The rising tide of inflation threatens to swamp Oregon’s public budgets

Gas prices and grocery bills have headlined the immediate effects of rising inflation on household budgets. But inflation has downstream effects that will swamp public budgets as well, eroding the capacity of state and local revenues to sustain support for vital services.

In Oregon and neighboring states, consumer prices rose 8.8% year over year in June, according to the U.S. Bureau of Labor Statistics. Gas prices increased a whopping 52%. The price of food at home rose 13%. Those are the volatile components of the consumer price index, which are prone to ups and down over the course of a year. 

The cost of other items, like medical care and housing, are harder to reverse. Those were up about 6%, embedding a new and higher trend line of cost increases in sectors of the economy that are heavily dependent on public spending (health care) and public policy interventions (homelessness). 

Almost all of the political responses to inflation have focused on short-term mitigations, like gas tax holidays, or mid-term strategies to repair the supply side of the economy. A thoughtful compilation of the best responses was recently posted by Gary Conkling on the Oregon Way website. 

But not enough attention has been paid to the consequences for government budgets and public services as we move from a decade of steady growth, low inflation and easy money, to a period in which costs rise faster than revenues, money tightens and demands for government services and responses increase.

This is not a problem unique to Oregon by any means. But the structure of Oregon’s government finances creates unique vulnerabilities for our state.

First, we have constrained local property tax revenues with a hard cap of 3% on year-to-year increases, thanks to the combined effects of Measure 5 (1990), Measure 47 (1996) and Measure 50 (1997). As wages rise to keep up with the rising cost of living in the labor-intensive operations of schools, cities and counties, revenues will fail to keep pace, and the purchasing power of local budgets will shrink.

This effect was highlighted as a major concern by the state’s Task Force on Comprehensive Revenue Restructuring in 2009. It’s a problem that will first affect schools and local governments in Oregon; but it will also put more pressure on the state to backfill school budgets and come to the aid of cities and counties to maintain public safety and health.

Second, both state and local governments will feel the inflationary effects of higher borrowing costs, higher health care costs and, most tellingly, the costs of the still massively underfunded Public Employees Retirement System. 

Legislation enacted in 2019 stemmed the rise of PERS pension costs for government workers in Oregon at an average of roughly 25% of payroll, paid in full by their public employers. But this year’s inflation-induced stock market declines have again decimated the fund’s reserves to pay future benefits. And if salaries rise above the system’s assumed trend line of 3.5%, the cost of benefits, which are keyed to salaries, will rise in tandem. This is a double whammy that, absent further corrections, will almost certainly force the system’s claims on public budgets to 30% of payroll or more by 2025 and beyond.

Oregon has some advantages to deal with the tsunami-like effects of inflation. Its income tax system only partially offsets the effects of inflation on its top brackets. So as wages and incomes rise, even if they lag inflation, state revenues will rise as well.

Also, there are record levels of reserves in state coffers. But the state will need those reserves to help schools maintain their staffing levels, adjust to higher costs for Oregon Health Plan providers, protect service levels for public safety and maintain its own level of services for Oregonians.

Inflation rarely raises boats; more often it swamps the most vulnerable households and stops dead in the water the forward progress of government programs. That’s the new challenge for our elected leaders, especially the new generation of legislators who came of age in the kinder fiscal climate of the last dozen years.

An era of rising revenues and the expansion of public services may be approaching an end, and an era of retrenchment and bailing out budgets may be just beginning.