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Revenue reform remains an elusive goal in Oregon

By GORDON OLIVER

When it comes to paying for public schools, Oregon has been in a 26-year funk, and is still searching for a clear revenue reform strategy for getting on track.

That’s not news to anyone who works in education or to parents who live with crowded classrooms, endless activity fees and school fundraisers, and short school calendars. The trouble is, since voters approved the tax-cutting Measure 5 initiative in 1990 and other tax limitations in later years, the stars have never aligned politically for a broad-based financial restructuring of Oregon school funding.

While biennial battles in Salem have produced some recent funding boosts, Oregon isn’t even close to providing the money that the state’s own analysts say is needed to provide essential education services. Between 1990 and 2015, Oregon has dropped from 15th place to 31st among states in education spending.

Some longtime education leaders have had enough.

“Because of how school funding has evolved with ballot measures, court rulings and PERS, you’ve got a hodgepodge and a big mess, and you have to have leadership to pull it into a rational system,” said Dr. Doug Nelson, OSBA president. “It’s not very rational right now.”

"When I look at the last 20 years, I wonder how we were able to keep the doors open at all," said Hass, a Beaverton Democrat.

This is an image of oregonschoolfunding

State Sen. Mark Hass likes to use this image to show fluctuations in Oregon’s General Fund revenue since the late 1990s

 

Hass notes that the funding gyrations are traumatic for staff and students in ways often unseen. Educators lose their jobs mid-career due to layoffs, triggering a chaotic round of bumping by remaining teachers and overcrowded classrooms before new, less-experienced teachers arrive when budgets rebound.

The Legislature’s quarter-century inability to un¬ify behind a school finance fix has opened the door to yet another tax-related initiative, this one on the Nov. 8 ballot. Measure 97 (see related article: Measure 97: Schools solution or regressive tax?) would raise an estimated $3 billion annually through taxes on large corporations.

The measure has divided those who support more stable and robust education funding. Schools would tend to benefit from the state’s new tax, if passed, but a recent state legal analysis indicates that the Legislature can spend the funds as it chooses.

OSBA has taken a neutral position on the measure, and is set to launch a statewide discussion of ideas for comprehensive school finance reform, regardless of whether voters approve Measure 97.

Its Revenue Reform Advisory Workgroup has prepared a set of potential options for the Legislature to consider in next year’s session. The workgroup’s draft report is being presented for discussion and suggestions in meetings around the state this fall and at OSBA’s Annual Convention Nov. 10-13.

If Measure 97 passes, he said, education leaders may want to advocate for levels that would meet the baseline for adequate funding outlined in Oregon’s Quality Education Model (see related article). If the corporate tax measure fails, “we as school board members and OSBA need to be leaders on this,” Green said. “We have dealt with budget cuts for much too long.”

Schools lose in tax revolt

In 1990, Oregon voters voted to blow up the state’s tax system, which has always relied heavily on property and income taxes.

Measure 5 introduced property tax rate limits that, when fully implemented in 1995-96, cut rates an average of 51 percent from 1990-91 levels, according to a state Department of Revenue analysis. Measure 50, passed in 1997, introduced limits on growth of assessed property values. It replaced most tax levies with permanent tax rates, a fundamental transformation of the state’s tax system. Measure 50 cut tax rates by an average of 11 percent.

Under both measures, the state was required to compensate schools for their revenue losses.

“In both cases, the effect of the requirement was negligible, because the Legislature appropriated more than the required amount each biennium,” the Department of Revenue said in a 2009 history of Oregon’s post-Measure 5 tax system. But, the report noted, some of that money came from reductions in other state school support funds that were no longer mandated.

Schools have not yet recovered from the recession-era cuts, despite recent state funding increases. Consider this: Before Measure 5 and Measure 50, Oregon’s education funding was 6 percent above the national average, according to a state Quality Education Commission report. Today, that funding is about 11 percent lower than the national average.

State revenue now covers about 70 percent of costs for Oregon school districts. The Legislature has increased funding levels significantly in the last two biennia, with education spending of $7.4 billion in the current biennium.

The recent increases have eased some immediate pain, but they’ve sidestepped hard discussions about how to stabilize state school funding through good times and bad. Complicating matters is a state law, established by referendum in 1997, requiring a three-fifths vote to create or raise any state taxes.

The state’s Quality Education Commission, created by the Legislature in 1991, was Oregon’s attempt to at least quantify the scope of the funding problem in response to a voter mandate to fully fund education. Each biennium, the commission calculates just how much money is needed to meet what it calls a Quality Education Model for K-12 schools. The commission estimates a funding need in the 2017-19 biennium of $9.97 billion, almost $2 billion more than the expected inflationary adjustment needed to maintain current service levels.

It’s a big gap. And it is unclear if Measure 97 passes how much money would actually go to schools.

Possible funding models

Of course, it’s easier to identify a problem than to find a solution. Even in a state where one political party dominates the statehouse and the Legislature, and where the public says that education funding should be the state’s top priority, consensus has been as vaporous as a rain cloud.

There’s no lack of ideas for a better funding formula, but all contain potential pitfalls that could be their undoing in terms of public acceptance, legality or adequacy of revenue. And, as Sen. Hass notes, states that have been most successful in steadying school funding are states that do not allow voter initiatives to create laws outside the legislative process.

The OSBA Revenue Reform Advisory Workgroup has examined some of the key proposals advanced in recent years. It recommends that any new source should generate $1.5 billion to $2 billion per biennium in new funding dedicated to public schools, and says that a new funding source should have broad support from school boards and other community organizations.

Funding should also be at a level necessary “to provide the type of education our public school students deserve,” the draft report says.

One possibility is for the state to amend the language of its constitutional requirement to fund schools at the level called for in the Quality Education Model. Under Ballot Measure 1, passed in 2000, and a subsequent court decision, the Legislature has to either fund at the QEM level or write a report explaining why it cannot do so.

Effectively, writing such a report gets the Legislature off the hook for full education funding, and that is what it has always done. Eliminating that “out” would immediately pressure the Legislature to provide adequate funding for schools.

Yet education advocates need look no further than north to Washington, which has a similar funding requirement the Legislature has been unwilling or unable to meet, to see the tangle of litigation that can result from such a mandate.

Others are also looking for comprehensive solutions. Here are some of the ideas that have surfaced in recent years, which were examined by the OSBA workgroup:
  •  The “Hass Plan” – Sen. Hass has called for Oregon to enact a Commercial Activity Tax (CAT) similar to one recently adopted in Ohio. Unlike Measure 97’s high tax rate targeting a relatively small number of businesses, this proposal favors a relatively low tax paid by a large number of businesses.
  • Property tax reform measures – Possibilities include resetting the value of property at the time of sale; replacing the current 3 percent maximum increase in assessed property values with a variable rate of 1.5 to 6 percent, based on property types; allowing local option levies outside limits imposed by Ballot Measure 5; or basing property taxes on real market value, but with a limit of perhaps 8 percent on annual tax increases.
  • Sales or gross receipt tax – No tax discussion is complete without consideration of a sales tax, or the fact that Oregon voters have rejected sales tax proposals nine times.
  • Kicker reform – The 2 percent surplus kicker, embedded in Oregon’s Constitution, gives taxpayers an income tax refund or credit if actual revenues for the biennium are more than 2 percent higher than forecast at the time the budget was adopted. OSBA has long supported redirecting those funds into a “Rainy Day fund” for public schools available when Oregon’s economy takes a downturn.
  • The “Superintendents’ Proposal” – A proposal floated by some school district superintendents during the 2016 session would have amended the Oregon Constitution to require the Legislature to spend not less than 33 percent of the legislatively approved budget on education and public safety. The measure did not receive a hearing during the session.
  •  The Karen Minnis Plan – Then-House Speaker Karen Minnis proposed in 2005 what she called the “Stable Schools Funding Plan.” The plan would have dedicated 51 percent of personal income taxes to schools. If taxes grow faster than 9 percent in the two-year budget cycle, the extra would go to school-improvement grants and a rainy-day fund to protect schools in an economic downturn.

The Revenue Reform Advisory Workgroup report will go to the full OSBA Board in November for final action.

Oregon Public Broadcasting coverage on school funding challenges: