Gov. Ted Kulongoski met with Southern Oregon business and community leaders Wednesday to warn that the state will drown in deficit for many years if it doesn't change business as usual.

Gov. Ted Kulongoski met with Southern Oregon business and community leaders Wednesday to warn that the state will drown in deficit for many years if it doesn't change business as usual.

"There is going to have to be dramatic changes," he said.

Kulongoski said the state needs to "reset state government" and outlined some recommendations by his "reset cabinet" — a body made up of nine state employees and business leaders that's looking at ways to pull Oregon out of the red. He said the state Legislature and unions will make the ultimate decisions about whether the reset recommendations ever take effect.

About 143,000 jobs in Oregon were lost during the recession, and the economy is not expected to rebound for several years. "The average recession is 15 months," he said. "This one lasted 18 months, but I think you are going to be hard-pressed to find citizens who think the recession is over."

Those job losses have resulted in unrealized income tax revenue at the state level. This biennium, revenue has tumbled by more than $1 billion from when the budget was approved.

"There are three more revenue forecasts before the end of the biennium," he said. "I don't anticipate positive numbers out any of those three."

In the 2011-13 biennium, the state expects to have about the same amount of funding as this biennium, he said.

The state spends the most on public eduction and human services, about 40 percent and 25 percent, respectively. Public safety ranks third in cost at 16 percent of the budget, followed by higher education, community colleges and other education services. The state expects to see continued growth in demand for senior services as baby boomers retire. It expects the needs from the population with disabilities to increase, as well.

Rising health care costs also will continue to sap the budget. While some people continue to live without health care, Oregon's convicts in the prison system do receive health care.

"If you want health care, commit a crime," he said.

Labor costs also are taking a toll on the budget.

The cost of the Public Employees Retirement System is expected to increase by $350 million to $400 million in the next biennium, he said.

Currently, the state and about 40 percent of school districts pay not only their share of PERS payments but also the employees', part of a settlement with unions when districts couldn't increase wages. Employers pay about 6 percent toward PERS for each employee, and the employee is supposed to contribute another 6 percent. By the next biennium, the employers' share will go up to 14 percent, while the employees' portion will remain at 6 percent.

That means the state and school districts such as Medford will pay 20 percent toward PERS in the next biennium. Kulongoski said during the next labor negotiations, he would ask state employees to pay their share in the next biennium.

Kulongoski said the state needs to continue to support public schools, but part of the reset must involve holding schools more accountable for how they spend their money.

"Out of 100 students, 71 will graduate in four years," he said. "...The state cannot continue in that path."

The reset cabinet recommended requiring school districts to use more dual credit opportunities and virtual education to share more services to cut down on costs. Currently, sharing services are elective through what's called an Education Service District, or ESD. For example, the Southern Oregon ESD provides special education classes, teacher training and migrant education.

Cabinet members cited a study in the High Desert ESD, which showed its four school districts in Central Oregon could save $2.2 million per year on staff, fiscal, technology and instructional expenses if all four districts consolidated those services under the ESD.

"Comparable savings statewide could be upwards of $47 million per year through this approach," the cabinet's final report stated.

Kulongoski said one hopeful sign is the state's growing renewable energy industry. Oregon is being used as one of five test markets for the largest deployment of electric vehicles in the nation this fall. It's also a leader in solar, wind and wave energy.

"This is a very positive economic development for the community," Kulongoski said.

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Reach reporter Paris Achen at 541-776-4459 or e-mail