The concept has a few precursors. In particular, Oklahoma’s deal-closing fund is a descendant of two programs: the Oklahoma Opportunity Fund and the Texas Enterprise Fund. The histories of both programs should raise warning flags before we follow the same path.

The Opportunity Fund was Oklahoma’s first attempt at a deal-closing fund. The fund was created in 2006 at the request of Gov. Henry. At the time, Henry made many of the same claims as Gov. Fallin that the fund was needed for attracting business to the state. In its brief life, almost nothing went as planned.

In 2006, the Nanjing Automobile Group Corporation, which is owned by the Chinese government, was considering bringing a new MG auto plant to Ardmore. To facilitate the deal, Oklahoma used the Opportunity Fund to provide $15 million for improvements to the Ardmore airport as well as $5 million for a startup loan to MG. The company also promised to build a new headquarters in Oklahoma City and a research facility in Norman, all of which would receive public money under the Quality Jobs Act of up to 5 percent of the company’s payroll for 10 years.

MG North America CEO Duke Hale said at the time, “I mean when we compared yourselves in the total state offering to other states, man, I can tell you the incentive package offered by the state is superb.”

However, the deal ran into trouble when the Chinese Communist Party decided to consolidate its auto industry and scale back plans for manufacturing in the United States. Representatives from MG have never made a definitive statement that the deal was finished, but 5 years later and despite Oklahoma’s investment, MG has not come to Ardmore.

The Oklahoma Opportunity Fund soon ran into a trouble as well. In 2007, the Oklahoma Supreme Court ruled that the fund violated the separation of powers because the board to oversee it included legislators even though it was part of the executive branch. However, the court ruled that the fund could continue under the governor and Department of Commerce.

After the Supreme Court ruling, Governor Henry unilaterally awarded $15 million to the Oklahoma Medical Research Foundation. He also gave $10 million to build a new hangar and renovate another building at Tulsa International Airport on behalf of American Airlines and Spirit Aerosystems. Finally, he awarded $1 million to Sulzer Chemtech and $4 million to Oklahoma County (information on the purpose of these awards was not immediately available).

Today the fund still exists and contains just over $140,000, but the legislature has not appropriated additional money into it since 2008.

Another model for the Quick Action Closing Fund frequently mentioned by Governor Fallin is the Texas Enterprise Fund. Yet even as we move towards copying the TEF in Oklahoma, it is under attack in Texas. Senator Kay Bailey Hutchinson has called for an independent audit of the program, and a current proposal in the legislature would abolish it entirely.

This program has its own checkered past. Created in 2003 at the request of Gov. Rick Perry, it has handed out $412 million in subsidies. However, a report by Texans for Public Justice found that more than a quarter of the money went to companies that failed to create promised jobs, based on their own compliance reports. When job creation falls short, the state has the authority to terminate the agreement. However, that did not happen in Texas. Governor Perry ended agreements with two companies, but for 11 other non-compliant firms, only 1 percent of the $61.4 million they had been given was returned.

Other projects paid for by the Texas Enterprise Fund have brought charges of political cronyism. In 2005, TEF gave $50 million for a genetic research center to be operated as a public-private partnership between Texas A&M and Lexicon Genetics. The facility would develop genetically altered mice for researchers to study specific traits affected by changes to the genome.

The next year, failure to win a $50 million NIH grant put the entire project in jeopardy. The lab has required annual subsidies from Texas A&M to stay in operation, and the university also took on all of Lexicon’s job creation obligations until 2012 since they employ fewer people today than when they received the award. Critics pointed out that several Lexicon investors were also major financers of Governor Perry’s political career.

Oklahoma’s Opportunity Fund raised its own issues of conflict-of-interest, or at least the appearance of one. When Gov. Henry awarded $15 million to the Oklahoma Medical Research Foundation, his wife served on the board of directors.

All of these examples should raise serious concerns about the accountability and effectiveness of closing funds. The Supreme Court ruling prevents us from giving legislators direct oversight on where the money goes after it is appropriated. And if history is any guide, putting the fund at the discretion of the governor provides inadequate safeguards against political favors or unwise award decisions.

Political leaders may assure us that safeguards are in place, but by necessity any program meant as a last-minute deal closer will sacrifice oversight for speed. With the state budget already stretched to its limit, a closing fund is not a responsible use of limited public dollars.

Update:  For a final update on the closing fund, see Where Are They Now? Bills we kept our eye on

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Based on the revised estimates for FY ’10 certified by the Board of Equalization in December, the state is looking at a total mid-year shortfall of $809 million in FY ’10, made up of  $729 million in the General Revenue Fund and $80 million in the HB 1017 Education Reform Fund. The leadership agreement involves the following main features for bringing the FY ’10 budget into balance:

• Continued across-the-board cuts in monthly General Revenue (GR) allocations of  to each agency of 10 percent for the remaining five months of FY ’10. This means agency budgets will have been cut 5 percent for four months and 10 percent for seven months (there were no cuts to July allocations). This equates to a 7.5 percent cut in GR over the full course of FY ’10. Total across-the-board GR cuts will equal $385.7 million.
• The agreement also includes supplemental funding for four agencies.  The Department of Education will get an additional $104.4 million. The bulk of these funds are intended to make up for the $80 million projected shortfall in the HB 1017 Fund, crating a net increase of $24.4 million.  Additional funds will also be provided to the Oklahoma Health Care Authority ($33 million), Regents for Higher Education ($25.6 million) and Department of Corrections ($7.2 million). Excluding the funds intended to address the HB 1017 Fund shortfall, total supplementals will equal $90.2 million

In total, OK Policy calculates that the agreement calls for appropriations to be cut by $295.5 million. Please see this spreadsheet (PDF) that provides agency-level calculations of FY ’10 cuts and revised appropriations under the agreement.

Given projected shortfalls of $809 million and cuts of $295.5 million, the question that still needs to be sorted out is where exactly the $513.5 million in additional revenue needed to bring the FY ’10 budget into balance will come from.  The leadership announcement remained short on details. According to the press release:

…state leaders also agreed to use reserve dollars from the Rainy Day Fund and the state stimulus account to help balance the budget.

The amount of additional stimulus and Rainy Day Fund dollars that will be injected into the FY ’10 budget is not specified in the release; however, Speaker Benge is quoted saying:

This agreement maintains more than half of our state’s total reserve dollars for fiscal year 2011 and beyond

The Rainy Day Fund has a current balance of $597 million; if less than $300 million of that amount will be used in FY ’10, then the agreement would seem to require well over $200 million in additional federal stimulus dollars or other unspecified revenues for FY ’10. The initial FY ’10 budget included $640 million in stimulus dollars, which was seen to represent one-half of total available dollars from the stimulus package that could be used to stabilize the state budget.

The conclusion of an agreement on the FY ’10 shortfall will certainly make the Legislature’s task in the upcoming session much less complicated and hopefully bodes well for the ability of the Governor, Senate and House to reach consensus. But it’s necessary to point out two things. First, even with the injection of well over $1 billion in  stimulus and Rainy Day Funds to buttress the FY ’10 budget, the cuts agencies are facing this year are having serious and worsening effects on public services over a wide swath of state government. Many agencies that took 5 – 7 percent cuts going into FY ’10 are now looking at 12 – 15 percent cuts compared to last year’s budget, while even those agencies that were spared steep cuts going into the year are reducing or eliminating core services. The Oklahoma Health Care Authority, which has already cut provider rates and scaled back benefits in recent months,  indicated yesterday it will have to implement another round of cuts to manage ongoing 10 percent monthly budget reductions over the remainder of this year.

Secondly, this agreement should result in final FY ’10 appropriations of some $6.935 billion. The initial FY ’11 certification of available ongoing state dollars is for $5.295 billion, or 24 percent less than the revised FY ’10 total. The one certainty at this point is that the challenge of finding revenues to fill that shortfall and mitigate the severity of cuts in FY ’11 will remain daunting.

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There is currently $597 million in the Rainy Day Fund.  Since adoption of a constitutional amendment in 2004, the RDF can be accessed as follows:

• Up to 3/8ths of the Fund, or $224 million of the current amount, may be appropriated to make up for a shortfall in the current year’s collections upon declaration of a revenue failure by the Board of Equalization.
• Up to 3/8ths of the Fund, or $224 million, may be appropriated in the budget for the forthcoming year if General Revenue collections are forecast to be less than the amount originally projected for the current year. A letter [PDF] from the Attorney General’s office indicates that this portion of the RDF can still be appropriated by the Legislature for  FY ’10. (Earlier OK Policy materials assumed this money was no longer available for FY ’10.) It is likely that conditions for using this money will also be met for FY ’11.
• Up to 1/4 of the Fund, or $149 million, may be appropriated upon the declaration of an emergency. This requires either an emergency declaration by the Governor with 2/3rds approval of both Chambers, or 3/4ths approval by both chambers without the Governor.

The unfortunate reality is that even using the maximum available amount from the Rainy Day Fund is unlikely to make up for revenue shortfalls without cuts and/or other new revenues. OK Policy has forecast that current year GR collections are likely to come in around $700 million below appropriations. In total, using the full 3/8ths “revenue failure money” and 3/8ths “forthcoming year money” could provide up to just under $450 million from the Rainy Day Fund for the current year. The $250 million difference between the estimated shortfall and this draw from the RDF would be equivalent to full-year across-the-board cuts of 5.0 percent, unless additional revenues can be identified. If only 3/8ths of the Rainy Day Fund is used this year, our projected shortfall would be $476 million, equivalent to full-year across-the-board cuts of 9.4 percent in the absence of other revenue. Other scenarios are equally possible, but all will involve a trade-off between using more RDF revenues to help fill this year’s shortfalls versus saving more for what is certain to be a long and slow fiscal recovery.

The Governor’s strategy is to hold off making any decisions about how to fill the budget gap until the Board of Equalization meets on December 21st to certify a formal estimate of revenue collections for this year and next, with a special legislative session to follow in January.  In this, he seems to be supported by Speaker Benge.  Senate Republicans, however, are calling for a Special Session in December.

The bottom line is that if  economic conditions look to be improving, it may be possible to use most of the RDF this year to minimize the severity of budget cuts, with a combination of remaining RDF and stimulus dollars used to avert deeper cuts next year. That’s the optimistic “we-get-wet-but-only-catch-a-minor-cold” scenario -  although one that still involves painful cuts and that creates the prospect of enormous revenue holes for FY ‘12 once stimulus and reserve fund dollars expire. If, however, the projections are for a much slower and weaker revenue recovery over the next 18 months, nothing short of new revenue streams is going to keep public services, and the Oklahoma citizens who depend on them, from being exposed to the full wrath of a hard, hard rain.

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It’s natural to wonder what could happen in the just-started budget year, FY ’10. Even though it will be a month until the first months’ revenue are known, Meacham was willing to speculate:

It appears very likely at this point that Fiscal Year 2010 revenues will be less than
originally estimated by the tax commission. That means a revenue shortfall is probable.

This week, Meacham and others are talking about what to do about it. According to the Tulsa World,

Cutting appropriations to agencies would be the first action. Meacham is asking state agency directors, many of whom are dealing with 7 percent cuts this fiscal year, to look for further reductions because of the likelihood of a revenue shortfall. … If the revenue shortfall is prolonged or steep, budget cuts likely won’t be enough, Meacham said. When cuts start affecting employees and vital services, the rainy day fund has to be considered.

It may be premature to declare a revenue shortfall when we haven’t seen any revenues for FY ’10. While recent trends have been quite discouraging, most economists expect a rebound to take hold soon.A growing economy in the spring of 2010 can make up for some bad months this summer and fall. Further, our Constitution only allows the Legislature to appropriate 95 percent of certified revenues; we can absorb a 5 percent shortfall for the year.

Whether or not there’s a shortfall, though, we can assess the tools we have available and see if we can improve them in a way that helps this year and beyond. We should use these tools–now and in the future–to be sure we maintain adequate and consistent public services for Oklahomans. Here are some suggestions:

1. Be ready to call a special session of the Legislature later in the fall. Treasurer Meacham and Governor Brad Henry can only make across-the-board cuts. We elect the Legislature to determine if cuts affect employees and vital services and select the best course. Let’s demand that they make strategic, rational cuts–if any cuts are needed–that maintain the programs we need to weather the recession and invest in the coming recovery.
2. Be ready to use the Rainy Day Fund to help fill a shortfall if it does materialize. The Fund was created for this purpose and three-eighths of it may be used ONLY for this purpose. The graph below shows that $224 of the $597 million in the fund could be used to shore up agency budgets and maintain services.
3. Improve the Rainy Day Fund rules. First, we should be able to use the Fund when we need it most. Our earlier FY ’10 budget brief suggests that revenues are likely to start climbing next year, FY ’11. Under the current rules, most of the Rainy Day Fund is off limits when state revenues are climbing. Regardless of the FY ’11 revenue, we still will be in a recession. Our earlier brief shows how we could use the Fund effectively and responsibly when revenue is climbing slowly but is still below earlier levels. Second, we should consider a higher cap on the Fund, so it can help us through prolonged downturns in the future.
4. Get serious about revenue and expenditure forecasting. We should demand the state create and update professional five-year forecasts of revenues, expenditures, and service levels so we can see where we’re headed in the long run and make the best decisions for the next few years, not for the next few months.

Oklahoma has tools to deal with this recession without panicking. Our conservative revenue forecasting process gives us a cushion to withstand modest shortfalls. Our Rainy Day Fund was designed to deal with larger budget gaps and we are fortunate to have sufficient resources to do so. And our Legislature can craft a revised budget that best gets Oklahoma through another round of trying budget times.

We could do better, though. Using the Rainy Day Fund during the recovery would maintain services when they are needed and prepare state agencies and programs to make investments in and during the economic recovery. Long-term forecasting would help us identify shortfalls sooner, understand their real impacts, and address them strategically rather than haphazardly. Using–and improving–our tools can help us be sure that Oklahoma adequately invests in services.

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