Gov. Kate Brown on Thursday made the first move in a looming, months-long chess game over Oregon's finances, putting forth a mix of new revenues and "unacceptable" cuts to close a $1.7 billion budget gap normally seen in the throes of a recession.
Brown presented her $20.8 billion budget -- her first since taking office in 2015 -- at a muted news conference in the Capitol. It comes weeks after the crushing defeat of Measure 97, which would have raised $3 billion a year and erased a shortfall largely opened by spending on health care and public employee pensions.
Instead, her plan seeks just $897 million in new revenue in 2017-19, mostly by raising taxes on tobacco, liquor, hospitals, insurers and some corporation owners' incomes. She would protect the state's K-12 schools from cuts. To do so, she would make deep cuts to some programs and hold back money sought by social services providers and universities, among others.
"This budget is a short-term solution, nothing more," she said. "It represents the beginning of a conversation, not the end."
That conversation will linger at least until the 2017 legislative session gavels to a close next summer. And its reverberations could last longer, with battles expected over pension reform, corporate taxes, and whether and how to limit state spending.
On Thursday, Brown's plan earned a cool reception from educators, business interests and lawmakers on both sides of the aisle. Democrats, who control the House and Senate, will lead on a final budget plan. But they'll need help from Republicans, whose support is required for the supermajority votes necessary to raise taxes.
"The governor made a lot of tough choices," said Sen. Richard Devlin, D-Tualatin, co-chair of the Legislature's budget-writing committee.
Although Devlin agreed with Brown that Oregon's next budget can't be solved by cuts or new revenue alone, lawmakers will likely strike their own balance.
"The Legislature might make different choices," he said. "From my perspective, flat funding universities is not an option that we can realistically consider."
Republicans were more pointed, saying governors and lawmakers should have braced for the largest costs contributing to the shortfall years ago.
"We have known for years that Oregon was on an unsustainable fiscal path, yet our leaders continued to operate as if the bill would never come due," House Minority Leader Mike McLane, R-Powell Butte, said in a statement, calling on Democrats to "commit to having an honest conversation about our state's unsustainable rate of spending."
Senate Minority Leader Ted Ferrioli, R-John Day, merely called Brown's plan "a self-inflicted wound caused by years of Democrat overspending on the wrong priorities."
Business groups, meanwhile, plan to outline their own strategy at a summit in Portland on Monday. The Oregon Business Association suggested it might include revenue reform aimed at easing ups and downs in tax collections along with proposals to rein in long-term public pension and Medicaid costs.
"Oregon has spent far too long in the Band-Aid business," the group wrote, adding that "there is a much preferable route if we have the political confidence to take the road less traveled here in Oregon."
Though Brown supported Measure 97, which would have taxed certain businesses with at least $25 million in Oregon sales, she set her course on revenue in a slightly different direction.
Her increases in hospital assessments and insurer taxes are meant to provide health care coverage for every Oregon child. And she's proposing an 85-cent hike, for instance, in taxes levied on each pack of cigarettes sold in Oregon.
But Brown is risking another fight with businesses and Republicans over calls to end a corporate tax break passed in 2013, part of a so-called "grand bargain" meant to cut public pension costs and revamp tax laws. Pension reforms passed as part of that deal were already largely undone by the Supreme Court last year.
The tax break applied to certain types of companies structured to pass profits to owners and shareholders who would then report the cash as personal income. The idea was that business owners would save money if they were taxed at the state's lower corporate rate.
Brown's office argued it hasn't created new investments or jobs as intended.
"The idea was to encourage small business growth," said Legislative Revenue Officer Paul Warner. Legislative economists estimate keeping the tax cut would cost the state roughly $200 million over the next budget.
Among cuts, Brown has proposed closing the Junction City state psychiatric hospital, which opened in 2015, along a youth correctional facility in Clatsop County.
She's also called for cutting funding for community-based developmental disability programs, which would affect the services they deliver to clients. And she would eliminate a program that provides health-care information to families with children who have special medical needs. Other cuts would target wildland firefighting and energy tax credits.
Community college and public universities would receive less funding than requested -- forcing them to cut back or raise tuition to cover rising costs and enrollment.
"These cuts are a level that I find absolutely unacceptable," Brown said. "State needs are growing, but state resources are not keeping pace with the needs."
Proposed spending for K-12 education would be "held harmless," said Kristen Grainger, Brown's communication director, meaning Brown would cover all expected cost increases, including rising pension costs. The state would pump $8 billion into elementary and secondary education, if legislators agree next year.
That would mark an increase from the $7.4 billion contained in the state's 2015-17 budget. But the increase is intended to cover the higher costs of employee pay and benefits, including much higher payments to the state pension system, not to add or expand programs or services.
On top of that, Brown called on lawmakers to fund programs designed to boost high school graduation rates, overwhelmingly approved last month under Measure 98.
But she recommended allocating just $139 million -- not quite half of the $294 million, or $800 per student, outlined in the measure.
Education advocacy groups expressed dissatisfaction with Brown's plan, with advocates of preschool, public schools and public universities all saying their sectors need more.
The Oregon School Boards Association predicted schools would face big cuts in staffing and services unless they get $500 million more.
University presidents decried almost certain tuition hikes. And preschool advocates said Oregon will never fix its achievement gaps and dropout epidemic with so many low-income children still shut out from Head Start and public preschools.
Hanna Vaandering, president of Oregon's powerful teachers union, said her group and others that backed Measure 97 will continue to push for tax increases.
"As the governor says, the budget is not adequate to provide for students across the state," Vaandering said. "It is going to take all of us working together and being honest, being honest that we have a revenue problem."
On the other hand, the governor has proposed borrowing $350 million to help with facilities projects at the state's colleges and universities. That effort includes borrowing $15 million in debt for campus security upgrades in the wake of the October 2015 shootings at Roseburg's Umpqua Community College.
She would expand Oregon Opportunity Grants, aimed at helping the state's neediest post-secondary students, with an aim of providing financial assistance to an additional 5,000 students.
She'd also preserve the Oregon Promise program, which lets high school students with high enough grades attend one of the state's nine community colleges for as little as $50 per semester.
Elements of a transportation-funding package expected to be a prime source of haggling and controversy in the 2017 session are not contained in Brown's budget. Those, Grainger said, will be included in separate legislation next year.
The budget also calls for borrowing money to jump start clean-up activities along the Willamette River in Portland, part of the U.S. Environmental Protection Agency's Superfund project.
Lawmakers and business groups won't wait long to start plotting their counter moves.
"It will definitely prompt debate and it should," said Senate President Peter Courtney, D-Salem. " The process doesn't end today. It is just beginning."
And revenue discussions are expected to loom large.
House Speaker Tina Kotek, D-Portland, said in a statement that Oregon's shortfall has its roots in property tax cuts stretching back decades.
"Oregon's budget is built upon an insufficient revenue structure that stretches back 25 years," Kotek said, saying she'd work with Brown to "build a budget that maintains positive momentum for Oregonians."
-- Dana Tims, Hillary Borrud and Betsy Hammond
503-295-7647; @DanaTims