John Tapogna is President of ECONorthwest, a regional economic consulting firm.

Oregon’s well-being is based on the inter-dependency of the economy, the livability of its communities, and economic opportunity for its citizens. We call this relationship the Circle of Prosperity. Unfortunately, Oregon has fallen off course, and not simply because of the current recession.

Despite a surge in the 1990s, Oregon’s per capita income has declined compared to the national average. Lower per capita income means less revenue available for public services like quality education. Lower investments in education lead to further deterioration of personal incomes.

From its peak at 102% of the U.S. average in 1976, Oregon’s per capita income slid throughout the 1980s, rebounded strongly during the tech boom of the 1990s, and has recently fell to just above 90% of the U.S. average. Washington per capita income stands at 105% of the U.S. average.

Subpar income growth translates into inadequate revenues for state and local governments. That is because for the past thirty years Oregonians have devoted a constant share of total personal income to state and local government. If you want to understand the fate of funding for schools and other public services in Oregon, just look at total personal income.

Within the slow-growing state budgets, more money is being spent on healthcare and corrections, crowding out investments in education. Over the past decade, the crowding out of education in the state General Fund has been pronounced. In the long-term, our underinvestment in education will likely lead to further reductions in personal income growth. Convincing evidence shows that education and income are inextricably linked.

The decades ahead offer no fiscal relief. Aging baby boomers will put upward pressure on Medicaid spending, and an increasingly diverse population will raise the costs of providing education services. And the post-2008 declines in the stock market have increased the cost of our public pension system–PERS. Increases in Medicaid and PERS alone will eat up an additional 1.1% of Oregonians’ personal income in the next decade.

While these trends may seem insurmountable, they are not. For example, if Oregon were to return to 97% of the U.S. average per capita income (the level it was at in 1997), Oregon could have a budget surplus by the end of the decade.

Other opportunities lie in reinventing state services and the way that we budget for them. As an example, reducing Medicaid cost inflation by 2 percentage points would reduce Oregon’s budget deficit by 1/3 over the next decade. Adopting reforms to the state’s prison and sentencing system could have similar effects. The Governor’s reset report points to some of these opportunities.

One necessary step toward identifying opportunities to change our state budget trajectory is to adopt a new budgeting process that is long-term and takes a dynamic view of revenues, expenditures, delivery, and performance. More on that in a future post.