By JULIA SHUMWAY/Oregon Capital Chronicle

SALEM — Gov. Tina Kotek ordered an immediate halt to state employees’ non-essential out-of-state travel and directed agencies to find more ways to cut costs on Tuesday after Oregon’s budget surplus from a few months ago turned into a nearly $375 million shortfall.

In a letter to all state agency directors, Kotek wrote that tariffs and the Republican megalaw passed in July that expands tax cuts and slashes federal funding for Medicaid and food benefits means the $37.3 billion two-year budget lawmakers passed and she signed this summer won’t be sufficient.

“I am directing state agencies to begin immediate cost-saving measures and prepare for further reductions,” she said in a statement. “We will make tough, sensible decisions while protecting the core services Oregonians rely on.”

Along with suspending travel, her letter directs all agencies to prepare for future cuts by slowing spending, such as by holding positions vacant for longer periods, reducing spending on supplies and services and waiting to implement new or expanding programs.

The state’s chief financial officer will determine targets for reducing costs at each agency, Kotek wrote.

Lawmakers passed their budget in June with a projected surplus of $472.8 million, most of which would have gone to the state’s rainy day fund at the end of the budget cycle in 2027. The rainy day fund is a reserve account to help the state weather major economic crises.

But by the time state economists provided their next quarterly revenue forecast in late August, that surplus had turned into a $373 million deficit.

Oregon expects to lose about $888 million in revenue over the next two years, in large part because the state tax code automatically aligns with changes to federal tax policy. That means new federal initiatives, like exempting overtime pay and tips from income taxes and allowing individuals and businesses to immediately deduct 100% of the cost of “depreciating assets,” such as real estate and equipment, will apply to state taxes as well unless lawmakers divorce the two tax codes.

Sen. Mark Meek, D-Gladstone and chair of the Senate Finance and Revenue Committee, said lawmakers will discuss their options when they return to Salem at the end of the month for Legislative Days. That’s when legislative committees meet at the Capitol every few weeks outside of scheduled legislative sessions for informational hearings on various issues.

The current $372 million deficit doesn’t include other costs to implement federal policy changes. An earlier analysis Kotek’s office released estimates that cuts to federal programs will cost the state $15 billion over the next decade.

“In the wake of failed leadership from the Republican-led federal government, we must step up to the plate. This is not what we had planned for, but it is what we must do,” Kotek wrote in her letter to agency directors.