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Federal aid to states is on the congressional agenda, even if the money isn't imminent

Even as a legislative panel prepares this week to draw from the state's emergency fund, Oregon faces a steep drop in income taxes that state government relies on to aid schools and pay for services — and a need for federal help.

Estimates of tax losses are still being developed. But Oregon and all other states are likely to require billions in federal aid that may dwarf the amounts given during the Great Recession a decade ago — and far more than Congress has approved so far to counter the economic downturn prompted by the coronavirus pandemic.

While Oregon Sen. Ron Wyden and the Democratic majority in the U.S. House have made aid to states a priority, Treasury Secretary Steven Mnuchin says it's more likely such aid will take a backseat to replenishing federal help for small businesses, which have already exhausted the $350 billion Congress made available for them.

States will get more money for testing, but general aid was omitted from the latest $484 billion package, which the House was expected to give final approval to soon and send to President Donald Trump.

One expert says Congress will have to do more for states.

"States face massive budget shortfalls that will be more severe than they saw during the Great Recession," said Michael Leachman, senior director for state fiscal research for the Center on Budget and Policy Priorities, a progressive-leaning think tank.

"Those cuts will make an already weak economy even weaker and will hurt families and communities when we are already vulnerable," Leachman, who once worked for the Oregon Center for Public Policy, added.

More than 90% of Oregon's general fund, which represents its most flexible state spending, comes from just two sources: Personal and corporate income taxes. The state's next quarterly economic and revenue forecast is scheduled May 20.

"We are being impacted by a loss of revenue because there are fewer people working," Gov. Kate Brown said last week. "The needs are great in terms of our public health capacity and for our safety net. Of course, unlike the federal government, the state has to balance our budget."

In addition to almost 300,000 Oregonians filing unemployment claims in the past few weeks as a result of business shutdowns and curtailments linked to the Covid-19 coronavirus, demands have increased for public health, state-supported health insurance under the Oregon Health Plan, and other services during the downturn.

Slowdown accelerates

State Economist Mark McMullen warned in several recent forecasts that Oregon's economy was likely to slow, despite continued growth in jobs and tax collections, as the national economic expansion passed a record 10-year mark.

The 2019 Legislature set a total of $23.7 billion for the current two-year budget from general taxes and lottery proceeds, with an ending balance of about $600 million. Total state spending for 2019-21 is $85.8 billion, but more than 70% consists of federal grants or other restricted funds, such as fuel taxes and vehicle fees earmarked for highway and bridge work.

While there are no official projections yet of how much less state tax collections will fall short, Sen. Betsy Johnson, D-Scappoose, says some of the early numbers are scary: Losses between $2 billion and $3 billion during the rest of the current two-year cycle ending in mid-2021, and between $1 billion and $5 billion in the next cycle.

"We have been told by the state economist it is awful," said Johnson, a Senate co-chairwoman of the Legislature's joint budget committee. "Other than observations at 100,000 feet, I do not know what to tell you."

The Legislative Emergency Board, whose members make budget decisions between sessions, was preparing this week to tap the state emergency fund that is now down to around $50 million. But only the full Legislature, not the board, can spend other funds or move money from already approved agency budgets.

Oregon does have two big reserve funds with a total of $3 billion, almost 14% of the general-fund budget, which puts the state in a better position than during the last downturn. A lottery-based reserve can go to education, and a second reserve can be tapped for other purposes. But only the full Legislature can approve those transfers — and the laws creating the funds bar lawmakers from spending all of the money in a single budget cycle.

The governor does have authority to cut most agency budgets by 2% without legislative approval. Brown said she has instituted a partial hiring freeze — there are exemptions, such as the Employment Department adding staff to process a record number of claims — and barred nonessential travel.

Johnson said lawmakers agree with Gov. Brown that any special session should await the next economic/revenue forecast and an updated analysis of how Oregon benefits from the myriad programs that Congress approved in the $2 trillion CARES Act. Federal agencies are still writing rules for how the money is spent.

"We're still waiting to understand what the federal (CARES) bill means for Oregon so that we do not do anything that makes it harder to use the federal money," Johnson said. "That will give all the certifiably smart people in Oregon a chance to digest all the different streams coming from the federal government."

Aid proposals

One expert says the key to how much aid states will need is the length of the economic downturn that will persist once business activity resumes after the worst of the coronavirus pandemic.

"The length is not independent of the (pandemic) event," said Susan Wachter, codirector of the Penn Institute for Urban Research, who spoke on a conference call sponsored by the Volcker Alliance. "The longer this persists, the deeper it will be for state and local governments. State and local cuts, which are beginning and are planned to go deeper, will contribute to the downturn."

During the downturn a decade ago, Oregon and other states got aid in several forms, some money as general assistance and some as increased federal shares of Medicaid, the joint program of health insurance for low-income people. It's known here as the Oregon Health Plan, although Medicaid goes to some nursing-home care.

"By letting states reduce their own contributions to Medicaid, we have seen this step provide flexible funding they can use to address their own budget gaps," said Aviva Aron-Dine, vice president for health policy at the Center on Budget and Policy Priorities.

But she said Congress will have to raise the federal share by far more than it did a decade ago, when the increase was about 12 percentage points.

One of the recent congressional aid packages did raise the federal Medicaid share, but only until the current public health emergency is declared over by the Health and Human Services Department.

Aron-Dine said a good starting point is a proposal by the Democratic majority in the U.S. House to raise the federal Medicaid share by 5 points for every 1 percentage point that a state exceeds its historic unemployment rate. She said based on that proposal, the projected state budget shortfalls would drop by about two-thirds — and Congress could do something else to offset the rest.

States — and local governments with more than 500,000 people, such as Multnomah and Washington counties — also got a separate source of aid in the congressional package. Other urban counties do not qualify. For Oregon, the total is about $2.4 billion, about $1.6 billion of it for state government.

"But we cannot use that to backfill the revenue we have lost," Brown said last week. "That is a frustration shared by governors around the country."

Led by Maryland Republican Larry Hogan and New York Democrat Andrew Cuomo, the National Governors Association called on Congress and President Donald Trump to approve up to $500 billion in aid to states.

"The challenge that all the governors are having is the strings that were put on earlier federal resources," Brown said. "Whether we are Republican or Democrat, red or blue states, we would all like to see much greater flexibility to support the financial needs in our states."

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