State economists presented the December Oregon Economic and Revenue Report on Wednesday to a joint hearing of the House Interim Revenue Committee and the Senate Interim Finance and Revenue Committee.
Oregon received a welcome bit of financial news Wednesday: The General Fund revenue forecast is up $310 million, nearly closing a projected 2025-27 budget shortfall.
Twin blows have rocked Oregon’s budget this biennium and into the foreseeable future. Federal policy changes will reduce Oregon’s state tax revenues as well as take away federal payments to Oregon that support vital services.
But the December Economic and Revenue Forecast says Oregon’s economy is looking up for 2026. Oregon Chief Economist Carl Riccadonna warned legislators in a hearing Wednesday, though, that uncertainty over tariffs and missing data from the federal shutdown means they have less confidence than usual in their economic predictions.
The Legislature will receive the next economic report Feb. 4, during the first week of the short session. House Interim Revenue Committee Vice-Chair Rep. E. Werner Reschke asked that legislators receive reports before then as that missing federal data come in.
Legislators have cause to be cautious. Three months ago, the revenue forecast warned legislators that federal tax and policy changes would decrease Oregon’s tax revenue by $888 million, creating a $373 million shortfall in the state’s recently passed 2025-27 budget.
Wednesday’s report, boosted by better-than-projected corporate taxes, cut that shortfall to $63 million, casting a new light on hearings this week on possible state agency cuts.
“The Legislature in the last session prioritized education funding because we have to invest in students, our state’s future, and because legislators called on schools to do more,” said Emielle Nischik, OSBA executive director. “With this improved forecast, the Legislature has time to develop thoughtful plans for how to navigate increasingly tight budgets in the coming biennia. The choice to make cuts now would be just that – a choice.”
The Legislative Fiscal Office requested state agencies develop suggested reductions of up to 5% of their budgets and present them this week.
On Tuesday, the Joint Ways and Means Education Subcommittee heard from the Oregon Department of Education, the Department of Early Learning and Care, and the Higher Education Coordinating Commission what education funding cuts might look like.
ODE Director Charlene Williams said the department aimed to protect student-centered supports and limit district and classroom disruptions while also maintaining statutory compliance and preserving organizational stability.
Williams presented a chart showing incremental reductions to the State School Fund that showed potentially hundreds of millions in cuts, warning that these are schools’ most flexible funds. The funding loss would be distributed proportionally across all school districts. In many cases, the losses would force drastic mid-biennium program and staff cuts to realign already tight district budgets because districts can’t move funds from sources such as the Student Success Act to fill general fund holes.
As an alternative method to reach reduction targets, Williams presented legislators with the option of eliminating the Educator Advancement Council, which supports educator professional development, or reducing or eliminating a raft of programs that support specific initiatives such as career and technical education, rural agricultural programs, attendance efforts, physical education and science, technology, engineering and math programs.
Legislators took issue with many of the choices, pointing out how individual programs on the chopping block help underserved students, aid regions and support state goals such as increased education accountability.
“None of these options represent a judgment about a program’s worth,” Williams said. “They simply illustrate what meeting a 2.5% target would require.”
Education advocates, including OSBA, are meeting with legislators to discuss the ramifications of budget decisions in the face of pending Education Accountability Act rules being considered by the State Board of Education next month.
In the next two years, districts are facing added costs such as purchasing new assessments and updating accounting systems without new money.
“This budget uncertainty is forcing Oregon schools to ask which options they can cut rather than asking how can we give students more opportunities,” said OSBA’s Nischik. “ ‘Where should we inflict painful cuts?’ is the wrong question. We should be asking how to ensure we fulfill our promise to students of a high-quality education.”
Oregon still has rough budget waters ahead, with revenue shortfalls projected through 2029-31 as well as the loss of roughly $15 billion over five years in federal funds that support areas such as health care and nutrition.
With the budget still feeling shaky, Oregon has two reserve funds to help steady its hand.
The Education Stability Fund is forecast to have $1.3 billion at the end of the 2025-27 biennium. The Rainy Day Fund is forecast to have 2.2 billion. Together they would equal nearly 10% of the state General Fund forecast.
The funds tend to be lumped together, but they have different mechanisms.
The Education Stability Fund was created in 2002 by constitutional amendment and can be spent only on education. It was last tapped in 2020 to shore up pandemic spending. It is funded with 18% of net Lottery proceeds so it continues to grow, but the balance is capped at 5% of General Fund revenue from the prior biennium.
The Rainy Day Fund was created by the Legislature in 2007, so although it has rules in statute, the Legislature can also change its own rules. It was last used in 2010 as the Legislature grappled with the Great Recession aftereffects. It is funded out of the Legislature’s ending fund balance at a rate of up to 1% of total General Fund appropriations, but the balance may not exceed 12.5% of the General Fund revenue collected in the prior biennium. The Legislature cannot use more than two-thirds of it in a biennium.
Both funds require an economic downturn to trigger usage and a three-fifths vote from both legislative chambers to tap. The Education Stability Fund can also be used if the governor declares an emergency.
“Economic downturn” is defined as either the final revenue forecast for the biennium anticipating revenue for the coming biennium will be 3% or more below the current biennium’s budget appropriations, at least two consecutive quarters of dips in employment or a quarterly revenue forecast showing a 2% drop in General Fund revenues compared with the forecasts used when the budget was adopted.
The revenue report had some notes of caution for schools, including a $31 million drop in projections for the corporate activities tax that supports the Student Success Act grants.
Education advocates are wary.
“When we ask our schools to do more with less, when we ask them to choose between offering CTE courses and offering teachers the training they need, we are really just telling our students we will give them less when times get tough,” Nischik said. “We understand the budget numbers are tight right now, but there are young faces behind those numbers.”
– Jake Arnold, OSBA
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