Seven Principles of State Budget Reform

Fiscal Insight #6
by Martin Buchanan
June, 1993

Seven Principles of State Budget Reform

Executive Summary

Why is there another fiscal crisis in Oregon? In a state budget debate dominated by discussions of specific programs, there is little discussion of broad principles for responding to Oregon's budget squeeze. This report describes seven basic, yet powerful, principles that could save taxpayers billions of dollars, close the state's budget gap without new taxes, and maintain or improve core services. Admittedly, there is a cost involved in this process: liberating state budget decisions from the undue influence of special interests and business-as-usual politics. Taken together, this report's seven principles constitute a Bill of Limits and a new covenant for Oregon governance:

1.  State government should focus on its core businesses.
2.  No taxation without direct representation.
3.  Civil servants should not earn more than other citizens. 
4.  Contract out services when private providers offer better value. 
5.  No more blank checks.
6.  Empower the entitled.
7.  Don't accept federal strings as straitjackets.

These broad principles can be applied separately or together. Applied together, they could save $2.5 billion each biennium, twice the claimed shortfall in the 1993-95 biennium and equal to the projected shortfall in the 1995-97 biennium,[1] closing the budget gap with no new taxes while fully implementing 1990's Measure 5 property tax limits.[2]

The context, merits, and politics of a principled approach to state budget reform

This is a paper about the forest, not the trees. It suggests that broad principles can sometimes be more helpful than technocratic details in solving large problems like a $1.2 billion budget gap.[3] The most important fact about members of the Legislature is that they are outnumbered and systematically overwhelmed. There are 90 legislators who work part time.[4] There are 152,000 state and local government workers who work full time, outnumbering legislators 1,689 to 1.[5] If oversight of the state's $12.75 billion all-funds budget[6] were divided equally between the legislators, each legislator would need to oversee the expenditure of $141.7 million.[7]

An incremental, piecemeal, and tactical approach to dealing with the state's budget problems leads to endless hours in hearing rooms listening to well-organized parades of witnesses testifying about the sea of unmet needs, how the XYZ program helped them, that the agency will have to cut a good program, and so on. A piecemeal approach gives pressure groups time to organize and subject the Legislature to what one powerful lobbyist calls the "Chinese torture" of organized phone, mail, and protest campaigns by large special interests.[8] A piecemeal approach requires using up political capital and mustering majorities for unpopular votes again and again, for relatively small gains each time. A piecemeal approach leaves even principled legislators vulnerable to pressure as they are bargaining for a dollar more or less here or there, rather than staking out and standing on clear principles. In the piecemeal approach, a legislator becomes focused on the false dichotomy of either fewer essential services or higher taxes. Possible savings from restructuring government are often overlooked.

A principled, comprehensive, and strategic approach to dealing with Oregon's budget crisis views the current debate as an opportunity to transform government and the provision of government services. Such an approach selects a small number of specific principles that can be readily embodied in legislation or in the Oregon Constitution. Taken together, these principles could help solve Oregon's budget crisis without new taxes. These principles are designed to be clearly understandable to the people at large and to win widespread popular support. While these principles will lead to more economical government, they are not distinctly conservative or liberal and will help government maintain and improve a wide range of services for Oregonians.

A Bill of Limits

Taken together, these principles constitute a Bill of Limits for Oregon government, a new covenant with the people of Oregon: that an economical and frugal government will deliver the best possible services in ways that empower and respect Oregon citizens.

Such an alternative and attractive vision of Oregon government creates political opportunities for those willing to lead and willing to take political heat by confronting powerful special interests. The boldness and simplicity of these proposals makes it possible to energize large numbers of private citizens in support of them, something that is rarely possible for the marginal and technical fiscal debates that often dominate a legislative session. In several cases, adding one of these principles to the Oregon Constitution will save more state money than a hundred piecemeal bills, hearings, and markup sessions.[9]

While this report's proposals work well together, each can be considered separately on its own merits. Enacting any of them will help the state's budget.

George Bush's one-term Presidency showed us the political costs of inaction, drift, and lack of principles. Every member of the Oregon Legislature is now serving under the term limits enacted by voters in 1992. Legislative service is not a career anymore; legislators are there to do some good and then move up or out. The future belongs to the bold.

#1 State government should focus on its core businesses.

Would you take your car to a grocery store to get it fixed? Of course not, because a grocery store is not an institution for fixing cars. Our dynamic private economy works best with a large number of institutions that each focus on a small range of possible goods or services. Private sector focus has increased in local years, as corporations spin off subsidiaries that are not part of their "core businesses."

In contrast, state government has become a "do everything" institution. Table 1 is a partial list of Oregon state government businesses, dividing these businesses into "essential" and "debatable" businesses. The state spends about 80% of its all-funds budget on the essential businesses.[10] Few Oregonians would shut down all or even most of the debatable businesses, but many would shut down some of them, saving substantial funds and improving the state's focus on essential services.

Table 1.

Some Oregon State Government Businesses[11]

Essential (alphabetical order)

basic education
consumer protection against business fraud
environmental quality
higher education
highways and auto licensing
public safety
safety net for those in need

Debatable (alphabetical order)

agricultural programs
campground and park operation
child care
economic development programs
energy conservation and planning
gambling monopoly
geological services
health insurance mandates for small businesses
home loans for veterans
job referral services
job training services
labor dispute mediation
land ownership of large areas of Oregon
land use control of private lands
liquor sales monopoly
low-income housing projects
port subsidies
rail and light rail planning and subsidies
retirement plan operation
tourism promotion
transportation programs (other)
water allocation and planning
water system subsidies for local communities

As an example of focusing on the state's core businesses, abolishing the state's Economic Development Department would save $199.2 million in state funds in the 1993-95 biennium. Such a change would recognize that taking money out of the private economy and then returning it to selected businesses only rearranges jobs and business success, and won't in general increase economic growth or job creation. Lottery funds could then be reallocated (by amending the Oregon Constitution) to the general fund.

Legislative Principle:

Develop a consensus on a limited set of "core businesses" for state government. Describe these businesses in specific terms, avoiding such vague and elastic phrases as "economic development," which can now mean almost any expenditure of taxpayer monies.

Constitutional Principle:

Enumerate state government functions in the constitution and do not allow appropriations, legislation, or loaning of the state's credit outside of those functions.

#2 No taxation without direct representation.

Legislators rarely hear from organized interest groups or testifying witnesses who want less government spending on a specific program. Each program has a special interest constituency that receives major benefits, making it worthwhile for that constituency to organize politically. The same program's marginal cost to the general taxpayer is low enough that the taxpayer remains rationally ignorant, not ready to devote major time and resources to fighting for policy improvements that benefit the taxpayer only slightly.

One special interest group, the Oregon Education Association (the state's major teacher's union), has 15 members in the average Oregon precinct, 583 members in the typical Oregon House of Representatives district, and 1,166 members in the typical Oregon Senate district.[12] The OEA is far more powerful than any Oregon political party's precinct organization. In March 1993, the OEA and its political allies waged a concerted political pressure campaign against legislators who considered cutting back runaway school spending.[13] John Danielson, the OEA's chief lobbyist, succinctly described their expectations of the Legislature: "You can't go through Chinese torture forever."[14]

Add to the OEA more than 115,000[15] other state and local government employees, their families, and hundreds of thousands of direct beneficiaries of specific programs, and the total dwarfs any other organized political group in the state.

According to reports from the Advisory Commission on Intergovernmental Relations,[16] government's systemic tendency towards increased taxation and spending has led to total government spending that exceeds 40% of national economic output. Oregon state and local taxes are now $2,188 per capita, $8,752 per family of four, and $6.5 billion per year.[17] Excessive government spending is now the greatest clear and present danger to our economy and society. Pundits and pro-government lobbyists clamor about "unmet needs" requiring new government programs, disregarding the likelihood that if government took 20% of income instead of 40% then more people would be employed, fewer people would be poor, more investment capital would be available, and our entire society would grow wealthier much faster.

Researchers Joseph Bast and John Beck summarize the literature this way:

The combined burden of state and local taxes has been found to be closely related to a state's economic growth rate relative to other states. Some researchers estimate that half of the variation in a state's economic performance is a consequence of state policies, with changes in the state's tax burden responsible for two-thirds of that influence.
Seven studies have found that high tax levels have a negative effect on economic growth; nine studies found that rising tax levels relative to those of other states have a negative effect on growth.[18]

Researchers Robert Genetski and John Skorburg report that for every 1% increase in a state's tax effort relative to other states, the state will experience a 0.6% decrease in personal income growth relative to other states.[19] A piecemeal response to the powerful pro-taxing and pro-spending biases of our system is inadequate. Oregon's state government and 1,500 local governments[20] make thousands of proposals annually for increasing taxes or mandatory fees (which are taxes by another name).[21] Principled legislators and taxpayer groups are in a position to turn back only a few of these proposals. At the same time, the voters have developed a rational anti-tax bias and can be reasonably relied on to approve only those new taxes that the people consider genuinely worthwhile. A strategy of referring any new tax increases to voters will act as a powerful brake on tax and spending increases, increasing Oregon's long run prosperity.

Legislative Principle:

Develop a working majority of legislators who will vote "No" on any significant tax increases that are not referred to the people.

Constitutional Principle:

Require prior voter approval of any new taxes or tax increases imposed by state or local governments.[22]

#3 Civil servants should not earn more than other citizens.

The people as a community create government to perform particular functions and hire civil servants to carry out those functions.

The average state or local government worker in Oregon receives total compensation that is $6,072 more per year than the average private sector worker in Oregon.[23] In 1990, Oregon's public employees received $714.6 million more in salaries, wages, and benefits than if they had simply kept pace with private sector workers since 1980.[24] Excess compensation for public employees costs the average Oregon household $648 each year.[25] These findings are documented in detail in America's Protected Class II: The Widening Public-Private Pay Gap, a study published by the American Legislative Exchange Council and distributed by Cascade Policy Institute.

Reducing state and local government compensation to match private sector levels would save taxpayers more than $1.4 billion in the coming biennium, enough savings to wipe out the state's claimed $1.2 billion shortfall. (Through its basic education financing and other funding, the state contributes considerable funds towards local government employee compensation.)

The overcompensation of government employees should not be a surprise, since compensation levels for this group are set by a political process largely controlled by public employee unions and the legislators to whom they contribute. State sponsored surveys comparing pay with the private sector are skewed by primarily including large corporate employers, which make up a declining share of Oregon's private sector employment.

Not only do state and local government employees receive more compensation, but they work significantly fewer hours, producing compensation per hour worked that is 45% higher than private employee compensation nationally[26] (state by state information is not available). Public employees have more paid holidays, more paid vacation, more sick leave, and more other paid leave than typical private sector employees.[27]

Public employees have greater employment security and are laid off only one-fourth as often as private employees.[28] The author worked with one of Oregon's most successful private companies in the 1980s during an industry downturn. During that period, the company laid off several thousand workers amounting to nearly one-third of its work force, unilaterally cut all employee salaries and wages by 10% for a six-month period, and later asked all salaried employees to work 50 hours a week for the same 40-hours per week pay during a six-month period. This company is #1 in its industry, rated one of America's best companies to work for, and shares its good times as well as its hard times with its workers. The moral of this story is that these kinds of actions are standard operating procedure in a dynamic, competitive economy, but actions that government workers have been privileged in avoiding. Public employees also have greater individual security on the job due to civil service protection and union contract protection from abrupt termination.

Legislative Principles:

* Cut government salaries that exceed private sector levels before cutting public services or increasing taxes:
* Do whatever is contractually and legally possible to reduce the retirement costs of present workers and increase their share of contributions to the Public Employees Retirement System (PERS).
* Freeze salaries and benefits with no cost of living increases for present government workers until parity between average government compensation and average private compensation is restored.
* Establish a two-tier compensation system with lower salaries, less generous fringe benefits, and no defined-benefit pension plans for new public employees. Average compensation for new public employees should be no higher than average compensation for private sector employees.
* Ensure that all public employees are aware of their rights under the Supreme Court's Beck decision, to withhold that portion of their union dues used for political purposes.[29]
* Include all full-time private sector employees, including the full-time self-employed, in any state surveys of Oregon private sector compensation.
* Be ready, willing, and able to take strikes by public employees, where such strikes are allowed by law. Within the limits of federal labor law, prepare state and local governments to withstand strikes or other political pressures by angry workers losing their privileges.

Constitutional Principle:

The average dollar amount per employee spent for compensation of workers in state government and in each local government shall not exceed the statewide average dollar amount per employee spent for compensation of Oregon private sector workers.[30] (This principle can be phased in by honoring existing contracts and freezing compensation for existing workers until a government is in compliance.)

#4 Contract out services when private providers offer better value.

There is ample evidence that people want certain public services, want those services in large quantities, and don't want to pay higher taxes for those services. There is almost no evidence that direct provision of public services by government employees is the most economical way to provide public services. Contracting out the provision of government services is a way to deal with Measure 5's constraints by operating more efficiently rather than cutting services or increasing taxes.

Competitive contracting results in lower costs for the services that are contracted. Savings of 15% to 30% are common and savings of 50% and more are reported in authoritative studies.[31] Competitive contracting also results in lower costs for services subject to competitive contracting but retained by government. For example, when a transit agency contracts for 20% of route service, there is a decline in costs even in the remaining 80% of route service produced by the agency.[32] This so-called "ripple effect" has been observed after the competitive contracting of many government services, including solid waste collection, public transit, and fire protection. Detailed evidence about contracting public services is available in Competitive Contracting: Taking Control of Government Spending, available from Cascade Policy Institute.

Among other benefits, large-scale contracting out can create hundreds of new Oregon businesses and expand existing businesses. Government tax bases will expand as public services are provided by taxpaying businesses rather than by governments that don't pay corporation taxes, property taxes, or other business taxes. There is no reason that private contractors cannot operate Motor Vehicles Division offices or state Employment Department offices, teach children or administer programs in public schools, or perform many other functions. Contracting out the functions performed by 20% of state and local government workers at an average savings of 25% would reduce state and local government costs by at least 5%[33] or more. Because many jobs will be created in private businesses performing the work, net job losses could be kept at a minimum.

What if Oregon had the benefit of a thousand permanent Grace Commissions,[34] constantly investigating government efficiency and improving government services? Establishing contracting out as a constitutional principle will do just that, by causing thousands of Oregon businesses to investigate and discover government services they could provide more economically while earning a profit.

Legislative Principles:

* Develop accurate cost accounting systems to provide the needed cost information for contracting out in state and local governments.
* Establish quality and service standards for contractors.
* Create a contracting process that is open to wide participation, includes small businesses, and is genuinely competitive, with full disclosure and rebidding among providers at reasonable intervals.
* Do not allow agencies to constrain contractor labor arrangements or require particular wages, impose artificial requirements to create obstacles to contracting, or cross-subsidize their own artificially low bids to continue providing services internally.

Constitutional Principle:

If a qualified private company offers to perform a public service and reduce costs by 20% or more compared to a public agency, then either contract out the service based on competitive bids and proposals or submit to voters the question of whether to contract out the service.

#5 No more blank checks.

We cannot design government services without considering costs. Consider basic education. The Oregon Department of Education issues an annual Oregon Report Card,[35] full of useful information about Oregon basic education. The Fall 1992 issue contains dozens of state and national goals for what basic education will accomplish, but economy is not one of the goals. Such lack of concern about costs is extremely costly to taxpayers.

Oregon public education is now spending $7,079 per actual student.[36] In 1992-93 dollars, Oregon is spending $1,513 more per student than twelve years ago[37], to purchase essentially the same educational product. Excessive basic education spending in school districts is costing $736.5 million this year.[38] Funding basic education at current services levels in the next biennium would produce $1.666 billion in excessive spending compared to the 1980-81 school year.[39]

Legislative Principles:

* Establish a cost baseline for each major government service. In general, make the cost baseline a past year in which the service was generally equivalent to today.
* Establish a budgetary process by which real (inflation-adjusted) costs per unit of service return to the cost baseline or below.

Constitutional Principle:

Per student spending in public schools, including all spending and adjusted for cost-of-living changes, shall not exceed per student spending in the 1980-81 fiscal year.[40] (This limit can be phased in over several years. The same principle can be used for other major state-funded services.)

#6 Empower the entitled.

In the pursuit of universal access to social services, government has provided an array of entitlements, notably entitlements to education and "safety net" services for low-income families. The most striking feature of these entitlements is their frequent monopoly nature. In the name of "opportunity" we have taken away our citizen's consumer sovereignty, first taxing them so heavily that they must rely on government services, and then forcing them to use monopoly government providers.

There is no reason that government cannot provide an education entitlement and allow a free choice of schools with that entitlement, or provide a "safety net" that allows beneficiaries to choose among various helping programs with different structures and administered by different private charities.

The previous principle, "No More Blank Checks," addressed the high costs of monopoly public services. An equal or greater concern is the poor quality of monopoly entitlements such as education.

Consider basic education as an example of empowering the entitled. Oregon taxpayers will spend more than $92,000 on the basic education of each student now entering K-12 public schools.[41] Ninety-two thousand dollars is a large amount to pay for the basic knowledge of reading, writing, math, and little else that most students acquire in public schools. If we give parents freedom of choice in deciding what educational services to purchase, that $92,000 entitlement could buy not only a superior K-12 education but a complete college education as well.[42]

The Brooking Institution's landmark study, Politics, Markets, and America's Schools by John Chubb and Terry Moe, concludes that the most effective ways to improve schools are school autonomy from external bureaucratic control and free choice by students and families among those autonomous schools.[43] These two reforms free up our monopoly school system by simultaneously freeing the supply side and the demand side of the system.

An educational system of Marketplace Public Schools, often called charter schools, provides autonomous, competitive, and varied education, all within a public context. The Legislature, educators, and citizenry could redefine "public school" in terms of non-sectarian service to any and all students, not in terms of centralized control or the bricks and mortar of particular buildings.[44]

Allow any group controlled by certified public school teachers to start a new public school, a deregulated "charter school." Charter schools would be entrepreneurial public schools, able to experiment in governance, teaching methods, student management, textbooks, curricula, labor relations, financial management, and almost every other aspect of education. Charter schools would retain key public responsibilities to provide a secular education and to open their doors to all kinds of students. Existing public schools and districts could also form charter schools or become charter schools.

On the demand side, give each student a scholarship usable at any public school, whether a traditional school or a charter school, whether in their local area or in another area or district. Allow unspent scholarship dollars to accumulate in personal education accounts and be used for college costs after students graduate. The potential accumulation of scholarship dollars will create price pressures on the public schools. Students with special needs, who cost more to educate, would receive larger scholarships.

Central school district offices and educational service districts would receive funds from students at charter schools only if they succeed in selling their central services to those new schools or directly to the students and their families. By sending money to the school or classroom first and the central office second, we can greatly shrink administrative costs through marketplace forces.

Legislative Principle:

Transform government's role from providing categorical monopoly services to dependent clients to providing autonomous citizens with the financial resources and information to purchase the best services in a free market.

Constitutional Principle:

A public school shall be any K-12 school that accepts applicants without regard to academic level, disability, gender, national origin, race, or religion. A public school shall provide a secular education. A public school shall make information about its educational programs and finances available to the public. An Oregon student's entitlement to basic education can be spent at any Oregon public school.

#7 Don't accept federal strings as straitjackets.

Suppose the federal government offered to fund an innovative new program called MORE-POVERTY by matching state dollars and providing more than half the funding.[45] The MORE-POVERTY program would pay young women who drop out of school, have babies, don't work, and don't marry men with jobs. For each dollar that a woman in the MORE-POVERTY program earns or that any husband earns, her MORE-POVERTY paycheck will be reduced a dollar, for an effective tax rate of 100%.

Any state legislature presented this opportunity by the federal government in this way would say "No, keep your money. No amount of federal money is worthwhile if we are going to create more poverty and break up families, which are the best way out of poverty." Unfortunately, every state legislature has already said yes to this program, ADC (Aid to Dependent Children) and the related programs known to the public as "welfare."

The Legislative Assembly and Governor cannot sidestep their responsibilities to the people of Oregon by saying "Uncle Sam made me do this stupid thing." In each area of public service, let us consult, debate, and reason together to design a system that makes sense. Then establish pilot projects, funded only with state funds and not with any federal funds. The pilot projects may demonstrate that, free of federal mandates, state and local governments can accomplish the desired result better using only their own portion of the total funds.

While designing a rational welfare program is not the job of this paper, such a program might include a full-time work requirement, placing recipients (whenever possible) with private employers who would bid for their services. The state will guarantee the minimum wage for recipients and the recipients and the state would split the amount paid by the employer, giving the recipient an incentive to become more and more valuable. Recipients not placed with private employers would be required to do real work in government offices. If a recipient is fired for cause, the recipient would be ineligible for readmission into the program for a month or longer. Unlike the present welfare system, there would not be any reduction of benefits for other income. The reformed system would not contain marriage disincentives, savings disincentives, or work disincentives. The system would simply guarantee a job to all comers, with pay ranging from minimum wage to twice minimum wage. (This discussion relates entirely to the perverse disincentives of the welfare system. Oregon's welfare benefits are quite low and our welfare costs are not a major proportion of the overall state budget.)

It is worth noting that President Bill Clinton governed a small state for twelve years and has expressed frequent support for greater state latitude in a federalist system and for granting federal waivers for experimental programs.

Legislative Principles:

* Don't avoid an idea or innovation simply because it doesn't conform to the federal government's way of doing things.
* Establish working committees to design "zero-based" common sense solutions in areas now hampered by federal mandates.
* Establish pilot programs that don't use federal funds. Simultaneously apply for federal waivers. Don't compromise essential features of programs in order to obtain federal waivers.
* If a pilot program provides clear improvements in economy or results, expand it statewide even if federal funds are lost.

Constitutional Principle:

In accordance with Amendment X of the United States Constitution, the People and State of Oregon assert their sovereign right to establish, control, or disestablish institutions, laws, and systems for education, medical care, social welfare, and all other functions not specifically and clearly delegated to the federal government or prohibited to the States in the United States Constitution.

What are the possible savings? Table 2 reviews this study's seven principles and indicates the approximate savings to state government from each. Savings are expressed in hundreds of millions of dollars and the specific savings realized will depend on the specifics of legislative action.

Table 2.

Possible Savings from the Seven Principles of State Budget Reform

Principle Approximate Comments
State Biennial Savings

1. Focus on core $200,000,000 The suggested savings come from businesses. eliminating the Economic Development Department. If the state eliminates other agencies, departments or functions, then greater savings may be realized. 2. No taxation without --------- This principle does not save state direct representation. government money, but would save taxpayers hundreds of millions of dollars each biennium. If this principle had been in effect in the 1991-93 biennium, taxpayers would have saved nearly $200 million. 3. Civil servants should $500,000,000 The savings in state government are not earn more than other estimated at 34%+ of the total savings citizens. possible in state and local government. Nearly a billion additional dollars can be saved each biennium in Oregon local governments. 4. Contract out services $200,000,000 The savings in state government when private providers from contracting out are offer better value. estimated at 34%+ of the total savings possible in state and local government. Nearly four hundred million additional dollars can be saved each biennium in Oregon local governments. These estimates are based on replacing only 20% of state and local government workers through contracting out. Contracting out more work can generate greater savings. 5. No more blank checks: $1,600,000,000 Returning Oregon per student eliminate excessive spending in public schools to the education spending. real (inflation-adjusted) levels of the 1980-81 school year, when schools were essentially the same would save more than $1.6 billion each biennium. 6. Empower the entitled. -------- This principle will lead to choice, innovation, and quality improvements in public services. Cost reductions may be a secondary effect, but are not a primary effect of this principle. 7. Don't accept federal -------- This principle will lead to strings as straightjackets. pilot programs that may actually cost money in the short run. The long range effect may be significant savings from replacing federal programs that don't work with Oregon programs that do work. TOTAL SAVINGS $2,500,000,000

The total savings of $2.5 billion in a biennium are sufficient (when adjusted for future inflation and population growth) to more than cover the deepest shortfalls attributed to Measure 5 in the state's forecasts with no new taxes.

By more aggressively focusing on core businesses, contracting out services, and making other indicated changes, the state could realize even greater savings, either to put back money into essential services like education, or to provide further tax reductions.

What are the alternatives?

To satisfy the state's $2.5 billion budget gap by the 1995-97 biennium through a "business-as-usual" policy of raising taxes would require increasing taxes on an Oregon family of four by more than $1,600 per year. This would push hundreds of thousands of families that are barely making ends meet deeper into poverty, slow economic growth, and maintain an unsatisfactory status quo.

The oft touted alternative of enacting major tax increases would jeopardize Oregon's families, businesses, and future. Such tax increases are not required to maintain essential services, but would be in the name of public employee privilege, government monopolies that shut out cheaper and better alternatives, and programs that demand a blank check from taxpayers regardless of costs or outcomes.

Conclusion

An incremental, piecemeal, and tactical approach to dealing with the state's budget problems leads to endless hours in hearing rooms listening to well-organized parades of witnesses testifying about the sea of unmet needs. Looked at uncritically, this approach implies that everything is government's business and that government should have an unlimited call on its citizen's incomes.

This report proposes another approach: seven principles which constitute a Bill of Limits and a new covenant for Oregon government:

1. State government should focus on its core businesses.
2. No taxation without direct representation.
3. Civil servants should not earn more than other citizens.
4. Contract out services when private providers offer better value.
5. No more blank checks.
6. Empower the entitled.
7. Don't accept federal strings as straitjackets.

Applied together, these principles could save $2.5 billion each biennium. To advocate these principles takes vision and courage.

A quote from the 1989-90 Oregon Blue Book describing the end of the 19th century in Oregon may also describe the end of the 20th century: "It was in this rush of reform that Oregon left the old century and entered the next, almost all segments of society affected by the new provisions."

The first settlers did not travel the Oregon Trail 150 years ago to create a society of passive citizens subject to powerful special interests. Now is the time to recreate their pioneer spirit.

Sources

1. Governor Barbara Roberts, Governor's Budget 1993-95, page 5 (1993-95
shortfall) and
page 11 (1995-97 shortfall). State of Oregon Executive Department, 155 Cottage Street,
N.E., Salem, OR 97310.
2. Oregon voters enacted ballot Measure 5 in 1990 to phase in property tax reductions,
reducing property taxes to 1.5% of property values and replacing lost school revenues
from the state general fund. Vernon S. White's "Focus on Measure Five" study,
available from the Cascade Policy Institute, describes Measure 5's provisions and
financial impact.
3. Governor Barbara Roberts, Governor's Budget 1993-95, page 5. State of Oregon
Executive Department, 155 Cottage Street, N.E., Salem, OR 97310
4. Oregon Blue Book 1989-90, page 174. Secretary of State, State Capitol, Salem, OR
97310.
5. Statistical Abstract of the United States 1992, page 308, table 487, "State and
Local Government Employment and Average Earnings, by State: 1986 and 1990,"
shows 52,000 state government employees and 100,000 local government employees in
October 1990 (accurate to the nearest thousand). Because these numbers are FTE
(full-time equivalent) numbers, the number of employed persons and their political
influence is even greater.
6. Governor Barbara Roberts, Governor's Budget 1993-95, page 9. State of Oregon
Executive Department, 155 Cottage Street, N.E., Salem, OR 97310.
7. $12.75 billion in the all-funds budget for the 1993-95 biennium divided by 90
legislators equals $141.7 million per legislator.
8. John Danielson, chief lobbyist for the Oregon Education Association, quoted in The
Oregonian, March 9, 1993, page A-1 as saying "You can't go through Chinese torture
forever."
9. For an indication that most bills in the Legislature are not about saving
money, see House Legislative Calendar, Cumulative or Senate Legislative Calendar,
Cumulative for the Sixty-Seventh Oregon Legislative Assembly, 1993 Regular Session.
The Legislature spends considerable effort on housekeeping efforts to update, improve,
or otherwise change the state's regulatory and criminal laws. For example, five
separate house bills out of the first 101 bills filed relate to the mortuary and cemetery
business. (The Legislature's concept of "emergency" is also amusing, as in House Bill
2090, described as "relating to student driver training; declaring an emergency.")
10. Governor Barbara Roberts, Governor's Budget 1993-95, page 9, counting
educational funds, human resources funds, public safety funds, and 80% of
transportation funds as related to essential services. State of Oregon Executive
Department, 155 Cottage Street, N.E., Salem, OR 97310.
11. Governor Barbara Roberts, Governor's Budget 1993-95, was perused to produce this
table. State of Oregon Executive Department, 155 Cottage Street, N.E., Salem, OR
97310.
12. There are an estimated 35,000 Oregon Education Association members (KATU-TV
report). Divided by 2,237 precincts (source Oregon Secretary of State's Office Number
of Precincts by County and Congressional District, October 1992) yields 15.6 members
in each precinct. Divided by 60 house seats and 30 senate seats yields 583 OEA
members in each Oregon House district and 1,166 OEA members in each Senate
district.
13. Martin Buchanan, Oregon K-12 Education: Can It Withstand State Budget Cuts?,
April 1993. Page 4 documents rapidly growing spending in the current school year.
Page 5 projects excessive spending of $1.666 billion in the next biennium, based on per
student spending in the 1980-81 school year. The study is available from the Cascade
Policy Institute.
14. John Danielson, chief lobbyist for the Oregon Education Association, quoted in The
Oregonian, March 9, 1993, page A-1, as saying "You can't go through Chinese torture
forever."
15. Statistical Abstract of the United States 1992, page 308, table 487, "State and Local
Government Employment and Average Earnings, by State: 1986 and 1990," shows
52,000 state government employees and 100,000 local government employees in
October 1990 (accurate to the nearest thousand). 152,000 minus about 35,000 OEA
members leaves 117,000 employees or more than 115,000 employees. Because these
numbers are FTE (full-time equivalent) numbers, the number of employed persons and
their political influence is even greater.
16. A study by the Advisory Commission on Intergovernmental Relations found that
the federal, state, and local tax bite rose from 36.6% in 1952 to 43.7% in 1990; that's 16%
fewer dollars for the family budget. Taken from a syndicated column by Debra
Saunders, appearing in The Oregonian on April 25, 1993.
17. Oregon state and local taxes per person were $1,934 per person in 1989-90,
according to "Economic Dimension of Oregon's Fiscal Problems," page 9, A Report to
the Joint Legislative Committee on Trade and Economic Development, October 16,
1992, by Joseph Cortright, Executive Officer. Adjusting for consumer price index
changes yields an estimate that state and local taxes per person were $2,188 in 1992-93
(based on dividing the 1992 CPI of 140.3 by the 1989 CPI of 124.0 and multiplying by
$1,934 per capita). Multiplying by four yields $8,752 per family of four. Oregon's state
population on 1/1/93 is almost exactly 3,000,000 persons; extrapolating the U.S. Census
Bureau's 7/1/92 figure of 2.979 million persons times the 1.4% annual growth rate in
the preceding year applied for six months yields 2.9999 million persons. Multiplying
the per capita tax rate by 3,000,000 yields $6.564 billion per year. The per capita tax
amount can also be multiplied by 2.5675 persons per household to yield an average of
$5,618 per household in state and local taxes.
18. Joseph Bast and John Beck, "Taxes and Economic Growth," Chapter 2 of Coming
Out of the Ice: A Plan to Make the 1990s Illinois' Decade (March 1990, The Heartland
Institute, Chicago, IL), page 32.
19. Ibid., pages 29-30. "Tax effort" is the ratio of a state's actual tax revenues to its
estimated capacity to raise tax revenues. It is a specific measure of tax burden used by
the Advisory Committee on Intergovernmental Affairs. It is considered to be the best
measure of tax burden presently available.
20. Statistical Abstract of the United States 1992, page 296, table 471, "Number of Local
Governments by Type -- States: 1982 and 1987," indicates that Oregon had 1,502 local
governments in 1987.
21. Examples known to the author include the 1991 Legislature's repeal of the Oregon
income tax's excess revenue credit, a proposed (and defeated) Multnomah County
utility tax to fund libraries, and a recent increase in the cost of a first-time Hillsboro
business license from $15 to $105 (a 600% increase).
22. An initiative petition that would add this principle to the Oregon Constitution has
been filed with Oregon's Secretary of State and is now being circulated. Note: Cascade
Policy Institute does not support, oppose, or endorse legislation, initiatives, or
candidates. Cascade exists to inform and educate policymakers and the public on
policy issues.
23. Wendell Cox and Samuel A. Brunelli, America's Protected Class II: The Widening
Public-Private Pay Gap, page 37, (January 1993, American Legislative Exchange
Council, Washington, D.C.), available from the Cascade Policy Institute.
24. Ibid., page 41.
25. Ibid., page 41.
26. Ibid., page 8.
27. Ibid., page 8.
28. Ibid., page 39.
29. Communication Workers of America v. Beck, 1988 U.S. Supreme Court. The
Court's opinion declared that employees forced to pay union dues under the National
Labor Relations Act do not have to contribute to a union's partisan political activities.
The Communication Workers of America had been using as much as 79% of Harry
Beck's dues for such activities.
30. Draft legislation is available from the author: Martin Buchanan, 347B South First
Ave. #117, Hillsboro, OR 97123.
31. Wendell Cox and Jean Love, Competitive Contracting: Taking Control of
Government Spending, page 19, December 1992, (originally published by The
Heartland Institute, Chicago, IL) available from the Cascade Policy Institute.
32. Ibid., page 19.
33. Average Oregon state and local government employee total compensation is $2,773
per month in 1990 per America's Protected Class II. Adjusting for 7.35% inflation from
7/1/90 to 7/1/92 and estimated inflation at the same low rate (about 3.6% per year) for
the next two years to the middle of the 1993-95 biennium yields average biennial labor
costs of $3,195 per month or $38,340 per year per employee. Multiplied by 152,000 state
and local government employees (1990, with no adjustment for population growth,
because of possible countervailing cuts attributed to property tax limitation) yields an
annual state and local government payroll cost of 5.828 billion dollars. Contracting out
the functions performed by 20% of state and local government workers at an average
savings of 25% would reduce state and local government costs by at least 5% of $5.828
billion or $291 million annually, $582 million in a biennium. These savings only
consider labor costs. However, private contractors may also use buildings, capital
equipment, and other assets more efficiently than government agencies.
34. The Grace commission, chaired by J. Peter Grace, was established by President
Ronald Reagan. The commission produced a highly regarded report on eliminating
wasteful spending within the federal government.
35. Oregon Report Card, Fall 1992, Oregon Department of Education, 700 Pringle
Parkway S.E., Salem, OR 97310-0290.
36. Martin Buchanan, Oregon K-12 Education: Can It Withstand State Budget Cuts?,
page 3, available from the Cascade Policy Institute.
37. Ibid., page 3.
38. Ibid., pages 3-4.
39. Ibid., page 5.
40. Ibid. Page 5 discusses the choice of 1980-81 as a base year. The study is available
from the Cascade Policy Institute.
41. Computed by multiplying $7,079 per actual student per year by 13 years of K-12
education, producing $92,027 spent per actual student.
42. Martin Buchanan, Oregon K-12 Education: Can It Withstand State Budget Cuts?,
page 2, April 1993.
43. John E. Chubb and Terry M. Moe, Politics,
Markets, and America's Schools, 1990, by the Brookings Institution, Washington, D.C., page
186.
44. Martin Buchanan, Oregon K-12 Education: Can It Withstand State Budget Cuts?,
pages 8-9, April 1993, available from the Cascade Policy Institute. Also, Schools of the
Marketplace: A New Generation of American Schools, March 1992, by Richard
Meinhard, PhD, available from the Cascade Policy Institute.
45. The federal/state ADC (Aid to Dependent Children) program and related
programs are 58.6% funded by federal funds, according to the Adult and Family
Service's Division detailed 1993-95 budget, page 28.

Martin Buchanan is a writer and public policy analyst living in Lake Oswego, Oregon.

Cascade Policy Institute is a 501(c)(3) not-for-profit, non-partisan, independent
public policy research and educational organization. Cascade is not affiliated
with any other group or organization, although our research and information is
available to everyone, whether or not they support our work. While the Institute
itself does not take positions, it acts as a vehicle for individuals to research and
comment on a wide range of issues such as education, health care, and
government taxing and spending policies. Cascade neither solicits nor accepts
government funding, but instead relies on tax-deductible contributions from
foundations, corporations and individuals.

Acknowledgements -
This study relies heavily on prior work of Cascade Policy Institute, notably by Wendell
Cox, Richard Meinhard, Ph.D., and Vernon S. White. Steve Buckstein, Cascade's
President, conceived of this project. Tracie Sharp, Cascade's Executive Director, shaped
the final product. Parts of this report are drawn from previous Cascade Policy Institute
publications:

-Oregon K-12 Education: Can it Withstand State Budget Cuts?
-Oregon's Protected Class: The Widening Public-Private Pay Gap
-Competitive Contracting: Taking Control of Government Spending
-Focus on Measure Five: Does Oregon Need Tax Reform or Spending Reform?
-Schools of the Marketplace: Time to Shift the Education Paradigm

Nothing written here is to be construed as necessarily reflecting the views of Cascade Policy Institute, as an attempt to aid or hinder the passage of any legislation, or as an endorsement of any candidate or initiative. This report was authorized and paid for by Cascade Policy Institute. Permission to reprint granted provided proper credit is given. ISSN: 1078-4861

Cascade Policy Institute 813 S.W. Alder, Suite 450 Portland, OR 97205 (503) 242-0900
send mail to info@CascadePolicy.org

Fiscal Insight #6 by Martin Buchanan June, 1993