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Q & A with Allen Alley
Oregon expects to reap an additional $1.5 billion in revenue for 2015-17, a new record. Yet state expenses are expected to be $2.7 billion higher. Overall, the state expects a $1.4 billion budget hole. So, what's causing that shortfall? Why are expenses suddenly $2.7 billion higher?
Just by the way you framed the question you are falling into the rhetoric trap! There is more money than ever available for state government. Record taxes, fees and fines are available to be spent. Only in the government can record gross receipts be characterized as a shortfall. It is government double talk like this that has ruined the credibility of politicians. As a citizen and a taxpayer, all I know is, by any objective measure, the performance of our schools is an embarrassment and we have third-world roads. I really believe the reason Subarus are so popular in Oregon is our roads are so bad; you need an off-road capable car to have even a tolerable commuting experience. All of this while the state is collecting a record level of taxes, fees and fines.
The facts are taxes, fees and fines are way up. The General Fund is the pool of the most fungible dollars because they can be allocated to literally anything. The allocation of the General Fund is ground zero for the biannual mud-wrestling match for every not-so-special interest group as well as some of the most important interests in the state (K-12, higher education, health and human services, corrections). The truth is, the General Fund is projected to have $19.4 billion available for the 2017-19 biennium, up over 20 percent in the last four years. Is your income up over 20 percent? And they have the unmitigated gall to call it a shortfall.
In our March newsletter, Phil Knight said of the state's $22 billion PERS liability, "Left unchecked, PERS will just very simply sink the whole state." Last week, the Portland Business Journal called Knight's comment "hyperbolic." But Katy Durant, a 12-year member of the Oregon Investment Council, also said, "I don't think people want to deal with the magnitude of the problem. We have to be honest about the fact that we've over promised." Are Knight and Durant right? And is the PBJ trying to downplay the magnitude of the problem? Why?
We could write an entire newsletter -- in fact, we could write an entire book -- only on the PERS liability. Put simply, Democratic leadership has lavished benefits on their largest donors, the public employee unions, without regard to cost for 60-plus years. The result is a massive liability of a scale that is so large it is just about impossible to comprehend and does, in fact, have the potential to, as Mr. Knight said, "sink the whole state."
Those of you who know me understand I ran for governor to do the job, not to cut ribbons and kiss babies. We haven't had a governor who really acted like the CEO of the state since Governor Atiyeh, and it shows. We need one now.
PERS is a defined benefit system where the government promises retirement income for life but is not required to always fully fund those benefits. The promise to the retirees is a real contract and according to the Oregon Supreme Court cannot be changed. Over time, as the size of the government has grown faster than the size of our state, the contractual obligation to pay the benefits has grown to an astronomical size. Quite frankly, the state just does not have the economic ability to continue this.
The size of the liability is hundreds of billions of dollars and continues to grow dramatically every year. There have been theatrical political attempts to make voters think the problem can be simply cleaned up. These proposals include the Measure 67 corporate tax or Governor Brown's idea to sell state assets. These proposals raise billions of dollars, and that is a lot of money, but when the problem is hundreds of billions of dollars, these attempts are just smearing the puke around on the table and don't really clean up anything.
The steaming mess can be cleaned up in a fairly straightforward way, but the Democrats will never take the necessary steps to do it and disinfect things so it never happens again. The answer is to first commit to uphold the commitments made to retirees and current employees and move all new employees to a defined contribution, 401K type system. It isn't easy. There will need to be fiscal discipline to fund it, but it can be done, and it works.
Sen. Mark Hass, co-chair of the Legislature's Joint Tax Reform Committee, has introduced a proposal to eliminate the corporate income tax and replace it with a tax on gross receipts tax. What do you think of Hass' "Son of 97" proposal?
As I understand it, Sen. Hass' proposal raises about $500 million a year. To put it in perspective, the current PERS cash payments to only the existing retirees is over $4.5 billion a year and will rise to $8 billion a year within 20 years. Remember, the $4.5 billion is cash payments today made only to people who have already retired. It does not include saving anything to offset our future liabilities. Put another way, the current payroll of all of the state, county, city, police, fire and schools covered by PERS is about $10 billion a year. Our current cash payments only to existing retirees, is already 45 percent of our payroll and is rising. That is an astoundingly high number and already isn't sustainable.
I am concerned that Sen. Hass' proposal or something similar will pass and the Democrats will declare victory, problem cleaned up! When the reality is we still fundamentally have a giant steaming pile on our hands.
Hass recently told the PBJ that "whatever revenue piece we have will be accompanied by a cost-cutting piece. Oregonians want to see cuts in spending and they want to see changes in how business is taxed." Do you have any confidence in Hass' statement about cost-cutting pieces? If not, why not?
I have not seen any sign that the government is capable of cost cutting. Even budget cutting is hard, but cost cutting indicates that somehow the government is going to cut costs. That means making management changes to be more efficient. Doing things differently. Outsourcing to the private sector. I just don't see it. As long as Democrats are in control, and their largest donors are the public employee unions, it simply, structurally can't happen.
I recently had this discussion with a Democratic friend of mine. We were discussing the growing adversarial tone between Republicans and Democrats. I thought about it, and I believe there has been a fundament shift that explains it. My first job out of college was as an engineer with Ford. At that time, broadly speaking, I viewed myself as part of management and we were Republicans and labor were Democrats. Government employees were "public servants" and they really were not politically active. Management (Republicans) and Labor (Democrats) fought like crazy when it came time for a new bargaining agreement, but in the end, we were all Ford men and women, and the enemy was every other car maker on the planet. We were like brothers and sisters. We would fight among ourselves within our family, but when it came time to go kick some butt against GM or the imports, we were part of the Ford family.
With the waning power of the private unions, there has been a shift. The Democratic power base has shifted to public employee unions while my former brother and sister blue collar Ford workers have become political free agents. So now we have the Democrats who want to shift as much power and resources to fund their base, the union bosses representing the employees of the government, and the Republicans fight to keep as much of the power in the hands of the private sector. Republicans and Democrats don't really agree on much of anything. Democrats want to shift more and more of the economy to be controlled by the government and Republicans want less. There is little room for agreement and the formerly "deep blue" private sector union members have become the disenfranchised "purple" swing voters who rightfully don't believe the core or either party represents them.
This is a long way of saying, we structurally see the world differently, and Democrats will never be able to control government costs or drive efficiencies.
Sandra McDonough, Director of the Portland Business Alliance (PBA) and spokesperson for Brighter Oregon, has said that PBA is willing to accept new business taxes, but not without a strategy to control spending.
Meanwhile, Rick Miller, founder and chairman of Avamere Group, wrote in the PBJ, "Speaker Kotek's revenue proposal asks larger corporations in Oregon to pay more. Senator Hass' proposal does the same. But it is important to recognize that the Speaker's spending plan offers significant reforms in managing public payrolls and spending. This is what we in the business community have been asking for ... I believe we should respond to this approach with good faith and a willingness to accept a reasonable increase in the support our business leaders provide for education and other vital public services."
The last time the legislature presented a so-called "grand bargain," the cuts to PERS were later rescinded by the courts. Given this recent history, are you surprised that McDonough and Miller are so willing to accept new tax increases? Do you share the faith these two have that the legislature can pass true spending/cost control measures -- especially when it comes to PERS?
See above answer.
Do you think that the Oregon's Residential Energy Tax Credit HB-2681, which subsidizes solar energy, should be renewed? What is your current thinking about the viability of renewable energies? Have the energy market conditions for solar energy improved in the last few years, or is this policy essentially still fad-driven?
I have been in the technology business for a long time. I have constantly been stunned at how fast new technologies can drive down costs to unimaginably low levels. Whether it was cell phones, the internet or flat panel displays, the original estimates of cost ended up being 10 to 100 times higher than what we eventually achieved. We are now seeing the same thing in renewable sources of energy. I believe renewable sources of energy are on the cusp of undercutting the cost of traditional thermally produced energy. This is not because we will artificially jack up the cost of thermal energy; it is just that the physics of renewable energy are simpler and we are still very early in the adoption of these new technologies.
The final step in the shift is energy storage, because many of the renewable technologies produce power on Mother Nature's schedule not when you flip on the lights. It is now clear that batteries are going to become cost effective enough that a combination of battery storage, coupled with renewable energy production, will be less expensive than traditional thermal energy. Once this happens, and we basically have cheap, ubiquitous electrical energy with an acceptable environmental impact, other issues like clean water are totally solvable.
How would you rate Gov. Brown's job performance? How vulnerable do you think she is in 2018? Who do you think would be her stronger challenger, State Rep. Knute Buehler or Secretary of State Dennis Richardson? Or someone else?
Governor Brown certainly seems to be a nice person. She genuinely appears to care about people. But, Governor Brown is completely incapable of addressing the most pressing issues facing the state today. She has not shown an intellectual curiosity to understand the issues, and because she is completely beholden to the public employee union bosses, she can't provide the leadership to make the necessary changes.
By far, the most pressing issue we have is addressing the Public Employee Retirement System liability and putting a secure and sustainable retirement plan in place for not only our public employees, but insuring we have an economic environment that creates financial security for all Oregonians. The size of the PERS liability simply dwarfs everything else. The problem is so large, I believe the Governor should say, "Nothing gets done till we fix PERS. Nothing." And that simply will not happen with Governor Brown, or for that matter, with any governor who represents the Democratic Party.
Whoever runs in 2018 needs to be very transparent and direct. Those disenfranchised voters I talked about earlier don't really care about party affiliation -- in fact, party affiliation with either party might be an issue. What they want to see and hear is a willingness to take issues on head on and very clear solutions.
I often say we Republicans in Oregon spend a lot of time taking positions and saying things that make Democrats feel better about not voting for us. We move Democrats to the point of saying, "Allen is a good guy. I like him. I wouldn't mind if he was governor." But when they are asked if they would vote for Allen, they say, "Oh no! He is a Republican. He doesn't respect (insert Democratic talking points here)." Whoever runs needs to be bold, direct, unambiguous, strong and willing to debate and back up their positions.
How confident are you today about Oregon's economic future?
I met a governor from an eastern state a few years ago and he said, "Allen, so you are running for governor of Oregon. I know Oregon. You have all that timber and fresh water. You have the Columbia River and all that inexpensive, CO2-free, hydro power. You have deep water ports on the Pacific Ocean and direct access to Asian markets. I hear you have a vibrant technology sector, and I believe Intel has their largest facility in the world there. Don't you also have Nike? But I also hear you have one of the largest number of folks on food stamps, your schools are rated just above Mississippi, and you are constantly struggling to balance your state budget. Allen, with all that going for you, how did you screw it up?" I said, "Well, Governor, that's what you get with 30 years of Democratic economic leadership."
I think Oregonians are ready for a change, to realize their full potential and to be the shining light of prosperity for the nation.
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No Good Deed
By Eric Fruits
"It's better to ask for forgiveness than to ask for permission."
"No good deed goes unpunished."
We've all heard these expressions countless times. Think of these expressions as you read this story.
In April, Trident Seafoods Corporation approached Pacific Seafood Group about buying Trident's surimi processing plant on Newport's famed "working waterfront." Surimi is a fish product that is the main ingredient in imitation crab -- you know, "crab with a K." Trident's Newport facility has been financially unprofitable since 2011. If the deal could get through, 147 jobs in the fishing community would be saved.
Because the Pacific whiting fishing season begins on May 15, the companies had to act quickly to complete the purchase. As one of the major players in West Coast seafood markets, Pacific Seafood wanted some confidence that they wouldn't face rough seas on the way to getting the deal done.
In an abundance of caution, Pacific Seafood took an additional step in asking the antitrust lawyers at the Oregon Department of Justice whether the state might opposed the Newport deal with Trident. For those who are involved in mergers, this is what is known as seeking guidance.
Keep in mind, the Oregon Department of Justice has nine divisions and approximately 1,300 employees. By way of comparison, the State of New York's attorney general's office has 1,700 employees and has a population that is nearly five times bigger than Oregon. (Why Oregon needs a DOJ as big as New York is a question for another article.)
Despite its deep bench of staff, the Oregon DOJ responded with a letter declaring that Pacific Seafood's request was "extraordinary" and that the agency had no "express authority" to provide guidance to the company. That was May 10 -- just five days before the fishing season was to begin. Time was running out, and the companies didn't know if the sale would be challenged by the state.
None of the Oregon media picked up on the story. It was off The Oregonian's radar. The coastal press had no interest. Even OPB, which seems to have a keen interest in anything involving natural resources, had no coverage.
Then, later that day, the attorney for Pacific Seafood talked to Lars Larson and phones lines lit up at the legislature. The next day, the DOJ sent a letter to Pacific Seafood saying it would not object if certain stipulations were met, namely that Pacific Seafood would have to spend a year trying to sell the Newport plant to a third party. Pacific Seafood responded by offering a six-month marketing period, and then made the purchase that Friday, just in time for the opening of the fishing season on Monday.
The purchase was also just in time for Pacific Seafood's Chief Executive Frank Dulcich to receive an award from the governor as Oregon's exporter of the year on May 15. However, sometime just after the May 10 conversation with Lars Larson, Governor Kate Brown's calendar got filled up, and she could not attend the award ceremony.
If this article was published last week, that would be the end of the story. But, there's more.
On May 24, two Oregon seafood firms sued Pacific Seafood and Trident Seafoods, alleging that the companies conspired to violate antitrust laws with the sale of the Newport plant and other assets. The suit seeks a $2 million award of damages from Trident and Pacific, as well as a court order forcing Pacific to sell the recently acquired Newport plant.
The moral of the story: If you are trying to do business in Oregon, no good deed goes unpunished.
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United We Stand
Society's noise these days makes it hard to spot real nuggets of wisdom, and harder still to identify the person who is actually delivering that wisdom. So, in case you missed the Wall Street Journal interview of United Technologies CEO Gregory Hayes by Joseph Rago, here are the highlights, because there were some real nuggets.
United Technologies is headquarter in Indiana, and owns subsidiaries Carrier, Pratt & Whitney and Otis Elevator. They make everything from escalators to jet engines, with sales for 2017 estimated to be $59 billion. It's also the company that got caught in the crosshairs of President Trump's 2016 campaign for wanting to move a gas furnace factory from Indianapolis to Monterrey, Mexico. Mexico is where most of the furnace industry has relocated in the last couple of decades.
Hayes described his post-election conversation with President-elect Trump: "He said, 'Greg, you've got to help me.' I'm like, 'Sir, you know, we have looked at this, this is a cost -- there is just no way. We got the plant already built down in Mexico.' He goes, 'No, Greg, you don't understand. You got to help me. You got me elected ... I didn't have a great campaign, a great focus on the campaign early on, but once I got this Carrier thing I used it everywhere.' I said. 'Yeah, I noticed.'"
Maybe that's why Hayes adds a little cynically: "You need to take everything with a bit of a grain of salt that comes out of Washington these days."
In the end, Hayes and UT caved to the president, taking a $16 million hit, while at the same time saving 800 factory jobs in Indianapolis. Hayes told the WSJ that his biggest fear was the reputational damage to the brand of UT Carrier air conditioners, one of their few consumer products. "Having Mr. Trump tarnish the brand -- there was a huge cost to that."
United Technologies wrote what was basically a contribution check to keep the factory in Indiana, and Hayes allowed Trump to appear at the factory in December, posing as conquering hero. Meanwhile, Hayes used the WSJ interview to more or less set the record straight.
Speaking Truth to Populist Power
For instance, is it NAFTA or lack of education/job training that's causing the shrinking of the American middle class?
Says Hayes, "I've got thousands of job openings ... thousands. A lot of this is because we've got growth in the business on the aerospace side, but we'll be adding thousands of jobs in the next three years, and right now I cannot hire mechanics who know how to put together jet engines. But it's not just jet engines. We also make fan blades, other products, very sophisticated things. These are high-value manufacturing jobs that America can actually support."
According to Hayes, a Pratt machinist makes $34 to $38 an hour, or about $100,000 a year with overtime. The positions are usually filled by high school graduates with basic competencies in math and English, according to Hayes. That seems simple, but it's not.
Rago draws Hayes out on corporate responsibility regarding the country's overall cultural condition. Which is not good. Hayes takes a broader view than immediate market concerns. Rago finds it ironic how thoughtfully Hayes speaks on this subject, considering he was the corporate target of the 2016 populist campaign.
Hayes, Rago notes, believes that companies are accountable to other parties, including employees, consumers and the communities where they're based. "You try and balance these things without saying, 'Hey, look, it's just business, we are just going to do what's right for us.' You have to at least understand and have some empathy for the other stakeholders in this."
So is globalization good or bad for America?
It's good according to Hayes that the share of the world population living in poverty has decreased from 42 percent to 10 percent since 1982. And good if you are a company such as UT that's able to tell a story about creating thousands of high wage, high skilled domestic jobs here at home.
But possibly bad, Hayes notes, because the Carrier dust up may not be an isolated incident but more of a populist trend:
"We have to face the reality that the jobs that we have today aren't going to be here 20 years from now. And if we don't do something fundamentally different soon, we are going to have class warfare, and that's a scary thing.
"We know there's a dislocation with trade. There will be people left behind, and it is a measure of how we treat those people and how we deal with those people that'll determine whether or not we are ultimately successful."
Who is better Trump or Obama?
So how does Hayes feel about the new president, his former tormentor? "The rhetoric on trade is not helpful." Still, Hayes believes the president is on the right path on deregulation and tax reform, and then, most tellingly, adds that Trump is a better listener than his "predecessor."
When you follow the most anti-business president of our lifetime, that may not be saying everything, but it is saying something important.
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The Best Reason for Oregonians to Oppose Trump
By Philip J. Romero
Oregon -- and Portland in particular -- has been Ground Zero for the No Trump movement. Like many protest movements, it is a very big tent comprising anarchists, environmentalists, LGBTQ advocates, mainstream liberal Democrats, and sundry fellow travelers. But there is one issue that should be a rallying point for Oregonians of all ideologies: Trump's chilling effect on international trade. Few states have benefited more from trade than ours, and Portland most of all.
In the February newsletter, Phil Knight and Eric Fruits each emphasized the importance of trade, but steered clear of trade politics. I will not be so circumspect. Trump's wanton disregard of the benefits of trade can plant a delayed-action IED that will explode in the next recession, raining shrapnel on the American economy. Oregon will be in the shock front.
Why is trade such an economic boon? Two words: competition and its offspring, productivity.
- Expanding a firm's market from local to worldwide customers can mean more sales, but it also brings more competitors.
- Competing against world-class foreign firms forces Oregon firms to raise their game. One way to compete is to find a niche -- to specialize -- where your firm has a competitive advantage.
- Specialized firms are more productive; they generate more profit per job. That means they can pay their workers more. Not surprisingly, jobs in exporting industries tend to be among the highest paid.
- Every consumer benefits, getting more varied and better goods at lower prices than if they were captive of only domestic suppliers.
Manufacturing employs only about one fifth the share of the U.S. labor force that is did a generation ago, so there are millions of ex-factory workers who blame their fate on Japan or China. In fact, manufacturing output is nearly double its heyday -- the sector produces far more, with far fewer workers. The proximate cause is automation, not trade, although trade forced companies to automate to stay competitive. So opposing trade for the sake of the displaced is like shutting off your house's water supply because someone might drown in the bathtub. Very few Americans oppose competition; trade simply expands the playing field. If it is natural to compete with firms in Indiana, why object to competing with firms in India?
It isn't an accident that presidents as different as Ronald Reagan and Bill Clinton bucked their own party diehards and made political sacrifices for trade liberalization. It's a simple benefit/cost calculus. Free trade has allowed billions of people previously outside of the global economy to sell what they have in abundance (low skilled labor) for Western technology. It has been the greatest anti-poverty program in history: it has remade Asia and South America, and is making strides even in Africa.
The basic political problem is that trade benefits every American a little, but competition mortally harms a few. Those few mobilize politically. For decades their vehicle was labor unions, but in 2016 it was the Trump campaign, grafted onto the (formerly free-trade) GOP. Trump's entire leadership style is to appeal to his base's grievances. So although he has tactically retreated on some of his campaign promises, to maintain legitimacy with his shrinking supporters he promises to "renegotiate" trade liberalization agreements like NAFTA.
Trump's stance on trade is emblematic of his approach to many problems: oversimplify and misdiagnose, and act impulsively without regard to side effects. Getting tough with our trading partners will force them to reciprocate, to mollify their own domestic complaints. Suddenly not only our imports, but also their imports -- our exports -- will shrink.
Oregon's stake in this fight is especially large. About 10 percent of the state's total economic activity is international trade, with the vast majority shipped or originating from the Portland metro area. The most visible examples are Nike, whose design and marketing jobs reside in Beaverton, and Intel, which has transformed Washington County. Many less prominent companies, such as agribusinesses, vineyards and mills also sell to overseas customers. The West is America's Pacific gateway, and Oregon is the second most trade-intensive western state. According to the Brookings Institute, one in six Portland metro area jobs rely on trade for their existence.
Our state's economy has historically been poorly diversified, relying heavily on a very few industries like timber and agriculture. Not only did this make our economy volatile to commodity cycles, but relatively poor -- the profit margins in those industries are razor thin. In the 1970s through 1990s, a few companies, such as those named above, propelled Oregon up the national rankings, from the Mississippi of the West, into the developed world. This was only possible because they sold, and competed, worldwide.
In a time of angst about the fate of family wage jobs, Washington, D.C.'s, threat to stifle the very industries that pay the most -- because they have succeeded in the toughest competitive arena -- will be a self-inflicted wound. In Portland and Oregon, we inflict plenty of these already, all by ourselves.
Oregonians are deeply divided about our new president. A majority voted against him, and many took to the streets after the election in a made-for-television primal scream. But we all share a common economic interest. Trade, not economic nationalism, helped "make America great." America's trade flows have already retrenched in this decade, after a 50-year run of growing prosperity. Oregonians of every political hue -- blue, red or purple -- should resist further backsliding on free trade.
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