An open letter to the Oregon Joint Committee on Ways and Means:
Several weeks ago you asked for suggested priorities so that your committee can make recommendations to the Oregon Legislature. I attended the Bend hearing, and most people who spoke talked about funding needs. I am addressing the need for changes in the budget process, which I believe is a primary root cause of the state’s financial mismanagement.
My background is in accounting and finance and includes business turnarounds. The first step in dealing with a turnaround situation like the state of Oregon is understanding the true financial position so that required changes can be reflected in a budget. This means that financial information must be accurate and easy to understand. As members of the committee you know that the Oregon constitution requires the adoption of a balanced spending plan, but it defers the definition and standards of a budget to GASB (Governmental Accounting Standards Board), which is a private, nongovernmental organization.
I am concerned that Oregon depends on GASB because the result has been a flawed budget process that allows significant expenses to be incurred but not expensed or funded. These are called unfunded liabilities.
The problem is particularly bad with regard to funding pension expense. This is a process that is less strict than the standards used in the private sector. In short, you claim to have a balanced budget when you do not. It is the use of these grossly misleading standards that have allowed the Legislature to often avoid addressing unpopular topics like the need to reduce labor expense in order to match revenue because labor expenses are understated in the budget. Recently, GASB has begun to tighten these standards. This is a major reason why PERS expense has jumped. Even with these changes, there is too much room to understate expense.
I suggest the following priorities:
1. Request whatever legal change is required so that there will be no additional future unfunded or unexpensed liabilities. This would probably mean ending the unknown financial risk associated with a PERS stock portfolio and changing to a fixed annual employer contribution or to an employee-controlled retirement plan such as a 401K. It should be the employees who incur the risk if they decided to invest in the stock market. If the state decides to increase taxes, at least people will understand the true cost of labor.
2. Expense and fund current unfunded liabilities of around $16 billion over 16 years. In short, absorb $1 billion per year of expense that should have been expensed in the past. This expense should be reported as a separate line item in the budget so that current costs are not distorted. Funding should be accomplished without using new debt obligations. This is a pay-as-you-go philosophy and also probably means a degree of financial austerity over 16 years to offset this unreported overspending that built up over many years.
3. Fund an annual budget process. Events change too quickly for the Legislature to adequately provide budget oversight with a two-year budget. In addition, the political process will be more active with a one-year budget than with the current two-year budget process. This will help you receive the voter input you desire.
4. Fund and require annual external reviews or audits. Fire managers who ignore the audit process. This will help the budget process by uncovering good and bad practices.
There is too much at risk not to change the use of inadequate GASB standards in the budget process. Only when you, the Legislature, provide actual expenses through an improved budget process will voters have accurate and understandable financial information. Only then can you expect to have a financially well-run state and to get the informed direction from voters that you requested.