As state leaders grapple with the short-term challenges of bringing the budgets for this year and next into balance, it is not too early to draw lessons from the current state fiscal crisis to design policies that will allow us to respond better the next time the economy falters. This post, the third in a series that will recommend changes to our budget and tax system, looks at options for putting multi-year commitments on hold during downturns. Our first post recommended enhanced and expanded budget forecasting; the second looked at strengthening reserve funds. The final piece will consider tax expenditures. Our proposals are all intended to enhance the Legislature’s ability to manage budget downturns without having to implement deep cuts to vital state services or enact tax increases.

Time-delayed tax cuts and spending obligations enacted several years ago include the following:

• In 2006 the Legislature increased the standard deduction from the state personal income tax over four years. The last and largest of the phased increases takes effect in tax year 2010 and will reduce tax revenue by almost $100 million in FY ’11 and every year after.
• The same 2006 tax cut law also phased in reductions in the top income tax rate. The rate has fallen from 6.75 percent to 5.50 percent. It is scheduled to be reduced to 5.25 percent in the first year in which revenues are forecast to increase by four percent or more, likely in FY ‘12. This will reduce revenue by over $100 million per year.
• In 2006, the Legislature also voted to phase out the estate tax. The tax ends for deaths after December 31, 2009. While estate tax returns will still flow in over the next year, the elimination of the tax reduces revenue by close to $30 million starting in FY ‘11.
• Also in FY ’06, the Legislature created the Rebuilding Oklahoma Access and Driver Safety (ROADS) program. It was funded by reapportioning a growing amount of tax revenue from the General Revenue Fund to the ROADS fund. This will reduce GRF revenues by an additional $30 million each year from FY ’11 through FY ’13 and in later years.
• In 2007, the Legislature created a permanent funding source for the OHLAP scholarship program, known as Oklahoma’s Promise. Each year the Regents for Higher Education are required to estimate the cost of this program and the Board of Equalization is required to set aside funding before any other state function is funded.  It is likely that by FY ’13 more funding will have to shift from the General Revenue Fund to Oklahoma’s Promise.

Cumulatively, these already-adopted revenue changes are estimated to cost some $300 million by FY ’13. At a time when revenue collections are falling or struggling to rebound to pre-downturn levels, these obligations decided by prior Legislatures will require deeper cuts to core budgets and delay the restoration of programs and services.

There are two approaches that could help avert future occurrences of this situation. The first would be for the Legislature to make all future phased-in tax cuts and earmarked revenue allocations contingent on sufficient revenue growth and a return to pre-downturn budget levels. There are precedents for this kind of approach, including the trigger mechanism in place for the impending cut in the top income tax rate to 5.25 percent. Triggers should become standard practice, and the trigger should be tied not only to year-to-year revenue growth but also to revenues returning to pre-downturn levels. Otherwise, we are likely to see a situation where tax cuts will kick in during the first year of a recovery, when service levels are still far from having been fully restored.

A more comprehensive approach to aligning revenues and spending obligations would be to adopt some form of pay-go provision, as is currently required for federal legislation. Under pay-go, all new tax cuts or spending commitments must be budget neutral, meaning they must be fully paid for with spending cuts or new revenues over a multi-year period, unlike currently, where tax cuts, tax credits, and spending obligations can have significant back-loaded fiscal impacts. Such a requirement would promote fiscal discipline and help minimize the severity of the long-term fiscal gap, where annual revenue growth is inadequate to fund the ongoing cost of services.  Best of all, perhaps, pay-go would mean that the hard choices of aligning revenues and expenditures could not simply be left for the next legislature to deal with.

The STAR Coalition of organizations promoting accountability in the recovery praised this effort:

Our groups can now follow the money in ways they never could before and will use it to engage their policy-makers and build a recovery that benefit communities. We will also use the data to actively engage the public to better understand how the Recovery Act is impacting our communities, and how taxpayers can advocate to improve the Recovery Act and other government investments in the future.

The coalition expressed some reservations about the reporting effort, especially as it treats jobs. There are some great features to stimulus reporting and I think it’s worth your time to look around. On this page is a great national summary that tells you which states are getting jobs and spending money, and how far along the projects are (not very). This map will help you learn more about ARRA’s impact on Oklahoma. So far it’s  saved or created 8,764 jobs, according to the agencies and companies that were awarded funding. The map even lets you find projects in your own neighborhood by entering your zip code. There’s also a good state summary page.

Unless you are smarter and/or more stubborn than I, however, there are also lots of things you can’t find. If you want one list of all the grants and contracts in Oklahoma, you have your work cut out. The two options I saw were either to browse through hundreds of pages of grants without totals, or else to download, combine, and sort several very large spreadsheet files. I left this experience confident that we have a general picture of what the stimulus is doing for the nation and our state, but not sure I could find results for a specific program or a specific school district. I also had lots of questions about definitions and how reliable the reports might be; there’s no effort to address these issues on the site.

STAR recently posted a blog entry summarizing what some of their members and related state organizations are finding as they dig through the data more carefully. Among the concerns are that some states seem to be under-reporting the jobs they’ve created, that most of the jobs saved are attributed to capital cities, and that there is no reporting on grant applications that are still in process. They (and I) may be asking for too much reporting and detail, but there’s already plenty being reported that is not all that informative, so it might be worth shifting gears for the next set of reports.

The stimulus promised untold and previously unforeseen transparency and accountability. So far, each new step brings more reports, but fails to fulfill the promise. The stimulus could, and in our view almost certainly is, making a difference in Oklahoma’s economy and investing in a brighter future. We just don’t know how exactly to find out yet.

Recovery.gov, the federal government’s official ARRA site, features a map of reported contracts, spending, and jobs created or saved by state. Go a little further to this page, and you’ll find agency and state details. The only reports included so far are contracts made directly by federal agencies. This amounts to “only” $16 billion, or about 2 percent of the full stimulus. In Oklahoma, you’ll see that about $80 million is under contract but just $10 million has actually been received. The biggest projects are at Tinker Air Force Base, the Tar Creek cleanup, and some bridge and airport projects. 202 jobs have reportedly been saved or created. You can find more details in this Oklahoman article.

Not everybody is satisfied with the government’s portrayal of the reporting. The Coalition for Accountable Recovery, a consortium of nonprofit organizations, recently called for improving the web site:

Both the quality of the data and its awkward presentation preclude meaningful analysis by analysts, taxpayers, or the news media,” said OMB Watch executive director Gary D. Bass. “The data must improve if the Recovery Act is to meet President Obama’s pledge of true transparency.

There is definitely room for improvement and the phased reporting process will give the Recovery.gov team every opportunity to consider and respond to this well-founded criticism.

Whether or not it is presented more clearly, the next reporting, from state and local governments, will be more illuminating. These are the projects that make up a large share of the stimulus, were intended to stabilize the economy quickly, and can help make investments in and for the economic recovery. The White House previewed some numbers recently. It issued a report showing that ARRA education funding has made nearly all of the shortfall in state education spending. In Oklahoma and most other states, the stimulus has so far prevented teacher layoffs and tuition increases. A Tulsa World editorial on the early reporting suggests the jobs picture probably would have been worse without the stimulus.

If you’d like to learn more about the stimulus, you can look into the Oklahoma ARRA page at http://www.recovery.ok.gov. You’ll find a useful breakdown of the money coming to our state and a reasonably well-kept list of funding announcements and progress. The data page now provides estimates of spending and jobs created so far in our state, though details are limited. Perhaps the six-month reports and demands for more  transparency will make that site more useful. OK Policy also maintains a stimulus page, with useful links, a thorough issue brief on all the major provisions of the stimulus, and occasional updates on stimulus programs in specific policy areas.

Nobody stays awake long poring through government reports–believe me, we’ve tried. But the fact that we could try–that these reports are required, available to anyone, and pretty simple–is a huge step. Government transparency is an essential ingredient to government effectiveness. If citizens can tell how government is spending its money and what is being accomplished, they are more likely to appreciate the essential role that government plays in our economy and quality of life. We hope the greatest lasting effect of the stimulus will be a commitment at all levels of government to let the people paying the bills know what they are getting.

One area where Oklahoma needs to do better is our 529 college savings plan. Section 529 of the federal tax code allows families to set aside savings in a special account overseen by the state government. Interest earnings on the account are not subject to the federal or state income tax. CFED points out that:

Post-secondary education is one of the best investments an individual can make in his or her economic future…Yet escalating costs discourage many from pursuing post-secondary education. For many low-income families, the net out-of-pocket cost of a four-year public university education (even after grant aid) is estimated to be as high as 39% of total income.

Scholarships, grants and loans rarely cover the full cost of attending college; even students that qualify for federal and state aid need family income to pay the many expenses not covered by student aid. In addition to helping with college expenses, the practice of saving for college for your child or yourself can alter expectations about college attendance and help develop habits and skills that can provide far-reaching benefits.

CFED suggests making 529s more widely available and meaningful across the income scale by opening accounts for all children at birth; providing incentives for families to save by matching their contributions; and minimizing barriers to savings such as minimum contribution requirements. CFED gives Oklahoma low marks; we are one of 39 states with “No policy in place” for college savings incentives. This confirms what we already knew: Oklahoma must work harder to make post-secondary education  a realistic goal for all our students and to increase enrollment and educational attainment so we can compete more effectively in a rapidly-changing world economy.

Where to start? We asked Soddee Knight, our intern from Oklahoma State University, to compile a comparison of all the 529 plans in the nation. Here’s what we learned about how Oklahoma’s plan compares:

• Oklahoma’s minimum contribution to start an account, $100, is higher than 63 of the 101 savings plans (many states have more than one plan). This is a significant financial barrier that closes off 529s as a viable option for many low- and middle-income families. We should work toward a zero or very low initial deposit. Eventually, we should open account for all children with no initial deposit required.
• Additional contribution requirements are also high in Oklahoma. Our $25 contribution is higher than 37 other plans, many of which have no minimum at all. CFED says any minimum “…can be a barrier for very low-income families who may only have a few dollars at a time to deposit.”
• Oklahoma’s is one of 61 plans where families can deduct contributions to their 529 plan from their state income taxes. Our deduction–up to $20,000 for a family–is among the most generous. A deduction, however, is of little or no value to a low-income taxpayer. The most recent available data showed that fewer than 700 families earning under $50,000 took advantage of this benefit in Oklahoma in 2005. We could convert this deduction into a refundable tax credit, so that each dollar invested in education saves a dollar in taxes up to a maximum amount, even for those not owing state income taxes. Three states currently offer a credit for contributions..
• Unlike many states, Oklahoma considers the balance of 529 accounts in calculating state financial aid, so our students could receive less aid because their families saved money for college. That’s the wrong incentive; we want to encourage savings as part of the way to make college affordable. We should make savings, grants, and loans work effectively together.

We will be proposing a specific legislative agenda to make Oklahoma’s current 529 plan a more effective tool in building opportunity for all Oklahoma families, encouraging saving, and expanding our educational attainment and economy. We hope you’ll join us in our efforts.

Oklahomans and their families prefer in-home supports over institutionalization and we know these supports offer marked savings with much better outcomes. Over two decades, Oklahoma developed five in-home support Medicaid programs (i.e., 1915C Waivers) now serving 31,000 eligible citizens, and 2 more are in the works. Yet, in-home programs are increasingly squeezed by nearly eight years of stagnant reimbursement.

One way to generate new funds is through Medicaid provider assessments. Through assessments, fees levied on “classes” of services generate revenues matched with federal funds to help cover provider costs. Provider assessments on institutions like nursing facilities allow them to average annual 10% increases even while operating at 65% occupancy.

To investigate in-home provider assessments, the Home and Community-Based (H&CB) Services Council joined Representative Peters to organize an Interim Study (2009H-080) on Provider Assessment Options for Home & Community-Based 1915C Waiver programs. In-home support recipients, advocates, and providers endorsed the study in the belief that Oklahoma should lead through stewardship and prevention across the lifespan for disabled and aging populations, and with measures that assure cost-effective, quality-proven programs. In-home programs save Oklahoma nearly half of a billion dollars annually by preventing costly institutionalization, promoting individual responsibility, self-determination, and full participation in the community –all with better outcomes, including help with employment and a full life in the community no matter how complex the disability.

Medicaid experts spoke with legislators and agency heads on implications for in-home programs if assessments are not passed. According to consultants, CMS (the federal agency overseeing Medicaid), has not updated assessment classes since 1981, preventing states from assessing fees on in-home programs like other providers. National advocacy is underway to change this omission. Missouri and Texas passed bills pursuing in-home assessments, Kentucky has an assessment with the knowledge of CMS, Michigan created an in-home assessment in managed care, and Maine adopted an assessment through allowed taxation. Clearly, preventive, cost-saving opportunities through in-home programs are motivating states to pursue assessments. Conversely, as California cut citizen choice for in-home programs, families/advocates filed a lawsuit under the Olmstead Supreme Court Decision, one that mandates services in the most integrated setting possible.

Additional considerations:

• Oklahoma’s in-home programs support citizens, ages 3 through late adulthood and all are deemed “nursing-facility-level-of-care.” Without in-home programs, these Oklahomans are forced into more costly options, including emergency rooms, nursing and intermediate institutions;

• Oklahoma’s legislated Rate Review recommends a rate adjustment to sustain in-home services.

• Estimates suggest that over 100,000 Oklahomans are employed in in-home programs providing a range of proprietary and non-profit supports. Experts agree that rate stagnation lowers preventive, quality services, and employment for Oklahoma citizens.

• Oklahoma’s Health Care Authority received Oklahoma’s 2nd Freedom Initiative grant for over $45M to bring over 2,000 citizens out of institutions due to recognized benefits of community living. With CMS ‘ strong encouragement, the state is writing two additional waivers for children and adults with disabilities and seniors to advance use of in-home supports.

With the age wave upon us, increasing numbers of Oklahomans with disabilities across the lifespan, and when recognizing the place Medicaid holds in state budgets–the chief funding for long-term care–it seems logical to endorse in-home support programs to save Oklahoma substantial dollars, assure better outcomes, and serve individuals and families as desired–in their own homes and communities.

At Oklahoma Policy Institute, we report and comment on budget and tax issues and on poverty and other problems we face as a state, but we’re also an advocate for change. We want to see more transparent and accountable government, a structure where we can rely on effective public services, and a way to improve fairness in who we tax and who our programs serve. The Online Budget Guide helps explain why these issues are so important.

Those who share our concern for Oklahoma’s future prosperity may especially want to see these guide pages:

• Oklahoma ranked 50th among the states in spending per person, spending $885 per person less than the average state in 2005. We spent less than average in education, health and social services and every other government service.
• By many measures, Oklahoma falls behind other states in accomplishments as well. Here you can see representative effectiveness measures for education, health and social services, public safety, transportation,  general government, and natural resources and regulatory affairs.
• Oklahoma ranked 42nd in total state and local taxes in 2006 and ranked among the middle and lower states for most specific tax sources.
• Oklahoma governments face a long-term fiscal gap, where we will not be able to afford our current level of services. The Guide offers some ways of addressing this significant problem.
• Oklahoma’s tax structure is not fair to all income groups. The Guide suggests some options that could improve tax fairness.

If you go to  http://www.okpolicy.org/online-budget-guide, you’ll find the introductory page of the Guide. Use the menu on the left, or the table of contents, or the navigation pages at the bottom to find your way around. On the right-hand panel you’ll find a box where you can search the Guide, a place to leave comments (such as questions, corrections, or requests for further information), and an icon where you can print the current page through your web browser. If you just want to get a printed highlights version, you can download the “Talking Points” version.

So, if you want to know where Oklahoma stands, what we spend, what we’re accomplishing, who we tax, and how we build budgets, the Online Budget Guide is the right place for you. We won’t be where we are for long, however, and we expect the Guide to inform the discussion of where we’re headed.

When fully phased in, House staff estimated the initiative will cost the state an additional $850 million, or about a 12 percent budget increase. There are three ways to pay for an $850 increase in education funding if growth revenues don’t do it:

• increase taxes, which could require an increase in the state sales tax from 4.5 to 6.18 percent or an increase in the top income tax rate from 5.5 percent to 7.35 percent;
• reduce budgets for all services except common education by up to 20.2 percent; or
• a combination of tax increases and budget cuts.

There is room to question whether this is realistic; the Oklahoma Education Association argues revenue growth in the next four years will eliminate the need to raise taxes or cut other budgets. While there is at least some merit to this claim, it is important to be prepared for a less rosy scenario, as the House staff suggested.

The second day’s hearings allowed the leadership of major state agencies to report on the possible consequences of a 20 percent budget cut. Not surprisingly, the picture was not pretty. It involves significant losses in services like infrastructure, substance abuse treatment, senior nutrition, corrections, and highway patrol. Higher Education Chancellor Glen Johnson said a “new model” would be required for our colleges and universities to operate with 20 percent less. His description seems apt for all state services.

Many House members declared cuts of that magnitude unacceptable. Speaker Chris Benge, R-Tulsa, issued a press release saying, in part:

The level of services to Oklahomans that would have to be cut to accommodate State Question 744 is stark and would be hugely damaging to our state.

This discussion comes at the same time that all state agencies, including common education, are taking five percent cuts to their monthly allocations from the General Revenue Fund. While agencies have generally been quiet about impacts of these cuts, a few more examples of the strains that monthly budget cuts are creating trickled out during the SQ 744 hearings:

• Terry White, Commissioner of the Department of Mental Health and Substance Abuse Services, described the department as “close to the end of our rope” and suggested it cannot cut its budget five percent for the whole year without affecting services.
• Neville Massey, of the Department of Corrections, reported that a buyout offer and a hiring freeze has resulted in only 77 percent of the agency’s authorized positions being filled.
• Kevin Ward, of the Department of Public Safety, reported that troopers are starting to cover more ground and drivers license stations are starting to lose a significant number of staff.
• Howard Hendrick, director of the Department of Human Services, indicated cuts would be forthcoming in the senior nutrition program. Since this hearing, DHS has taken action to cut this program by 25 percent, reducing the number of meals by 85,000 per year. The agency also is making immediate cuts in sheltered workshops and employment programs for the disabled.

Legislators rightly suggested 20 percent cuts to agency budgets would impose unacceptably damaging effects on our ability to provide essential public services that ensure the state’s security, prosperity and well-being. Are cuts one-fourth as deep acceptable? Do they not also cause real harm? The examples above suggest a deteriorating level of service to the mentally ill, seniors, and all of us who depend on a strong public safety effort. We don’t think these impacts–and more we expect to hear about in coming months–will be acceptable to most Oklahomans.

Early bird registration ends this Friday, October 2 and all registration ends next Tuesday, October 6. For directions, an agenda, and online registration, see OICA’s web site.