As Oklahoma’s tax debate unfolds, it has been encouraging to hear a rising chorus of influential voices insist that any tax plan must be revenue neutral. Given deep cuts that state agencies have absorbed in recent years and the long-term fiscal challenges the state faces in the years ahead, eroding our revenue base with one-sided  tax cuts would be hugely irresponsible and fiscally unsustainable. One promising approach to ensure that we do not bankrupt the state is for Oklahoma to adopt a pay-as-you-go, or PAYGO, requirement.

State Treasurer Ken Miller recently stated:

Budget writers should adopt a “pay-as-we-go” approach to reducing taxes. To responsibly finance tax cuts, policymakers should eliminate one dollar of spending or credits for every dollar cut in taxes.

This can be accomplished with fiscal discipline, better spending prioritization and a refined approach to budgeting.

Miller’s call for a pay-as-you-go approach was quickly endorsed by both the Oklahoman and Tulsa World. Read the rest of this entry »

Last week we reported that next year’s revenues are expected to be 7 percent below their levels of six years ago (FY ’07), even though costs are higher due to inflation, population growth, and increased caseloads

Elsewhere, people seem to have read a different budget estimate than the one we saw. Two elements of the discussion show a growing disconnect between Oklahoma’s budgetary politics and reality.

First, Governor Mary Fallin and many others continue to advocate for reduction or elimination of the state income tax. A closer look at the budget shows that, of the $400 million forecast revenue growth from FY ’11 to FY ’13, fully  half comes from the income tax. Overall, the income tax is expected to provide $2.5 billion next year for General Revenue, the HB 1017 Education Reform Fund, and the ROADS Fund, which has helped restore the worst of our roads and bridges. Cutting this vital revenue support makes no budget sense. It also makes no economic sense. Read the rest of this entry »

Today we published “An Incomplete Recovery: The State Budget Outlook 2012-2015.” This is the third of our annual series of forecasts for the state budget. Our goals for this project are both to inform leaders and citizens about the state’s likely fiscal path and to advocate for better fiscal policies and decisions.

“An Incomplete Recovery” sums up the forecast part of the story. These are the key findings:

• The General Revenue Fund (GRF), which makes up 76 percent of the state’s budget in FY ’12, will continue its slow recovery. As we discussed here, GRF revenue has now grown over the prior year for 18 straight months. Unfortunately, revenue still remains 15.9 percent below the peak levels of FY ’09. Our forecasts indicate it will be two more years, FY ’14, before GRF revenues reach pre-recession levels.
• Much of the revenue decline and subsequent slow recovery can be attributed to the severe economic downturn, but not all. Read the rest of this entry »

Earlier this month, we released a brief that provided our projections for state revenue collections for Fiscal Years 2011 through 2014.  Last week, the State Board of Equalization certified its official preliminary revenue estimates for FY ’12, along with updated projections for FY ’11, which we discussed in this blog post. The Board’s forecasts are very closely aligned with ours.  For FY ’11, our middle forecast is for General Revenue collections of $4.969 billion, compared to $4.949 billion projected by the Board, a difference of $20 million, or a mere 0.4 percent. For FY ’12, we are forecasting GR of $5.121 billion, which is $19 million, or 0.4 percent, above the official estimate certified by the Board of Equalization.

We point this out for two reasons. First, to unabashedly toot the horn of our forecasting guru, Paul Shinn, for developing a methodology that so closely anticipates the numbers developed for the Board of Equalization (you can read the technical memorandum explaining his  methodology by clicking here). This is the second year of our forecasting project; last year, Paul’s middle forecast for FY ’10 GR came in within 3.5 percent of actual full-year collections. Read the rest of this entry »

Yesterday’s announcement of state General Revenue (GR) collections for the month of November showed that the state continues to recover only slowly and partially from the depths of the downturn. Outgoing State Treasurer Scott Meacham chose to highlight that November collections this year were 9.3 percent above last year’s; for the first five months of the fiscal year, FY ’11, GR is up 6.3 percent from FY ’10. But as we see from the chart, FY ’11 collections remain substantially below pre-downturn levels. Year-to-date GR is 24.0 percent below the same period of two years ago (FY ’11) and remains below levels of six years ago.

As we discussed in our recent forecasting brief, it is going to take a long time, likely several more years, before revenues recover to nominal pre-downturn levels under current policies.  Facing this extended period of sluggish revenue collections, the need for a revenue structure that is capable of supporting the cost of core public services will be increasingly vital and urgent.

This week OK Policy distributed a 4-page memo on the state budget to all candidates for state offices, which we have now released to a broader audience. The memo is intended to offer policymakers a clearer understanding of the budget situation they will face following the November election, while suggesting some guiding principles and specific recommendations for addressing the challenges that lie ahead. Here are some of the highlights of the memo: (Much of the information is contained in our most recent 2-page Budget Trends and Highlights fact sheet).

We begin by stating that:

The state budget crisis of the  past two years has put great strains on the public structures and institutions that Oklahoma families, businesses, and communities count on to help us meet our common goals as a state. Whoever wins the elections in November will face difficult choices in filling large budget holes and balancing the budget over the next two to three years.

Our overview of the past two years emphasizes the historic drop in state revenue collections and the importance that non-recurring revenues from the federal Recovery Act, state Rainy Day Fund, and other sources have had in mitigating the magnitude of budget shortfalls. However:

Even with these funds… this year’s appropriations of $6.714 billion represent an overall cut of 7.2 percent from FY ’09. Over half of all appropriated state agencies have absorbed funding cuts of at least 15 percent, and some cuts have been multiplied by the loss of matching federal dollars. These cuts have weakened the ability of state agencies and schools to fulfill their core missions and have contributed to a corrosion of the public structures and institutions that Oklahoma rely on to promote our well-being and invest in our future. Across state government, shortfalls have forced agencies to serve fewer Oklahomans in need, eliminate programs,  reduce hours of operation to the public, cut payments to private providers, and lay off or furlough employees. Read the rest of this entry »

Last year at this time, OK Policy began a revenue forecasting project. Our efforts stemmed from the limitations of official revenue forecasting efforts, which are limited to two annual forecasts prepared for the Board of Equalization, issued in December and February, each covering only the remainder of the current year and the year ahead. In stepping into this void, we had several goals:

1. To help state leaders, agencies, and citizens better understand and prepare for the impacts of the FY ’10 budget shortfall;
2. To encourage the legislature and governor to develop a cohesive plan for managing the shortfall while minimizing impacts on  services that Oklahomans depend on;
3. To better understand how long the revenue downturn would last and the path back to normal revenue levels; and
4. To encourage the state to build better forecasting and financial planning into the budget process.

Our forecasting brief summarized our forecasts and recommendations. This post looks back at how well those forecasts worked.

The graph below suggests that our efforts were generally on target. The graph shows our six forecasts, along with the “middle scenario” and the actual revenue the state received. (Our technical memorandum describes how each forecast was devised.) Read the rest of this entry »

Everyone knew it would be bad. Could we have known it would be this bad?  Nearly one year ago, in February of 2009,  several months after the national economic recession finally hit Oklahoma, the Board of Equalization certified an official General Revenue (GR) estimate for the current fiscal year of $5.4 billion.  This amount was half a billion dollars, or 9.5 percent, less than actual revenue collections for the most recently completed fiscal year (FY ’08) and about $300 million less than anticipated collections for the fiscal year in progress.

With the benefit of hindsight, we know now that even those already dreary revenue forecasts were wildly optimistic. Through the first five months of FY ’10, GR collections are running $578 million, or 24.3 percent, below the estimate. In December, the Board of Equalization received a revised FY ’10 estimate that projects that GR for the full year will come in a whopping $1 billion below the estimate (or, to be precise, $1,000,405,068). That equates to an 18.5 percent revenue shortfall– although since the state can appropriate only 95 percent of the certified estimate, the actual mid-year budget shortfall is somewhat less. Read the rest of this entry »

As state leaders struggle with how to manage the enormous budget shortfalls the state faces this year and next, the focus is understandably on decisions that must be made over the coming weeks and months.  But while short-term challenges are the highest priority, this is also an opportune moment to draw some lessons from what has transpired during the downturn thus far that could leave us better equipped to manage the full length of the crisis and respond better the next time the economy takes a nosedive. This post will be the first of a series of blog posts and an upcoming issue brief that will recommend changes to our budget and tax system involving forecasting, reserve funds, multi-year revenue commitments, and tax expenditures. Our proposals are all intended to enhance the Legislature’s ability to respond to budget downturns without having to implement deep cuts to vital state services or enact tax increases. Read the rest of this entry »

The latest monthly budget release (PDF) from Treasurer Scott Meacham provided some good news and some bad news. The bad news is that October revenues fell well short of projections, as they have in each month of the current fiscal year. General Revenue (GR) for October was 18.2 percent  below the official estimate and 23.7 percent below below last year’s collections. The good news is that the shortfalls are slightly less than in previous months. Over the first three months of FY ’10, General Revenue collections averaged 26.0 percent below the estimate and 29.5 percent below prior year collections. October’s slightly improved performance led the Treasurer to declare:

I am cautiously optimistic that October collections could show our economy has finally bottomed and we may start seeing some recovery in actual revenue collections. Read the rest of this entry »

We have not yet reached the end of the first month of the new fiscal year but already Treasurer Scott Meacham has publicly predicted that state General Revenue collections will fall far enough short of the forecast to trigger an official revenue shortfall. We have already shared our recommendations for how the state should respond to a shortfall if one does materialize.  This seems like a good time to provide a closer look at the state’s track record on forecasting and provide some suggestions for what we may be able to do differently.

Each year the Legislature makes appropriations based on an official estimate of revenues for the upcoming year that is certified by the Board of Equalization. For the General Revenue Fund (GRF), the Lottery Fund, and some smaller funds, the Legislature may only appropriate up to 95 percent of the certified estimate; for other funds (including the 1017 Education Reform Fund), the Legislature can appropriate up to 100 percent of the estimate. If revenues come in below 95 percent of the certified estimate, this triggers a revenue shortfall, which requires the State Budget Director to reduce appropriations in a proportionate amount.

The revenue estimates for the major taxes that constitute the bulk of the GRF are developed by the Oklahoma Tax Commission based on economic models developed in collaboration with the Oklahoma State University Center for Applied Economic Research.  OSU and the Tax Commission use a range of public and proprietary forecasts about economic growth, consumer confidence, oil and gas prices, and other variables to generate their estimates.

The results of this process reveal that forecasting is as much art as science. As shown in the chart, in five of the past eight years, actual GR collections have come in more than seven percent above or below the estimate. In only one year was the variance between estimates and actuals less than four percent. The pattern seems to be that in bad times, revenues do far worse than expected (2002-03, 2009-?) while in good time, revenues do far better than expected (2005-06).

Within the overall picture, the accuracy of revenue forecasts varies considerably across the different major taxes.  The record of forecasting gross production tax collections is quite dismal, which may come as no surprise given the volatility of oil and gas prices. In six years out of eight, collections have come in more than 15 percent above or below the estimate, and the average annual variation has been 26.1 percent. At the other extreme, sales tax forecasts tend to be most accurate: in seven of the last eight years, actual sales tax collections have come within five percent of the estimate, and the average variation has been 3.3 percent.   Income tax forecasts occupy a middle ground, with collections coming within five percent of the estimate in three of eight years, with an average variation of 9.2 percent.

We are left asking two questions. First, can we do a better job of forecasting revenues?  There is no obvious or immediate answer, but it would seem worthwhile to study Oklahoma’s forecasting methods and outcomes in comparison to those of other states – particularly those with a similar reliance on gross production revenues -  to see if others are having any greater success.  If some states have better records of accuracy, we should think about borrowing their methods. While we are studying official and binding short-term forecasts, we should also be working to improve our capacity to develop professional five-year budget forecasts to guide longer-term decisions about revenues, expenditures and service levels, as we recently suggested.

Second, assuming that forecasting will always remain imperfect, what should we do about it?  We cannot entirely eliminate uncertainty and imprecision from the budget process, but we could perhaps make the General Revenue Fund less dependent on the most volatile revenue source, the gross production tax. Oklahoma would benefit from a more predictable and consistent flow of funds for its public services. Forecasting is an important step, but strategic use of revenues may be necessary as well.

Last week, State Treasurer Scott Meacham unveiled the the state revenue report for June, 2009. Revenue was below the previous year, for both  the last  month and the fiscal year as a whole, as we reported earlier.

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: Read the rest of this entry »