 Step 6: Implement Reset Report Recommendations EDUCATION BEYOND HIGH SCHOOL Since release of the Reset subcommittee s report on post-secondary education, a joint legislative work group, co-chaired by Sen. Mark Hass and Rep. Tobias Reed, has been holding hearings on many of its recommendations, including the adoption of the goal for four-year degrees, two-year degrees and high school diplomas and the development of a new compact between the Oregon University System and the state. Further, both OUS and the state s community colleges have reported record enrollments in the school year, which have in turn generated additional tuition revenues that have buffered the effects of interim budget reductions since June. Finally, OUS continues to plan for a budget reduction of 15 percent below its projected current service level for next biennium, provided the labor cost savings detailed in Step 2 are achieved and its compact with the state allows more autonomy in managing its budget. Recommendations Relevant to The recommendations for which savings are projected for the next budget period and beyond are: The reduction to 15 percent below current service level for OUS; and, Savings to be shared by the state and OUS from a reduction in state assessments to OUS under the new compact. HEALTH AND HUMAN SERVICES Since release of the Reset Cabinet report, the Oregon Health Authority has been preparing a report to the 2011 legislature regarding the establishment of an insurance exchange and plans for cost containment in the Oregon Health Plan and the larger health care delivery system. Recommendations Relevant to The recommendations in these program areas for which savings are projected for the next budget period and beyond are: Limiting the growth of expenses in the Oregon Health Plan to five percent per year; and, Reducing foster care utilization. A recommendation to reduce the forensics population at the Oregon State Hospital is not expected to produce significant savings until the biennium. PUBLIC SAFETY The Public Safety subcommittee of the Reset Cabinet made a variety of recommendations that were structured around controlling Oregon s reliance on incarceration for certain categories of lower-risk offenders, thus lowering the overall costs of corrections, while at the same time using enhanced community corrections approaches that would provide the same level of public safety at less cost. However, the passage of Ballot Measure 73 on the November ballot has complicated these recommendations, making achievement of their longer-term savings goals even more challenging. Measure 73 will result in the incarceration of an additional 340 to 470 offenders, to house DUII offenders who would otherwise serve local misdemeanor jail and probation sentences. As a result, this measure sis expected to cost the state between $61.5 million and $92.7 million over the next five years. Governor s Reset Cabinet 2.0 Report 33

34 Step 6: Implement Reset Report Recommendations These costs have not yet been included in this report s projections for the biennium and subsequent biennia. Notably, there is confusion over the intent of portions of Measure 73. The measure states that there shall be a 90-day minimum sentence for a third DUII conviction within ten years. However, the measure s provisions activate a statute (ORS ) that imposes a presumptive month prison sentence for such offenders. A two-thirds vote of the legislature will be required to correct this conflict and make the 90-day sentence operative. But, if done, the Criminal Justice Commission estimates that the cost of the measure could be cut in half from the high-end cost estimates cited above. Establish a task force on sentencing guidelines involving all three branches of state government. However the conflicting provisions of Measure 73 are resolved, the measure will compound the challenge of devising more cost-effective and more flexible sentencing guidelines for Oregon s criminal justice system. In recognition of this challenge, the Governor supports the creation of a task force representing all three branches of state government (executive, judicial and legislative) to develop proposals for the 2012 legislature. The Governor intends to launch this task force by executive order later this month. Recommendations Relevant to The public safety recommendations for which savings are projected for the next budget period and beyond are: Continuing the suspension of Measure 57; Adopting the federal earned time system; and, Selectively adjusting Measure 11 sentences. The Reset Cabinet notes that the Oregon Association of Community Corrections Directors has endorsed these and other approaches to reducing the cost of corrections in Oregon. Their position paper is attached as Appendix C. SUMMARY OF RECOMMENDATIONS The recommendations detailed above are summarized in the following table. Table E: Recommendations Totaling Savings Through 2019 Reset Recommendations Net GF/LF Expenditure Impact Education Develop a shared services model across school districts Replace ESD's with fewer regional structures Create statewide Virtual Learning system OUS: 15% CSL cut for new compact between State and OUS (excludes Labor costs) OUS: No state assessments under new compact Human Services Health Care: Limit growth to 5% per year Mental Health: Reduce OSH forensics population Reduce Foster Care utilization Public Safety Continue to suspend M Adopt federal earned time system Selectively adjust M11 sentences TOTAL Governor s Reset Cabinet 2.0 Report 34

35 Step 6: Implement Reset Report Recommendations In addition to implementation of these recommendations, the Reset Cabinet recommends continued work on the following initiatives cited in its June report. Education Continue efforts to expand dual credit offerings to enable high school students to earn college credits while also meeting graduation requirements. Pursue the consolidation of school districts; Refine and implement a student success initiative for post-secondary students to accelerate their completion of degrees. Build on Oregon s shared responsibility model for financial aid to students pursuing two-year and four-year degrees in Oregon institutions. Health and Human Services Supporting the Oregon Health Policy Board s strategies for reducing health care costs. Regionalize public health services and shift to an emphasis on prevention. Improve Oregon s Substance Abuse Prevention and Recovery System. Better meet the needs of high-need youths ages 15 to 25 in the child welfare system. Implement the Wraparound Initiative for children with complex behavioral and health needs. Reduce the utilization of nursing home care by expanding lower cost alternatives. Create incentives for more individuals to secure and maintain long-term care insurance. Public Safety Move to a modern sentencing guideline approach with selective modifications of Measure 11 sentences and greater use of community supervision programs. Exploring the use of enhanced home detention systems. Consider incentives and performance goals for counties to achieve increase efficiencies in the statewide criminal justice system. Governor s Reset Cabinet 2.0 Report 35

36 The Need To Balance Other Commitments THE NEED TO BALANCE OTHER COMMITMENTS The preceding sections have dealt with the 93 percent of the state s general fund budget that addresses the core responsibilities of education, human services and public safety. The remaining seven percent of the general fund budget cannot be ignored, nor should it serve as the default budget balancer for the big three program areas. The remainder of the general fund budget is evenly divided between administrative and programmatic functions. Administrative functions are those that steer the ship (the Legislature and the Governor s office), provide below-decks support (computers and payroll, for example) and keep it fueled (tax collections). The programmatic functions include those that protect the environment and manage our natural resources, support business and community development and, in modest amounts, promote the arts and culture. The Reset Cabinet report noted that general fund support for these programs declined from 18 percent in 1990 to just seven percent in the current budget. Since that report was issued, two successive rounds of interim budget cuts reduced these programs even further. With the exception of the Dept. of Revenue s tax collection functions, these programs have had to cut their General Fund budgets by an additional 7.7 percent this year. These cuts, which will disproportionately impact functions in these program areas, will become part of the budget under Step 1 described above. For these reasons, new approaches and priorities must be considered for this area of the budget. Modifications of Measure 76 Since release of the Reset Cabinet report, voters approved a permanent dedication of a portion of lottery funds for parks and habitat restoration (Measure 76). Prior to the vote, however, legislative leaders announced an agreement with sponsors of the measure to put forward to the voters in 2011 an immediate modification of the measure s provisions. This modification would allow for the temporary diversion of the measure s lottery proceeds to other state programs in times of state fiscal crisis. This is a reasonable and necessary recognition of the reality that locking commitments into the state constitution, even for what voters deem to be the most worthy purposes, can create budgetary straightjackets and limit the ability to balance competing priorities in difficult financial times. Alternatives for Supporting Natural Resource Programs As the Reset Cabinet report noted, many of the natural resource functions that were formerly supported by general funds are now supported by user fees paid largely by regulated business (e.g. water quality permit and food safety inspection fees) or individuals (e.g. fishing license and state park entry fees). The Cabinet noted further shifts from general funds to fees to support these services would be considered in future budgets. This issue is now being examined by the Governor s Natural Resources Cabinet. One possibility is for agencies like the Dept. of Agriculture to become completely fee supported in exchange for a commitment by the Legislature not to sweep any fund balances that are needed to manage the program and keep faith with the fee payers in future biennia. Governor s Reset Cabinet 2.0 Report 36

37 The Need To Balance Other Commitments Continued Support for the Arts and Heritage Programs In 2007, the Governor initiated the CHAMP program to establish modest state support for culture, heritage, arts, movies, historic preservation and public broadcasting programs. Funding for these programs was set at $6.2 million in and at $3.4 million in the current budget period. The Governor recommends continuing funding for these programs at $7.5 million in , including $5 million to create an endowment for the Pendleton Round-up conditioned on $10 million to be raised in private funds. The details of the CHAMPS III proposal are contained in Appendix E. Governor s Reset Cabinet 2.0 Report 37

38 Sustainable Solutions Are Needed To Resolve The Remaining Deficit SUSTAINABLE SOLUTIONS ARE NEEDED TO RESOLVE THE REMAINING DEFICIT This report acknowledges that a deficit of about $1.3 billion dollars will remain to be solved in the next biennium even after the adoption of the recommendations outlined in Steps 1 through 6 above. That last billion dollar gap will pose the toughest problem of all for rebalancing the budget. Some of the solutions to that problem will be found in the Budget and Management Division s agency cuts lists, which will outline reductions for the Governor-elect to be addressed in his Recommended Budget for Some of these solutions have been included in this report; others will be determined by the Governor-elect. Still, in the face of difficult choices in the next budget, it is tempting to resort to wishful thinking or deferred decisions. This report urges that state budget writers reject such solutions, as they are likely to worsen the state s fiscal crisis in the remainder of the decade. In its June report, the Reset Cabinet challenged the wishful thinking that the economy can be counted on to outperform expectations and deliver higher revenues in the next biennium. The fallacy of that thinking was confirmed in the state s last two revenue forecasts, which lowered the expected general fund revenues for by $908 million. Further, the likelihood of a better performing economy is no greater than the likelihood of another downturn, as illustrated in the following chart showing the best and worst eight-year experiences of the last two decades. Chart 10: Best And Worse 8-Year Revenue Experience 30,000 28,000 26,000 24,000 22,000 20,000 18,000 16,000 14,000 12,000 Revenues (11/2010) Expenditures Best 4 Biennia Worst 4 Biennia 10, LAB This is not to suggest that the state abandon its best efforts to improve the economy nor to downplay the possibility of doing raising the economic and revenue trend lines in the years ahead. To the contrary, these efforts should be paramount for state policy and investment. But the likelihood of raising those lines and reaping a revenue windfall in the biennium is small. Governor s Reset Cabinet 2.0 Report 38

39 Sustainable Solutions Are Needed To Resolve The Remaining Deficit For this reason, this report recommends against borrowing to solve the remaining shortfall in the next budget period, which would create additional debt service costs of approximately $580 million per biennium on top of continuing program costs deferred to future biennia. The State s Debt Advisory Commission has determined that the state is now above its recommended debt ceiling. And, based on the most recent forecast, the state is not likely to gain access to additional debt within that limit until late in But, if an exception to this policy were made and the state did borrow to cover a $1.3 billion dollar shortfall in , the effects of that decision would compound if budget problems from forward, as shown in the following projection. Chart 11: Long Term Cost Of Borrowing 30,000 28,000 26,000 24,000 22,000 Revenues (11/2010) Expenditures Continue Allotment Cuts Align State Employee Growth Align K-12 Employee Growth Include Retirees in Solution Eliminate Inflation Other Reset Recommendations Debt Finance Remainder 20,000 18,000 16,000 14,000 12,000 10, LAB This report also cautions that borrowing against the future can occur in other guises. For example, the legislature could by law extend the period for amortizing the unfunded liabilities of PERS from 20 years to 25 or 30 years. But such extensions will have the effect of increasing the system s unfunded liability and increasing the contribution rates of the state, its school districts and local governments to even higher percentages of payroll than now projected. This report repeats the obvious that the state should reject solutions that kick the can down the road and stay focused on solutions that will not only balance the budget in but bring the remainder of the decade back into balance. Governor s Reset Cabinet 2.0 Report 39

40 Revenue Stability Remains A Critical Goal REVENUE STABILITY REMAINS A CRITICAL GOAL The new normal projected for the economy over the next decade is also likely to be more volatile. The revenue trend line portrayed in the preceding charts will almost certainly show peaks and valleys over the years, possibly steeper and more frequent that we have seen in prior decades. This makes the Reset Cabinet s earlier recommendation to modify the revenue kicker provision of the state constitution all the more compelling. Even in the face of a $3.5 billion deficit in the next biennium, the state economist predicts that the state will have to return $23.6 million to corporate taxpayers because of an underestimation of corporate revenues in the current biennium. It is important to recognize that the thrust of this recommendation is not to grow government or enable the state to expand spending with revenues that would otherwise be returned to the taxpayers. Rather, its primary purpose is to stabilize revenues and spending, by allowing the state to set aside higherthan-expected revenues in good years to make up for lower-than-expected revenues in bad years. The point is to keep the state s revenue and expenditure trend lines even, not to bend them upward. The benefits of such stability will go far beyond budgeting. Stable funding has become a perennial goal of school superintendents, university presidents and state administrators who are hard pressed to manage well or achieve improvements in their service models when faced with inconstant and unpredictable resources. Modifying the kicker to achieve this goal will also facilitate better planning and smarter spending. This report reiterates the key points for a constitutional amendment to be referred to the voters, as outlined by the Governor earlier this year: Establish an Emergency Reserve Fund (ERF) in the Constitution; Direct a specified amount of excess revenues to the Fund, e.g. a 50/50 division of kicker revenues, with half going to the ERF and half continuing to go back to the taxpayers; Continue to return kicker refunds to taxpayers above the amount that goes to the Fund, i.e. when the ERF reaches a sufficient amount; Set strict rules for when the Fund can be used; Make the ERF an interest bearing account, so that the taxpayers get added value for their savings; Ensure that the ERF can never be depleted in a single budget period; and, Continue the existing dedication of ending balance to the ERF. As recommend by the Reset Cabinet, the state should place a constitutional amendment on the ballot before the end of the current biennium. Governor s Reset Cabinet 2.0 Report 40

41 Sources And Terminology SOURCES AND TERMINOLOGY Sources The Reset Cabinet report was released by the Governor in June The full report is available on the Governor s website at: The state s revenue forecasts are prepared by the Office of Economic Analysis (OEA) of the state s Dept. of Administrative Services. The most recent forecast for December 2010 was released on Nov. 19, 2010 and is available on the OEA s website at: Budget data and cost savings estimates for this report were developed by the Budget and Management (BAM) Division of the Dept. of Administrative Services. Its website is: Terminology Biennium refers to the state s two-year budget periods, beginning on July 1 of odd-numbered years and continuing through June 30 of the next odd-numbered year. Current service level (CSL) represents the cost of continuing current services from one biennium to the next. The CSL encompasses all expected increases in costs for providing services the state is obligated to provide under federal mandates and state law. Federal funds are funds provided by the federal government to state government and state agencies in the form of grants, matching funds and funds for specified programs and purposes. Federal stimulus funds refer to funds provided to the states under the American Recovery and Reinvestment Act (ARRA), enacted in February 2009 and successor legislation enacted in August General Fund refers to funds that can be used for general purposes of state government. Most of these funds come from personal and corporate income taxes, with smaller amounts from taxes on liquor, tobacco and other products. In this report, we use the term general fund (lower case) to refer to both General Funds and the unrestricted portion of Lottery Funds that are used for general purposes. General Fund budget refers to the services and programs financed by the state s general fund revenues and unrestricted lottery funds. In budget shorthand, this is often referred to as the GF/LF budget. In this report, we use the term general fund budget to refer to the GF/LF budget. The kicker refers a revenue limitation measure first enacted by state legislation in 1979 and amended into the Constitution (Article XV, Section 4) by voters in 2000, whereby excess revenues are returned to taxpayers when they exceed budget estimates in a given biennium by two percent or more. The kicker is calculated separately for personal income taxpayers and corporate income taxpayers. Lottery Funds refer to the proceeds from state-sponsored lottery games. Constitutional provisions dedicate 15 percent of these funds to parks (7.5 percent) and salmon/stream restoration (7.5 percent) and another 18 percent to the Education Stability Fund. There are also dedicated distributions for sports programs in higher education, county economic development, county fairs and gambling addiction treatment programs. The remainder of the funds may be used for education and economic development, including debt service for bonds backed by lottery proceeds. Governor s Reset Cabinet 2.0 Report 41

42 Appendix A: Report Of The Education Reform Work Group Governor s Reset Cabinet 2.0 December 2010 Governor s Reset Cabinet 2.0 Report 42

43 November 19, 2010 To: Reset Cabinet From: Tim Nesbitt Margie Lowe Re: Findings and Recommendations from the Education Reform Work Group This is to forward the thoughts and suggestions we gathered from four meetings of the Education Reform Work Group. Purpose The work group was invited to review the recommendations of the Reset Cabinet s Education Subcommittee report and to provide guidance for how we might reduce costs and improve educational outcomes in the challenging context of balancing the budget. In particular, the work group focused on: Identifying budget balancing options and impacts in the upcoming biennium; Implementing reforms that can achieve savings from greater use of shared services and the restructuring of Educational Service Districts, as recommended in the Reset 1.0 report; Identifying reforms in teaching and learning that can improve educational outcomes both in K 12 and across the P 20 spectrum. Participants Participants included superintendents of school districts and ESDs, representatives of the Dept. of Education, school boards, advocacy organizations (Stand for Children and Chalkboard), business organizations (OBC and OBA), employee/professional organizations (OEA) and resource persons from the university system. Process The work group served as a sounding board for education reform proposals under development in other venues and undertook a more detailed inquiry into reorganization options for ESDs and the services they currently provide. No votes were taken, although straw polls were used to test support and opposition on certain ideas. Discussions were candid and informative. The work group made progress in refining proposals for shared services and ESDs but stopped short of endorsing any particular proposal on this or other subjects.

44 Education Reform Work Group Page 2 Budget Balancing Options and Impacts Given the forecast of a $3.25 billion shortfall in the next biennium (now estimated at $3.5 billion), the group set its sights on a likely target of funding for K 12 in the range of $5.7 to $6.0 billion in , with the following caveats and preferences: District level special education and Title 1 programs should continue at a level sufficient to meet the maintenance of effort standard; The number of school days should not be reduced any further; and, Stability of funding is critical over the long term (with a six year run rate suggested by some members as the basis for determining a sustainable baseline). In a discussion of reserves, it was generally agreed that there should be guidelines for determining an adequate level of reserves but that districts should not be penalized for prudence or what may appear to be an excess of prudence, although this issue should be revisited if and when the state is able to provide stable funding going forward. Some members cautioned that it will be challenging to define an adequate and prudent level of reserves. The budget committee of the Joint Boards undertook an exercise in which they constructed budgets across the P 20 continuum. (See Margie Lowe s separate memo on this subject.) Shared Services and Educational Service Districts Our review of the potential for efficiencies and savings that can be achieved from a greater use of shared services and a reorganization of current Educational Service Districts considered the following approaches, not all of which are mutually exclusive: 1. Mandating a set of core services that must be provided by ESDs and consolidating ESDs to achieve the minimum resource levels to deliver those services adequately and cost effectively, as recommended by the Reset Subcommittee; 2. Moving certain services to regional or statewide delivery platforms, as recommended for specified functions by the Reset Subcommittee; 3. Allowing school districts to opt out of ESDs for all services they choose to provide on their own; 4. Allowing school districts to shop for services from ESDs outside of their own boundaries and from other school districts as well; 5. Encouraging ESDs to specialize and become centers of excellence for certain services; 6. Promoting a modernization approach to shared services, by emphasizing the potential in information technology and broadband capacity to move from place based services to centralized and regional services delivered from a distance; and, 7. Changing the governance structures of ESDs. There was general agreement, although differences of opinion on details, on #2 and #4 #7 above. However, there are substantial differences of opinion on #1 and #3. Also, the work group reviewed budget data for ESD expenditures. These data revealed wide variations around the state and reinforced the argument that one size does not fit all ESD to ESD and from region to region. (See Exhibit A, attached.)

45 Education Reform Work Group Page 3 Further, the work group gleaned lessons and cautions from the recent consolidation of the Umatilla Morrow ESD with the Union Baker ESD. This experience highlighted the challenge of attempting mergers of ESDs when their tax rates are very different. Finally, the work group s discussions of this subject assumed new urgency and focus as it became clear that proposals will be advanced in the next legislative session to simply reduce or eliminate the ESDs share of the State School Fund and let market forces determine what services are shared or purchased and what ESDs remain viable as a result. Note: At the current funding level of 4.75% of the State School Fund, ESDs will receive approximately $200 million in the current biennium. In addition, local property taxes and enterprise revenues bring total ESD expenditures to approximately $750 million in the current biennium, with close to $150 million in additional federal funds. (See Exhibit B, attached). The work group eventually reached broad agreement, although not unanimity, on the following approaches. Focus on services, not boundaries. Many of the place based services that were originally delegated to ESDs need no longer be confined to local service delivery. See technology, below. Make greater use of technology. Related to the sense that we should focus on services, not boundaries, it has become increasingly clear that technology is redefining what services can be delivered from a distance, because of the growth of computing power and the expansion of broadband capacity. These changes enable the move from a bricks and mortar to a clicks and mortar approach for the delivery of many services, such as business functions and student assessments, virtual learning and professional development). We should approach the redesign of ESDs from the perspective of what new technologies now enable us to do from a distance This approach would focus on redefining and redesigning shared services to take advantage of new technologies and ultimately reduce the number of separate service providers. Some members expressed the following caveats on this subject: o o Most systems today are web based, so cost savings from consolidation are not as great as we used to see. Since most systems are now web based, we no longer see the large monetary gains that we used to see in consolidation of systems (i.e. we no longer have the same requirements for servers, storage and operations/support staff as most of the processing is done in the cloud" (on the internet), or in a virtualized (shared) environment). There are some business benefits from consolidation, but there is also a loss in flexibility. Some business benefits may result from multiple districts being on the

46 Education Reform Work Group Page 4 same system for instance transfer of students between districts may be easier if both districts are all on the same student Information system (SIS). However, flexibility is often lost in big consolidated systems for instance one district may want to negotiate with their employee association for smooth pay details which may differ from another district this gets difficult when both are on the same HR/payroll system. o Vendor issues can complicate matters as well. ODE just learned that Pearson Education recently purchased AAL esis, which represents the largest SIS in the state. There are now serious concerns that Pearson will discontinue support for this product in the near future. ODE is in the process of discussing this specific issue within Oregon and with other states and large districts that are potentially impacted so that they can approach Pearson with a unified voice. Thus, when we discuss building/maintaining centralized systems, business continuity planning and total cost of ownership are key considerations. Encourage specialization of ESDs in certain services. It is generally recognized that some ESDs have developed strong programs in certain areas. Northwest Regional is often citied for the quality of its professional development and school improvement programs, while Umatilla Morrow has excelled in the use of technology. Allow school districts to shop for services among ESDs, beyond their own ESD boundaries. There was strong support for this support, less support for including school districts as sellers of services in this model and opposition to allow the shopping to occur beyond ESDs and school districts. Some members suggested that ESD dollars should follow the school district when a school district finds it can get better quality and/or a better price beyond the boundaries of its own ESD. Change the governance model of ESDs to include greater representation of school superintendents and/or school boards. More direct representation for purchasers of ESD services, i.e. school districts, on the governing boards of ESDs was seen as a path to better systems of service delivery with the potential for reducing administrative costs as well. Representatives could come from school board members and/or superintendents. Some members believe that the process of decision making can be improved without structural changes if superintendents would engage the development of local plans earlier in the school year. Members of the work group also expressed the following cautions: Steer clear of outright mergers of districts.

47 Education Reform Work Group Page 5 Given the experience of the Umatilla Morrow and Union Baker ESD merger, further consolidations of ESDs may be a fool s errand, because of the political complications inherent in trying to combine different tax bases. Be wary of the mandated services approach. Contrary to the recommendations of the Reset Subcommittee, some superintendents deemed it problematic to attempt to define one size fits all lists of mandated services, if those lists become too prescriptive. Others noted the importance of achieving adequate and equitable levels of service for key services in the absence of mandates. Other members believe that greater efficiencies can be achieved by mandating core services. Further, the work group noted that: Minimum funding levels are a barrier to consolidations and more efficient sharing of services. The million dollar minimum for five small ESDs helps to perpetuate a funding model that is three to four times as expensive on a per student basis in these districts. It was also suggested that rural and remote ESDs could benefit from proposing a funding formula that reflects the challenges of attempting to deliver place based services, such as health, transportation and special education, to their smaller and more dispersed populations. Finally, the prospect of outright budget reductions for ESDs as a means of forcing change in the current delivery systems of shared services and helping to balance the budget focused the discussion on a budget based proposals for restructuring. With proposals circulating for reducing the current funding level of 4.75% of the State School Fund to 4.0% or even zero, the work group suggested: Specify an acceptable level of funding reductions to be reached in the second year of the biennium, and phase out the small district subsidy. This would give districts and ESDs time to develop and implement new service models. If the amount of the reduction were keyed to the savings identified by the Reset Subcommittee in its June report, the 4.75% would be reduced to 4.0% by However, the ESDs and their association are likely to oppose to any such reduction. Reforms That Can Improve Educational Outcomes The work group reviewed various proposals for improving teaching and learning which are now under development in a variety of venues. (See Exhibit C, attached.)

48 Education Reform Work Group Page 6 Also, the work group reviewed two summaries prepared by Margie Lowe that outline two important elements of reforms that gained increased attention during the Race to the Top grant application process. (See Exhibit D, attached.) These elements address linking student assessment with lowperforming schools and dealing effectively with low performing schools. Note: Some members questioned whether Louisiana should be used as a model for the use of educator data. Finally, work group members involved with the HB 3619 (2010) process provided draft recommendations related to, in the words of the legislation, improv(ing) effectiveness of education professionals by building stronger connections between education institutions and employers of education professionals. (See Exhibit D, attached.) Other than support, in concept, for improving professional development, including mentoring, the group was unable to reach unanimity on these proposals. However, we noted majority support for making the State Superintendent an appointed position and creating a unified P 20 Council and consistent acknowledgement of the need for better data collection and utilization to track student success and the contributors to that success. A different exercise, focused on the budget, produced a long list of best next steps. In the event that additional funding can be directed to new initiatives, e.g. if the final revenue forecast delivers additional revenue, the group s priorities for such new funds included: More intensive early learning, focus on pre K thru 2, extended days for early learners**** Smaller class sizes in the early grades** More resources for professional development, teacher quality****** More support for students of color and ESL students** More support for the transition from high school to higher education* More support for children in poverty** Continued support for reading for children who are not natural readers* Teacher effectiveness improved teacher evaluations keyed to standards* Information systems that allow teachers and administrators to practice continuous improvement with timely assessments*** (* indicates the number of work group members recommending this item.) Several members also identified savings within existing resources could be achieved from: Better coordinated use of early childhood funds and the use of wraparound programs Incentives for consolidation and mergers of districts Efficiencies achieved through integration of services (e.g. early childhood) and improved collaboration Finally, the work group identified the small school subsidy as a barrier to the consolidation of services between small and large districts.

49 Education Reform Work Group Page 7 Conclusion The work group helped to clarify and refine the best next steps to improve the delivery of shared services and the reorganization of ESDs and provided an informative sounding board for improvements in teaching and learning. Exhibits A ESDs Operating Expenditures by Major Function, B Budgeted Operating Revenues for ESDs, C Superintendents Vision Policy (List of Potential Reforms) D Education Reform Policy Papers (Prepared by Margie Lowe) E HB 3619 Draft Recommendaions

50 Exhibit A ESD Operating Expenditures by Major Function, Special Education Technology Services Business Services Instructional Services Student Support Services Staff Support Services All other Total Operating Expenditures 1902 Clackamas ESD $21,721,223 $5,624,358 $1,378,627 $0 $167,859 $2,415,284 $2,256,276 $33,563, South Coast ESD $7,602,630 $903,541 $1,102,009 $361,545 $2,375,727 $292,813 $489,637 $13,127, High Desert ESD $12,544,106 $1,044,078 $1,006,403 $1,067,266 $761,918 $2,512,620 $6,502,840 $25,439, Douglas ESD $4,209,788 $1,681,358 $795,223 $321,469 $1,095,454 $6,009,976 $615,425 $14,728, North Central ESD $647,520 $455,920 $131,052 $341,640 $2,131 $182,269 $161,042 $1,921, Grant ESD $651,856 $484,666 $300,812 $212,720 $4,582 $128,646 $81,174 $1,864, Harney ESD Region XVII $357,159 $860,602 $593,757 $445,129 $175,038 $216,289 $179,740 $2,827, Southern Oregon ESD $14,443,827 $1,133,650 $3,492,646 $1,217,054 $1,371,534 $5,880,424 $709,445 $28,248, Jefferson ESD $1,261,692 $399,185 $57,466 $44,016 $18,677 $170,729 $74,769 $2,026, Lake ESD $610,460 $76,023 $186,209 $73,161 $105,694 $223,807 $141,314 $1,416, Lane ESD $24,728,992 $1,485,014 $1,125,019 $915,781 $803,103 $2,624,271 $1,124,785 $32,806, Linn Benton Lincoln ESD $7,889,977 $2,933,034 $1,915,070 $3,290,088 $2,854,872 $1,042,096 $1,411,216 $21,336, Malheur ESD Region 14 $2,211,386 $30,230 $191,767 $328,959 $97,892 $539,815 $780,116 $4,180, Willamette ESD $13,385,624 $4,052,204 $4,501,603 $8,564,702 $13,829,921 $3,755,146 $2,498,604 $50,587, Multnomah ESD $12,830,848 $5,000,767 $11,575,555 $3,569,741 $25,079,272 $2,038,362 $6,821,643 $66,916, Umatilla-Morrow ESD $8,840,767 $4,538,597 $4,827,402 $2,546,438 $1,152,663 $1,735,495 $1,843,870 $25,485, Union-Baker ESD $1,134,368 $93,737 $270,904 $356,843 $256,184 $364,872 $252,376 $2,729, Wallowa Region 18 ESD $769,743 $51,155 $918,100 $1,500,739 $25,993 $512,383 $591,464 $4,369, Columbia Gorge ESD $1,523,157 $898,236 $256,532 $647,619 $1,199,845 $443,423 $180,469 $5,149, Northwest Regional ESD $40,163,174 $5,238,679 $2,790,513 $2,286,481 $549,955 $2,940,686 $3,556,987 $57,526,476 All ESDs $177,528,297 $36,985,036 $37,416,669 $28,091,389 $51,928,315 $34,029,407 $30,273,192 $396,252,304 Notes: Operating Expenditures are those in Funds 100, 200, and 500; Functions in the 1xxx, 2xxx, and 3xxx series; and all objects with the exception of 37x and 720 Special Education is Area of Responsibility 320 as well as Functions 1220, 1250, and 1260 that are not in Area of Responsibility 320 Technology Services is Function 2660 Business Services is Fucntions in the 25xx series Instructional Services is Functions in the 1xxx series, but excluding functions 1220, 1250, and 1260 since they are included in Special Education Student Support Services is Functions in the 21xx series Staff Support Services is Function the 22xx series All Other includes the remaining Functions in the 1xxx, 2xxx, and 3xxx series that are not included in the other six categories

51 Exhibit B ESD Budgeted Revenues by Source SourceCd SourceDesc Ad valorem taxes levied by district $92,013,877 $95,595, Penalties and interest on taxes $88,100 $86, Revenue From Local Governmental Units Other Than Districts $131,000 $126, Tuition from Individuals $1,094,922 $449, Tuition from Other Districts within the State $3,294,750 $2,990, Tuition from Other Districts outside the State $701,920 $35, Adult/Continuing Education Tuition $306,976 $305, Transportation fees from Other Districts within the State $198,855 $204, Earnings on Investments $2,506,985 $1,107, Food Service $19,000 $3, Extra-Curricular Activities $599,000 $913, Community Services Activities $406,512 $389, Rentals $292,541 $666, Contributions and Donations From Private Sources $1,560,197 $1,788, Rental or Lease Payments from Private Contractors $0 $1, Services Provided Other Local Education Agencies $50,019,021 $54,081, Textbook Sales and Rentals $156,302 $1,871, Recovery of Prior Years' Expenditure $2,835,293 $2,938, Services Provided Other Funds $1,053,838 $1,580, Fees Charged to Grants $11,218,769 $10,678, Miscellaneous $15,499,549 $16,957, Other Intermediate Sources $344,471 $709, Restricted Revenue $877,572 $3,886, Revenue for/on Behalf of the District $201,773 $234, State School Fund --General Support $108,638,793 $89,213, State Managed County Timber $150,000 $180, Other Unrestricted Grants-In-Aid $592,249 $257, Driver Education $541,320 $123, Other Restricted Grants-In-Aid $85,319,379 $83,908, Revenue in Lieu of Taxes $0 $1, Revenue for/on Behalf of the District $705,007 $576, Unrestricted Revenue From the Federal Government Through the $684,616 $376, Restricted Revenue Direct From the Federal Government $2,256,647 $2,166, Restricted Revenue From the Federal Government Through the S $60,989,320 $78,808, Grants-In-Aid From the Federal Government Through Other Inte $1,465,652 $1,367, Federal Forest Fees $1,000 $ Revenue for/on Behalf of the District $2,715,881 $4,323,195 Total $449,481,088 $458,904,506

52 Exhibit C SUPERINTENDENTS: VISION POLICY Improve and Align Statewide Governance Make superintendent appointed Create unified P-20 Council Improve Accountability and Assessment Systems Conduct internal and external review of state accountability and assessment systems Implement a rigorous statewide performance evaluation system for all educators Enhance a statewide delivery system for quality core professional development tied to NSDC standards Change procedures for license renewal to include proficiency Continue and sustain Oregon s commitment to mentorship Guarantee equitable distribution of effective teachers Develop new career pathways and compensation systems based on researchbased initiatives Close the Achievement Gap Establish high quality professional development to meet needs of students at risk Accelerate learning for students at risk Implement full day kindergarten Implement Pre-K program Design new equity-based funding formula Other Emerging Ideas ESD/regionalization tied to funding Oregon Transfer Module (OTM) and Associate of Arts Transfer (AAOT) implementation

53 Exhibit D Right Teachers/Right Places/Right Subjects Student Assessment Link with Teacher Evaluation The quality of teaching is the most critical school-based factor contributing to student learning, especially for low-income and minority students. The Race to the Top (RTTT) competition looked for initiatives that would: Measure the effectiveness of individual teachers and leaders Use the measures to inform personnel systems and decisions Ensure an equitable distribution of effective teachers and leaders Provide high-quality support for educators and principals Measuring Effectiveness As a condition of accepting the ARRA State Fiscal Stabilization Funds, the State was required to develop a data tool that would link student test scores and teacher identification data. This is also a component of the new grant for the State Longitudinal Data System (SLDS) that the State recently was awarded. This data link is viewed as a tool to discern the specific impact an instructor has on student learning progress. The tool is limited in its application because students today may have multiple instructors for core courses and many teachers do not teach the specific language arts and math subjects that are tested on the state assessment. Effectively harnessing the data resource to help schools and teachers improve student instruction through decisions on professional development, compensation, promotion, tenure, and dismissal is the coming challenge. Absent a constructive plan, Oregon could find the policy reins grabbed by less constructive forces as occurred this month in Los Angeles, where the LA Times commissioned its own research linking student test scores to specific teachers and is providing a web link to the data to the general public so they may reach their own conclusions on 6,000 teachers in their school system. Most experts agree that student growth based on test data is only a portion of how teachers and school leaders should be evaluated. Evaluation should also include structured observations of teachers, expert review of portfolios of teachers lesson plans and other materials, and assessment of teacher competencies, knowledge and skills. These other measures also provide greater advantage because they can also help identify ways in which a teacher may need to improve to be more effective. These evaluation methods are generally more subjective and time consuming though. The early efforts in this work have been most effective when they were developed locally and jointly by the various stakeholders who will need to support and sustain them over time. AFT, one of the large teacher union organizations, in a recent survey of membership found their members placed the issue of teaching quality higher than teacher rights when given the choice by a margin of 4 to 1. They want to do what is best for their students and they want to be treated as professionals. No teacher...wants ineffective teachers in the classroom. When a teacher is floundering, there are not only

54 repercussions for the students, but also for the teachers down the hall. They now support creation of a fair, transparent and expedient process to identify and deal with ineffective teachers. They hope to structure a process that uses trained expert and peer evaluators and principals, and is based on professional teaching standards, best practices, and student achievement. Teacher Distribution There is broad-based concern that the highest need students and schools are prone to being assigned the least experienced or less effective teachers. The RTTT initiative urged states to develop the means to change this dynamic. This requires careful mapping of the quality of teachers currently employed based on measures of teacher effectiveness, rather than paper qualifications that are only weakly correlated to student outcomes. In the latest RTTT selection feedback, Colorado lost considerable points for failing to address this problem in spite of having passed one of the most dramatic teacher tenure overhauls in the nation this year. Teacher Preparation The new data systems could also allow districts and students interested in teaching careers to evaluate the quality of teacher preparation programs based on the effectiveness of the teachers who graduate from their programs. Although Louisiana did not receive RTTT funding, they are regarded as a leader in using educator data for this purpose. Performance Measurement, Feedback, and Professional Development Most research finds that the typical teacher evaluation systems do not differentiate teachers who are performing at different levels. Annual test score data does not tell teachers or administrators what aspects of their work is contributing or detracting from helping students learn. To increase teacher effectiveness and to improve both the effectiveness and efficiency of professional development, the assessment data needs to be supplemented with valid, reliable practice assessments. Further Issues that Will Evolve from This Work Recruitment, Hiring, and Placement Decisions Compensation and Promotion Opportunities Ties Retention and Dismissal Interface Development of Tools to Broaden the Impact of the Best Teachers

55 Low Performing Schools Geographic Context The criteria set out in the RTTT grant was felt by many to not meet the needs of small school districts and to be too drastic for most large districts. These measures would have required a clean slate approach where the school would have had to discharge most of its staff and hire new management and teachers or reopen as a charter school. Critics charged that this approach would not work in areas of the state where there is often a single classroom or less per grade and one school for K-8 and a high school. The data produced by the Department of Education for purposes of the RTTT grant and the School Improvement Grant found that the schools in greatest need are alternative schools where their mission is to serve students who generally have not been successful in traditional high schools. Both of these types of schools often have difficulty recruiting and retaining effective teachers and leaders. What Fits Which Schools A Guide for Education Leaders, written by the Center for Comprehensive School Reform and Improvement, found: Classic turnarounds have the best chance of success when: Turnaround leaders who can drive rapid change and influence stakeholders are available; The district has the will to provide significant autonomy to turnaround leaders to innovate and deviate from district policies and practices required of other principals; A core of teachers is ready and willing to undertake dramatic improvement in the school (since turnarounds typically maintain a large portion of existing staff). Starting fresh has the best chance of success when: Capable fresh-start providers are available to operate schools for the students served; The district has or can create a mechanism (e.g., through chartering authority) to enter into a contract for school operation with an outside provider; A school s dysfunction is so complete that a clean slate appears to be the only way to gain traction for improvement. Most turnaround strategies (including Oregon s RTTT proposal) urge that the leaders of turnaround efforts be given flexibility to adjust staffing, spending, and the use of time to meet ambitious improvement goals.

56 State Role Recommendations from Achieve, suggest the inclusion of state-driven interventions in cases where districts lack the capacity to pursue viable change strategies for their struggling schools. They acknowledge that most states do not have the capacity to manage schools directly, but instead would enter into partnerships with external organizations that could. They also recommend states consider: Vigorous recruitment of turnaround leaders, start-fresh operators, and teachers, particularly to fill the hard-to-staff subjects that are so critical to college and career ready courses; Training programs for turnaround leaders; Extended reach of teachers who are very high performing in these challenging schools to as many students as possible, both within schools and across schools in the state; Incubation of new start-fresh operators, including operators prepared to take over failing high schools; Financial incentives for taking on and achieving success in persistently lowperforming schools. Evaluation Needed Oregon was also criticized in its RTTT application for lacking an evaluation of the school reform efforts that have already been tried in our struggling schools. As the school year begins, a new round of schools receiving School Improvement Funds will be focusing on implementing strategies approved by the Department of Education. This would be a good point to work with outside evaluators and the University System to put processes in place to better gauge the success of their efforts.

57 Exhibit E DRAFT Here are the current draft recommendations of the HB3619 group; the Task Force will finalize the recommendations at their November 30 meeting. Recommendations Create an Educator Preparation Improvement Fund in order to advance university and district partnerships that respond to: (1) changes in Oregon PK 12 education; (2) collaboration around delivery models and clinical partnerships that provide effective professional preparation; (3) Oregon's educator workforce needs, including recruiting individuals into high need areas and individuals from diverse backgrounds; (4) dissemination of research and best practices that address the needs of Oregon's schools; (5) focused collaboration around initiatives that support student success and post secondary achievement; and (6) efforts to meet national accreditation requirements Develop an annual event that focuses on best practices emanating from shared responsibility for clinical preparation models across the continuum of professional development, focusing on what is known about teacher recruitment, preparation, persistence, and success in impacting PK 12 student learning Create a comprehensive leadership development system to support all Oregon students with a focus on Oregon s highest need students. This initiative will provide research, technical assistance to enhance evidence based practices, and strengthen diversity and human capital capacity for the improvement of instructional and organizational leadership in schools. Fully fund the mentor teacher program Encourage teachers to participate in National Board for Professional Teaching Standards Incorporate national accreditation standards and InTASC standards into Division 17 and develop rubrics for those standards Develop a database for use in the analysis of teacher preparation program effectiveness, including information on 1) placement of all newly hired educators, 2) longevity of educator placements, 3) the nature of placements, including teaching assignments relative to licensure and certification, and district demographics, and 4) educator and employer satisfaction with educator preparation Conduct an in depth study of the use of student achievement data in the analysis of teacher preparation programs so as to determine how to best evaluate educator effectiveness and contribute to the analysis and development of such programs Concurrent with the development of the database, develop systems for regular access to the data and for training in its use for educators, including those in higher education, and particularly in educatorpreparation programs

58 Appendix B: Report On The Joint Boards P-20 Education Budget Exercise Governor s Reset Cabinet 2.0 December 2010 Governor s Reset Cabinet 2.0 Report 43

59 November 16, 2010 To: Reset Cabinet From: Margie Lowe Re: Joint Education Boards Budget Committee Recommendations This is the third biennium that the Joint Boards of Education Budget Committee have convened to determine the best course of action on the Education Enterprise budgets for the next biennium. The Committee is comprised of two members each from the State Board of Education and the State Board of Higher Education and one member from the Oregon Student Assistance Commission. The Committee had met in late September and early October to hear presentations on the budget requests including policy option packages and reduction options from: Oregon Department of Education State Superintendent Oregon Community Colleges and Workforce Development Department Commissioner Oregon University System Chancellor Oregon Student Assistance Commission Executive Director On November 1, the group met in a closed session lasting 5 hours to build the Education Enterprise budget to three different levels starting from the analysts recommended level that included only 75 percent of each agency s Current Service Level. This reduced the combined P-20 funding Current Service Level from $8.2 billion to $6.1 billion. The Governor s Chief of Staff had asked that the Committee prepare General Fund recommendations to total $7.0 billion plus-or-minus $700 million. The Committee first examined the restoration list recommended by the DAS analysts as their beginning consideration. The funding level for each agency at each restoration level is illustrated on the attached table. Also included with this memo is a list of the major program reductions included in the initial analyst recommendations. As overall priorities, the Committee s recommendations focused on keeping the state moving towards the education attainment goals, support of the Common Core Standards, productivity in education delivery, and commitment to need-based aid for students in college. Level 1 Priorities The first level of restoration, $6.3 billion, allowed the addition of $164 million General Fund and $104 million of Lottery Funds from the DAS analyst starting point. The special education programs were a high priority restoration to prevent loss of federal funds from a shortfall in maintenance of effort funding; without restoration, the program reduction will double.

60 At Level 1, the Committee recommends restoring: 1. ODE Early Intervention/Early Childhood Special Education (EI/ECSE) ($16.4 million) 2. ODE Regional Programs providing education services to children with low incidence disabilities e.g. hearing impairment, vision impairment, autism spectrum disorders, and traumatic brain injuries ($4.7 million) 3. ODE Long-Term Care and Treatment Programs (education services in 51 residential and day treatment programs) ($2.7 million) 4. ODE Hospital Education Programs for children with acute or chronic medical conditions (e.g. burns, cancer treatment, head injuries or mental health treatment) requiring extended hospital stays ($232,443) 5. State School Fund ($48 million GF and $104.1 LF) 6. CCWD Community College Support Fund ($60 million) 7. OUS Supplemental Support for Regional Campuses Restoration ($7.3 million) 8. OSAC Opportunity Grants ($25 million) Level 2 Priorities At Level 2, the Committee restored programs that support student learning in each sector, the essential functions of the land grant programs at OSU, the engineering program investments needed to attract and retain industry, and student aid to offset increases in tuition. The recommendation for the State School Fund should retain state eligibility for MOE provisions in federal special education programs. The second level of restoration, $700 million General Fund, would restore: 1. ODE Oregon Pre-Kindergarten ($10 million) 2. ODE Help Desk, Reg. Data Warehouse ($1.9 million) 3. ODE English Language Arts Assessment ($2.2 million) 4. ODE Critical Staff Positions and Contracts ($4.9 million) 5. CCWD Community College Support Fund ($9.1 million) 6. OUS Agricultural Experiment Station ($5.2 million) 7. OUS Extension Services ($3.9 million) 8. OUS Forest Research Lab ($1.0 million) 9. OUS Engineering, Technology Industry Council Education and Manufacturing Programs ($34 million) 10. OSAC Opportunity Grants ($49.7 million) 11. OSAC Child Care Grants for College Students ($1.0 million) 12. State School Fund ($537 million) Level 3 Priorities At the $7.7 billion level of General Fund support, funding would better support state local school districts work to improve student performance and implementation of the more rigorous diploma. Early learning programs are restored to full funding levels and support is provided for the public service and economic development related functions of the

61 Oregon University System. Enrollment growth is also supported in postsecondary education along with improved need based student aid. The third level of restoration, $700 million General Fund, would add the following: 1. State School Fund ($400 million, including $50 million reserved for System Improvement Grants for start-up funding that could provide the initial funding for redesigning education delivery by schools, ESDs, or community colleges) 2. ODE EI/ECSE full funding ($10 million) 3. ODE Oregon Prekindergarten full funding ($10 million) 4. OUS Public Services and Economic Development Programs ($40 million) 5. OUS Enrollment Capacity ($50 million) 6. CCWD Enrollment Capacity ($50 million) 7. CCWD Community College Support Fund ($100 million) 8. OSAC Opportunity Grants ($40 million) The Committee felt that the Reset proposals would ultimately save districts money but many would need initial start-up funding to build the delivery tools; hence their recommendation for the System Improvement Grants in the first item.

62 Major Analyst Reductions Not Included In Committee Restoration Recommendations Reductions Common to All Budgets Personal Services reduced 5.5 percent Elimination of inflation adjustments in Services and Supplies and Capital Outlay Roll-up of 2010 allotment reductions Department of Education Use of sales proceeds from School for the Blind to fund Blind and Visually Impaired Student Fund and School for the Deaf maintenance backlog Teacher and Administrator Mentorship Programs: $748,521 Early Head Start Pilot Project: $147,637 Connectivity Services for School Districts: $93,886 Physical Education Grants: $73,819 Student Leadership Centers: $73,819 School Breakfast Program: $338,828 Summer Food Reimbursement: $23,472 Summer Food Service program: $7,819 Community Colleges and Workforce Development Healthcare Workforce Program: $1,052,984 Skills Centers at PCC and Sabin-Schellenberg Center: $590,523 Match for Carl Perkins CTE funds Oregon Student Assistance Commission ASPIRE program is shifted completely to year-to-year grant funding Eliminates funding for new participants in the Nursing Faculty Loan Repayment program Oregon University System Funding for expanding the Vet Medicine program from 2 to 4 years ($2,558,888) OSU Veterinary Diagnostic Lab supplemental funding ($677,438) Targeted funding for faculty research support is reduced by a third ($2,085,840)

63 Appendix C: Strategies For Reducing The Cost Of Corrections In Oregon Governor s Reset Cabinet 2.0 December 2010 Governor s Reset Cabinet 2.0 Report 44

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66 Appendix D: Recommendations Of The Reset Cabinet June 2010 Governor s Reset Cabinet 2.0 December 2010 Governor s Reset Cabinet 2.0 Report 45