Employment Department warns of revenue shortfalls, urges state action to stabilize services

The Oregon Employment Department told the Transportation and Economic Development Subcommittee on Monday that projected declines in federal reimbursements and other revenues threaten its ability to maintain current customer service levels and staffing in the governor’s recommended budget for House Bill 5,007.

David Gerstenfeld, director of the Oregon Employment Department, said the agency has implemented major technology upgrades but now faces a funding gap that could force staffing cuts. “We provide economic stability to Oregon workers and to businesses,” Gerstenfeld said, adding that the agency needs resources to preserve service capacity and prepare for the next recession.

Why it matters: The department pays out the vast majority of its budget as direct benefit distributions; staff and operating funds are limited and often tied to federal reimbursement rules. Committee members were told that 84% of the department’s roughly $4.6 billion budget supports unemployment insurance and paid-leave benefits, leaving about 16% for administration and customer service.

Officials described three recent structural strains: (1) the multi-stage Francis online technology rollout that centralized tax collection and benefits processing; (2) the addition of the Paid Leave Oregon program; and (3) pandemic-era claims and complex appeals that created long-running backlogs. Stacy Chase, policy and budget analyst with the Department of Administrative Services chief financial office, said the governor’s budget includes “a small increase in capacity to improve benefit processing timeliness” and ongoing maintenance costs for Francis online.

The department said several revenue changes have emerged since the governor’s budget was drafted. Forecasts now project lower state-level revenue available for administration; federal reimbursement rates remain uncertain and may be lower retroactively to Oct. 1, 2024. David Gerstenfeld said the Federal Trade Adjustment (trade act) program also appears likely to remain unreauthorized, producing an estimated $33 million reduction in projected revenue for the next biennium and prompting planned cuts to positions tied to that program.

The department is proposing to rely more on the supplemental employment department administrative fund (CDAF) — a diversion of a portion of employer UI tax receipts that requires legislative approval. Gerstenfeld emphasized that CDAF does not increase the tax bills employers receive, but he warned that a large diversion could, over time, affect the unemployment insurance trust fund and future tax schedules.

Fraud and customer access were focal concerns. Gerstenfeld said the agency has shifted from traditional claimant fraud to “large coordinated sophisticated fraud attacks” by organized criminal networks using stolen identity data, a threat that requires increased investment in detection and prevention. He also warned that almost all federal funding is reimbursable, creating cash-flow vulnerability during federal funding disruptions.

Committee members pressed for specifics about customer service performance and staffing proposals. The department said progress has been made: some phone lines and programs now have shorter wait times; remote work and consolidation of physical contact centers have saved roughly $900,000 to date and increased resilience. But officials cautioned that recent revenue declines could force staff reductions and erode recent gains.

What comes next: Agency leaders said they expect to return with a “phase 2” request that would propose adjustments, including a possible CDAF rate change and restructured staffing proposals. They asked the committee to avoid adding major new program mandates while stabilization is underway so limited administrative resources are not diverted.

The subcommittee did not take votes on funding changes during the hearing; members asked for follow-up materials on staffing costs and customer service metrics.