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ARE WE PREPARED FOR THE NEXT DOWNTURN??

ARE WE PREPARED FOR THE NEXT DOWNTURN??. HISTORY SOURCES OF VOLATILITY RESERVE POLICY SCENARIOS. GENERAL FUND REVENUE: HISTORY OF VOLATILITY (% CHANGE COMPARED TO PRECEEDING BIENNIUM). STATE SCHOOL FUND: HISTORY OF VOLATILITY (IN MILLIONS OF $).

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ARE WE PREPARED FOR THE NEXT DOWNTURN??

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  1. ARE WE PREPARED FOR THE NEXT DOWNTURN?? HISTORY SOURCES OF VOLATILITY RESERVE POLICY SCENARIOS LEGISLATIVE REVENUE OFFICE

  2. GENERAL FUND REVENUE: HISTORY OF VOLATILITY (% CHANGE COMPARED TO PRECEEDING BIENNIUM)

  3. STATE SCHOOL FUND:HISTORY OF VOLATILITY(IN MILLIONS OF $)

  4. OREGON AMONG HARDEST HIT BY 2001 RECESSION(FY2002 COMPARED TO FY2001)

  5. SOURCES OF VOLATILITY • CYCLICALLY SENSITIVE GOODS BASED ECONOMY • RELIANCE ON HIGHLY ELASTIC INCOME TAXES • KICKER MECHANISM • INITIATIVES

  6. STATE TAXES BY SOURCE(PERCENT OF STATE TAX COLLECTIONS IN FISCAL YEAR 2006)

  7. LARGEST SOURCE OF VOLATILITY: OREGON’S HIGH INCOME TAXPAYERSPercent of Total Liability for Top 1% of Full-Year Filers

  8. PLENTY OF RISKS AHEAD • HOUSING WEAKNESS TRIGGERS NATIONAL RECESSION • ENERGY PRICES SPIKE EVEN MORE • INTERNATIONAL TENSIONS ESCALATE • WORLD TRADE IMBALANCES FORCE PAINFUL ADJUSTMENTS IN U.S. • FINANCIAL MARKETS TURN DOWN SHARPLY

  9. COPING WITH VOLATILITY:RESERVE FUNDS • EDUCATION STABILITY FUND (2002) • RAINY DAY FUND (2007)

  10. EDUCATION STABILITY FUND • STATUS: CONSTITUTIONAL • REVENUE: 18% OF LOTTERY UNTIL CAP REACHED THEN 15% INTO CAPITAL MATCHING FUND • TRIGGERS: (DECLINING EMPLOYMENT OR REVENUE 2% BELOW FORECAST OR EMERGENCY)+ 3/5 VOTE • USES: PUBLIC EDUCATION • CAP: 5% OF GF REVENUE

  11. RAINY DAY FUND • STATUS: STATUTORY • REVENUE: ONE-TIME CORP KICKER CREDIT + UP TO 1% OF GF APPROPRIATIONS IN PRIOR BIENNIUM (ENDING BALANCE)+INTEREST • TRIGGERS: SAME AS ESF/WITHDRAWALS CANNOT EXCEED 2/3 PER BIENNIUM • USES: GENERAL PURPOSE • CAP: 7.5% OF GF REVENUE

  12. PROJECTED RESERVE FUND BALANCES: TREND SCENARIO(IN MILLIONS OF $)

  13. NEXT DOWNTURN: “TYPICAL” RECESSION

  14. NEXT DOWNTURN: SEVERE RECESSION

  15. CONCLUSIONS • RESERVE FUNDS ESPECIALLY IMPORTANT IN OREGON DUE TO VOLATILITY • STATE HAS SIGNIFICANTLY IMPROVED ABILITY TO MANAGE DOWNTURN SINCE 2001-02 RECESSION (BOND RATING UPGRADE) • CURRENT RESERVES LIKELY TO BE CAPABLE OF ABSORBING “TYPICAL” DOWNTURN • RESERVE POSITION WILL HELP CONSIDERABLY WITH 2001-02 TYPE DOWNTURN BUT WILL NOT ELIMINATE MAJOR FISCAL PROBLEMS • POSSIBLE CHANGES TO RDF: • STATUS • LONG-TERM REVENUE SOURCES

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