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Standard ~ Poor's Measure 50 levels. As long as growth continues, many governments will not find Measure 50 to be an undue burden. However, over the longer term, the limit is likely to constrain budgeting flexibility and is not generally seen as a positive factor for credit quality. An additional credit concern looms on the horizon. There is already pressure from some areas in the state to enact an initiative to make local option levies harder to approve by requiring a two-thirds vote, instead of a simple majority, to approve levies that increase taxes. SCHOOL DISTRICTS School districts generally have been unscathed from the effects of most of the tax limitations. This is because the state has either been required or has felt politically compelled to increase funding to schools to offset the effects of the initiatives. While this means that school districts have not felt the immediate hit to their budgets experienced by cities and counties, they are now more dependent on the goodwill of the state to provide revenues. Since school districts are precluded from instituting local option levies, they have almost no control over their revenues, and almost all of their budgeting flexibility is on the expenditure side. With this lessened flexibility and increased state role, Oregon schools will need to continue to adapt their budgeting procedures to the new environment. Many have not yet implemented the type of budget controls common in other states that have a strong state role in funding education. It is not uncommon in Oregon to find districts granting wage increases over several years with no salary reopeners. This means that the districts are making a bet on the future direction of state funding. If that funding were to decline in a recession year or if increases in that funding were less than anticipated, those districts would have no way of producing extra revenues to fund the wage hikes; this would lead to some difficult budget cuts. There is considerable disagreement on what the level of state funding of education should PUBLIC FINANCE be and what a fair distribution of that aid should look like. Urban districts would like to see additional monies given the unique problems they face. Also, as school funding continues to be debated in the state, it is likely that cities and counties will find themselves under increasing pressure to help fund schools. For example, the city of Portland and Multnomah County have provided extra resources to the Portland public schools in recent years, and county voters recently approved a one-year tax to help fund the schools. COMMUNITY COLLEGES ANDSPECIAL DISTRICTS Community colleges face some of the same issues affecting school districts since they also rely on state funding. As in other states, they will more likely compete with K-12 districts for scarce education dollars. However, community colleges tend to have more expenditure flexibility than their K-12 counterparts since more of their staff are part-timers. Community colleges also have a small amount of flexibility to set student fees, as well as charge fees from corporations and other entities that use their services. To date, additional revenues from corporarions for worker training have not counted against their revenues under the state funding formula. Community colleges also maintain the ability to institute local option levies, but only up to an amount equal to the Measure 50 tax cut. In the case of tax increment districts, legislation implementing Measure 50 allows districts to impose a special levy to finance their existing redevelopment plan. THE STATE The state did not see any revenue reduction as a result of Measure 50. However, the measure, coupled with the tax compression under Measure 5, placed a greater burden on the state to fund public education. Oregon has some flexibility, however, since no dollar amount for state support of education is specifically stated in Measure 50, other than the initial requirement to fund school district shortfalls caused by the roll back of taxes. However, the state likely will find itself facing increasing political pressure to ensure that education is funded at levels that compare favorably with other states. If Oregon is not responsive to the concerns of voters in this regard, it may find itself facing a more formal limit similar to that of Proposition 98 in California. That limit would essentially require that a certain percentage of the state's budget be spent on education. Also, as the state becomes more involved in the funding of education, it may find the need to increase the monitoring of school districts. While the state insists it has no plans to increase monitoring or reporting requirements for schools, the state may find itself forced to take a stronger role if school districts grant wage raises out of line with state funding increases. CONCLUSION Overall, the effects of Measure 50 are still evolving. If growth continues at a fairly rapid rate, the effects are likely to be relatively mild for most local governments in the near to medium term. The real test of the effects of Measure 50 is likely to come in a recession when state revenues are down, growth in school spending is threatened, and property values are adjusted downward to reflect declines in value. This is essentially the scenario California faced in its early- to mid-1990s recession as the financial performance of many local governments was strained. Standard & Poor's will continue to monitor the response of local governments to Measure 50 and the other tax limitation measures in the state. As long as governments demonstrate the ability to balance ongoing budgets within the new limits presented by Measure 50, large-scale rating adjustments are not likely to occur. ~