Good forecasting starts with a sober look back at previous efforts. We first undertook the forecasting project in 2009, in response to rapidly falling state revenues. Our first forecast brief, released in November of that year, used six different models to forecast state General Revenue Fund (GRF) revenues for four years (here’s a summary of how those forecasts are developed). With the books now complete on FY ’11, we can look back to judge how we did and compare our performance with the official projections certified by the Board of Equalization.

The graph below compares all of our forecasts and official state estimates to the actual revenue.  Note that we’ve added a red bar to the first three forecasts in order  to show the $309 million in net new revenues adopted by the Legislature during the FY ’11 budget process. Neither OK Policy or the Board of Equalization could have known these would be adopted in making the early forecasts.   Adjusting for these changes, our initial forecast was the highest. It also proved to be the most accurate–just $94 million, or 2 percent, below actual revenues. The state’s official estimates moved up slowly throughout the period but remained well below the actual result. Adjusting for later revenue law changes, the first official estimate was $380 million, or 7 percent, below the actual revenue. The final estimate, more than halfway through the year, was still $188 million, or 4 percent, below the mark.

Looking back has helped us not only to better understand the dynamics of revenue and forecasting, but also to appreciate the changing dynamics of the budget cycle. When we started this project two years ago, we wanted to get a better picture of how far revenue would fall, for how long, and what the recovery might look like. Now that economic recovery, however halting, has set in, we need to turn our attention to whether the resulting revenue growth will make up for the end of one-time revenue fixes that balanced the last two budgets, as well as estimating how much revenue growth we can expect for how long. Our prior efforts have suggested that revenue will not return to pre-downturn levels until FY ’13 or ’14.

The need for better and longer-range forecasting has not diminished. We’ll incorporate what we’ve learned into work that’s now underway on developing new FY ’12-’15 forecasts. The state can do the same in preparing the Board of Equalization estimates for December. As always, we encourage a more inclusive and transparent forecasting process, and we implore both executive and legislative leaders to create an official long-term forecasting process.

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For the full year, General Revenue increased by $487.1 million, or 10.5 percent, from the depths of FY ’10. However, as we can see, revenue collections remain substantially below pre-downturn levels. This year’s GR came in 14.2 percent below FY ’08 and remains considerably below collections of five years ago, FY ’06.

As the Finance Director noted, by the end of the year, all the major revenue sources were showing signs of strength, including the personal income tax and gross production tax on natural gas, which had been lagging until recently. Again, however, if we extend our comparison further back, we see that the recovery remains partial and that we are still some distance from having recovered from the collapse of 2009 and 2010. Of the major state taxes that flow to GR, only sales tax collections have fully recovered to pre-downturn levels. Most notably, this year’s GR personal income tax collections remained 23.0 percent below FY ’06 and are at almost exactly the same amount as eight years ago. This reflects not only the severity of the 2008-09 recession but also the ongoing impact that tax cuts and tax breaks have had on weakening state income tax collections.

Thanks to revenue collections exceeding projections, the state will be able to make a substantial FY ’11 deposit of some $219 million to the Rainy Day Fund. Full-year collections also exceeded  the final revised estimate for the year certified by the Board of Equalization in February by $149 million, primarily as a result of income tax collections coming in much stronger than expected over the final months of the year. The strong finish to FY ’11 provides good reason to imagine that if current economic trends continue, we will see collections in FY ’12 outperform the official estimates developed five months ago (After adjusting for legislative changes, the Board of Equalization in June certified FY ’12 GR at $5.235 billion, which is only 2.5 percent above FY ’11 actual collections).  However, this will have little, if any, impact on the current year budget. So while revenues are on an upwards swing, this is too little and too late to spare state agencies from having to absorb more swings from the budget cutting axe.

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A couple of the notable charts are excerpted below.

The state’s annual appropriated budget for FY ’12 is $6.511 billion. This is the third straight year of decreased funding for state agencies; total appropriations for next year will be $250 million less than in FY ’07.Of total appropriations, 89.2 percent, or $5.811 billion, will go to the ten largest agencies in the core areas of education, health care, human services, public safety and corrections, with all the remaining appropriated agencies – 68 of them -  dividing up the remaining 10.8 percent ($699 million). This pattern of roughly 9 out of 10 appropriated dollars going to the ten largest agencies is long-standing and consistent; last year, as we showed here, the ten largest agencies received 89.5 percent of state funding.Click here for a table comparing the share of the total budget for each of the top agencies the past two years.

Our message on this year’s budget has been laid out in this blog post and this op-ed.  In short:

The agreement shows that legislative leaders and the Governor worked to minimize the damage, especially where cuts in state funding would have entailed a corresponding loss of federal matching funds…  However, this agreement is not cause for celebration. State agencies are now facing a third consecutive year of funding reductions and budget cuts, which will continue to corrode their ability to perform their core missions…. This outcome was not inevitable. Those who negotiated the budget will say they played the best hand possible given the cards they were dealt. However, we must recognize that a choice was made not to play with all the cards in the deck. Their decisions not to put serious revenue options on the table and to allow a cut in the top income tax rate to take effect seriously constrained what could be done to limit the magnitude of funding cuts.

We hope you will take a look at the FY ’12 Budget Highlights and share copies with others who may find it of interest. You can also click here for all our latest budget fact sheets and issue briefs, here for our budget blog posts, and here for our comprehensive Online Budget Guide.

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As noted in a new report from the Center on Budget and Policy Priorities:

Dismal state revenue collections caused by the severe recession are setting the stage for a new round of state budget cuts as fiscal year 2011 begins in most states on July 1. The states’ cumulative budget shortfalls will likely reach $140 billion in the coming year, the largest shortfall yet in a string of huge annual gaps that date back to the beginning of the recession.

The first two years of the state fiscal crisis have already had an enormous impact on state budgets. The National Association of State Budget Officers reported in its most recent Fiscal Survey of the States that for the first time ever, state general fund spending declined for two consecutive years in 2009 and 2010.  The Center on Budget projects that while total state budget gaps will be slightly less in FY ’11 than in FY ’10, the availability of less federal Recovery Act funds this year means that states will see larger shortfalls.

Slow revenue recovery and the diminished availability of federal assistance and state reserve funds has left states cutting more deeply into budgets and services in FY ’11. The Center on Budget’s new report identifies the elimination or reduction of health care services to low-income residents, including those with physical disabilities or mental illness, in Arizona, Iowa, Kansas, Connecticut, Oregon and Washington. Here in Oklahoma, deeper cuts to health and social services were avoided by the FY ’11 budget agreement that included some $1.4 billion in federal funds, reserves, and assorted revenue enhancements. But the impact of an overall 6 percent decline in FY ’11 funding compared to two year ago is being felt across Oklahoma, taking such forms as lay-offs for hundreds of public school teachers, the elimination of educational programs, up to  bi-weekly furlough days for correctional officers, and college tuition increases, among many others.

As the state fiscal crisis extends longer and deeper, cuts are taking a growing toll on families, businesses, and communities.  To cite a new economic letter from the Federal Reserve Bank of San Francisco (FRBSF):

State budget crises are having and will continue to have very real and significant effects on residents and businesses. Cuts to public services, public safety, and education are severe and could potentially have lasting long-term consequences.

The Bank parts ways with other analysts, however, in suggesting that the contraction in state and local public spending is having only a modest impact on the economic recovery. By contrast, the Center on Budget notes that according to the federal government’s Bureau of Economic Analysis, state and local government cutbacks sliced a half of a percentage point off GDP growth in the first quarter of 2010.  According to Moody’s Analytics economist Mark Zandi, further cuts to state and local government jobs and services imperil a still-fragile economy and could trigger renewed recession. And yet Congress failed once again last week to approve an extension of assistance to the states in the form of enhanced federal Medicaid matching rates.

The good news, at least here in Oklahoma, is that revenue collections are finally trending up, which means that there is little likelihood that the state will again be forced to make mid-year budget cuts in FY ’11. Yet everyone agrees that states will not be out of the woods anytime soon. In the FRBSF’s assessment:

Federal stimulus support for state budgets is winding down in the next two years. Rainy-day funds are all but exhausted. Thus state fiscal crises aren’t likely to go away soon and will probably get worse before they get better.

This assessment certainly seems to apply to Oklahoma, where over $1.1 billion, or some 17 percent of this year’s budget is funded with non-recurring revenues.  This creates a hole, or perhaps a crater, for the FY ’12 budget that even robust revenue growth is unlikely to fill. Rather than looking at restoring funding levels to pre-downturn levels, the next year is likely to require continued tough discussions of what services and what revenues must be on the table to allow for sustainable funding of core government functions.

So farewell and good riddance to FY ’10, but hold that champagne and expect to hear the band keep playin’ the blues.

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The state’s public television network, OETA, which plays a distinct role in covering public affairs and chronicling the lives of Oklahoma communities, has apparently reached such a tipping point. According to a recent article in the Journal Record (subscription only), the network will not be renewing the contracts of the studio staff of the Oklahoma News Report – anchors Gerry Bonds and George Tomek and meteorologist Ross Dixon -  for the upcoming year. All three were contract employees paid for by donations to the OETA Foundation. While the nightly news broadcast will continue to air, staffing reductions, increased workloads, and funding cuts will mean the end of new episodes of several locally-produced programs – Tulsa Times, Oklahoma City Metro and State of Creativity – that shed a spotlight on notable Oklahomans and current affairs. In addition, the agency has enacted a strict hiring freeze and will no longer offer weather broadcasts.

Over the past two years, state appropriations for OETA have been cut by 19.1 percent, from $5.2 million in FY ’09 (excluding one-time capital funding) to $4.2 million for next year. As we showed in our FY ’11 Budget Highlights, half of all appropriated agencies have seen state funding cut by 15 percent or more during this period. With one-fifth of this year’s budget being funded with non-recurring revenues, the chances for any quick or substantial improvement in the budget outlook for OETA or most any other agency are slim.

Despite the cuts, OETA will continue to operate, but with fewer staff shouldering greater workloads and responsibilities, and with fewer programs that are able to tell of the lives and deeds of the ordinary and extraordinary Oklahomans who make up the fabric of this state. Their loss of funding is our loss as well.

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Yet the impact of the downturn would have been genuinely catastrophic had Congress not provided substantial fiscal relief to the states as part of last year’s stimulus bill.  Formally known as the American Recovery and Reinvestment Act,  the stimulus bill provided states money in two basic forms – a State Fiscal Stabilization Fund, intended primarily for common and post-secondary education, and enhanced federal matching funds for Medicaid. Over the past two years, the Legislature approved the use of $1.375 billion in stimulus funds, allocated as follows:

These stimulus funds have directly served to limit the cuts to schools and to major health care and social service agencies to under 10 percent; indirectly, they have averted deeper cuts to public safety, transportation, and all other state agencies by freeing up state dollars for these functions.

Although use of Recovery Act dollars did not generate much debate in Oklahoma among those elected officials actually responsible for drafting the budget, some legislators, candidates, and policy analysts have contended that the stimulus, along with the nearly $600 million withdrawn from the Rainy Day Fund, have kept state spending at artificially and unsustainably high levels. However, without these funds, and assuming no tax increases, funding cuts across all state agencies would have approached 16 percent each of the past two years, and in many cases would have snowballed further due to the loss of federal matching funds. When core human service, education and public safety agencies presented their proposals for managing potential budget cuts in FY ’11 of an additional 10 to 15 percent, the scenarios in terms of core programs, services and jobs that would have met the axe were little short of chilling.

At the same time, the reliance on non-recurring revenues from the Recovery Act and Rainy Day Fund, along with some one-time revenue enhancements approved for the coming year, does create budget holes that even a robust economic recovery is unlikely to fill over the next year or two. This problem could be partially addressed if Congress agrees to extend the enhanced Medicaid matching rate, known as FMAP, for another six months, providing more of a glidepath than a sharp cliff to allow time for state revenues to recover. While this proposal has been a part of several economic recovery bills working their way through Congress in recent months, its future at this point is highly uncertain given growing concerns about federal spending and deficits. Yet as the Center on Budget and Policy Priorities, among others, has argued, failing to extend federal support will lead to deeper cuts to services and layoffs that will threaten the fragile economic recovery around the nation.

Overall, federal stimulus dollars could not fully protect the state budget from the impact of the Great Recession, and a reliance on non-recurring will contribute to ongoing challenges going forward. But as we continue to struggle  to control the bleeding from the cuts  imposed over the past two years, we should not fail to acknowledge how much more desperate and unsolvable our situation would have been without federal fiscal relief.

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Perhaps the two most notable points about this chart are:

• Total appropriations for FY ’11 are set to decrease by 7.1 percent, or $517 million, from the initial FY ’10 budget and by 3.5 percent, or $244.8 from the final FY ’10 budget after mid-year cuts;
• To minimize the severity of budget cuts, this year’s budget included over $900 million in non-recurring revenue from the Rainy Day Fund and the federal stimulus bill.  These revenues, along with deferred payments and other one-time revenue enhancements that were agreed to by the Legislature and Governor, create substantial budget holes for FY ’12 and FY ’13, even if revenues continue to recover along with the state’s economy.

The FY ’11 Budget Highlights fact sheet also provides detailed tables of appropriations levels for each state agency.  All but five agencies – Health Care Authority, Commission of Land Office, Election Board, Rehabilitation Services, and Medicolegal Investigations – will receive less appropriations in FY ’11 than in FY ’09 . Over 30 state agencies will have absorbed funding cuts in FY ’10 and FY ’11 of at least 15 percent compared to FY ’09. However, these raw numbers cannot tell the full story of how funding decisions play out for each state agency. Some agencies are facing growing caseloads and demands for services, as well as rising costs for employee benefits and operational expenses. In other  cases, the Legislature has given agencies some relief by approving fee increases, funding voluntary buy-outs, promoting savings and efficiencies, and allowing agencies and school greater spending flexibility.

Overall, as we indicated in our initial analysis of the new budget, the agreement succeeded in averting a full-fledged catastrophe and protecting programs serving the most vulnerable segments of the population. However, ongoing cuts and funding shortfalls will continue to corrode our public services.   We conclude in the policy points that accompany the budget highlights:

FY ’11 funding levels are expected to avert deeper cuts to core services but not to restore services and staffing levels to pre-downturn levels… Most state agencies and school districts will continue to be hard-pressed to accomplish their core missions with inadequate staffing and resources.

We hope you’ll download and share the FY ’11 Budget Highlights fact sheet, and let us know if you have questions or if we’ve missed anything (note that most appropriations bills are awaiting final action by the Governor). If your organization or community group would like to discuss state budget issues in greater depth, please be in touch with me about scheduling a presentation, briefing or forum.

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It is not surprising, then, that the funding levels announced in the FY ’11 budget agreement have been greeted with a certain amount of skepticism by some state agencies and school districts. A Tulsa World article on funding for common education, for example, included these reactions from Tulsa-area Superintendents:

“It will be good news if, when you get the details, if it is that type of cut,” Broken Arrow Superintendent Gary Gerber said, referring to the 2.9 percent budget cut. “But we have to take it with a grain of salt because we had a budget agreement last year and they proceeded to cut us every month of the entire school year…”

Union Superintendent Cathy Burden said that while she was pleased the district now has a number to work with, their budget will require careful scrutinizing before any major decision on staffing or plans for next year can be made.

Burden said her “cautiousness is based on the history of what happened this year” of promised 3 percent cuts almost doubling by year’s end.

Yet if this skepticism – which seems to be broadly shared, based on  conversations I’ve had in recent days  – is understandable,  it is also likely unwarranted. At least a decade of history suggests that the state’s forecasters tend to underestimate both how bad things will be in bad times and how good they’ll be in good times. Specifically, the revenue projections on which annual appropriations are based tend to consistently underestimate how much revenues will fall when the economy turns bad, but also underestimate how quickly and strongly revenues will recover once the economy improves.

This chart compares actual and estimated General Revenue collections since FY ’02:

In FY ’02 and FY’03, revenues came in 8.8 percent and 11.7 percent below the certified estimates, respectively. But once revenues began to recover they exceeded the estimate by 5.0 percent in FY ’04, 11.7 percent in FY ’05, and 10.7 percent in FY ’06. Over those three years, GR collections exceeded the estimate by almost $1.3 billion, more than filling the Rainy Day Fund to its constitutional limit and creating surpluses that were then available for additional spending priorities, the EDGE research fund, and tax rebates.

For next year, the Board of Equalization in February projected GR of $4.579 billion, which is an increase of  just $105 million, or 2.3 percent above the final updated estimates for FY ’10. Not only history but  recent trends in revenue collections suggest that this estimate is likely to be reached and surpassed.  After a devastating downturn, the past several months have shown clear signs of an upswing in the state’s economy and revenue collections.   UCO Economist Mickey Hepner recently forecast that FY ’11 revenues will grow by 3.3 percent to $4.623 billion, which is $43 million more than the official estimates released in February. For our part, OK Policy projected late last year that FY ’11 General Revenues would come in at $4.735 billion, which would represent an increase of 6 percent over FY ’10.

This isn’t to say that there’s no risk of shortfalls. The economic recovery remains somewhat fragile, carrying the threat of a double-dip recession that could send revenues reeling. The budget agreement also assumes a few hundred dollars from revenue enhancements such as increased sales tax collections and suspended tax credits that may not fully materialize.  And without question, the use of nearly $900 million of non-recurring federal Recovery Act dollars and Rainy Day Funds clouds the budget outlook past next year. But, all in all, we can predict with at least a little confidence that agency budgets should not be bit by the mid-year budget cut bug for a third time next year.

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Overall, the proposed budget appropriates at least $6.676 billion in FY ’11. This is $256 million, or 3.7 percent, less than the final FY ’10 budget of $6.931 billion, and $556 million, or 7.7 percent, less than the $7.231 billion initial FY ’10 budget that the Legislature decided upon last session. Most notably, to make the budget balance and limit the magnitude of budget cuts, leadership agreed to appropriate some $1.4 billion in additional revenues that were not initially certified. This total amount includes $496 million in federal funds for education and health care that were part of last year’s Recovery Act and the remaining $372.8 million from the state’s Rainy Day Fund reserve (however, $100 million of this amount is to be set aside for FY ’12). The remaining $630 million of additional revenues is to be generated by a wide variety of mechanisms, including fee increases, enhanced tax collections,  increased bonding, suspending tax credits, deferring payments, and transferring available cash balances.

With a few exceptions, agencies will absorb additional funding cuts in FY ’11 of 7 percent or less beyond those already enacted over the course of FY ’10. Several of the largest agencies providing core state services will see smaller cuts, including Common Education and Career Tech (-2.3 percent), Higher Ed (-3.3 percent), Public Safety (-1.0 percent), Corrections (-3.0 percent) and Mental Health and Substance Abuse Services (-0.5 percent). The Department of Human Services will receive an increase of 4.0 percent compared to its final FY’10 appropriations while Rehabilitation Services will be boosted by 3.7 percent. The Oklahoma Health Care Authority will be appropriated $17 million, or 1.8 percent, less than FY ’10; however, in addition to this basic funding, the agreement also includes $78 million for OHCA from a “1% Health Care Access Payment.” This led the agency to issue a statement (not yet available online) stating that it expects to be able to maintain the Medicaid program in the upcoming year without cutting benefits or provider rates.

Given the daunting challenges they faced in constructing the FY ’11 budget, the bipartisan team of budget negotiators deserves considerable credit for their willingness to propose new revenues to limit the size of overall budget cuts and preserve essential services. This is not the full-fledged catastrophe that many expected and feared, and shows that legislative leaders and the Governor were guided by a genuine desire to minimize the damage. We are especially grateful that leadership heeded the calls of advocates to protect our most vulnerable populations by targeting available funds for Medicaid, human services, mental health and rehabilitative services, as well as ensuring that education and public safety were spared the full brunt of cuts.

At the same time, there are two principal concerns that must be expressed. First, despite the genuine efforts made to limit budget cuts, we cannot expect everything to be fine next year. Many agencies will be facing additional cuts of 5 to 7 percent in FY ’11 on top of the 10 to 14 percent cuts already enacted in FY ’10. Even agencies that have been cut less than the full 15 to 20 percent will face severe challenges in fulfilling their fundamental missions with reduced resources, particularly given mandatory increases for employee health care and retirement costs, general inflation, and in some cases, new mandates and growing caseloads.  It is likely that most agencies will continue to operate under budgetary duress in the coming year, with continued unfilled vacancies and staffing reductions, and potentially continued or increased furloughs and involuntary layoffs, which will continue to corrode the public structures we depend on to ensure the security, health and prosperity of of our families and communities.  The impact of continued cuts and underfunding will need to be closely followed and monitored over the coming months.

Secondly, next year’s budget, like this year’s, is balanced through the use of substantial one-time and non-recurring revenues. While the specifics of all the additional revenue proposals are not yet fully clear from the information that was released yesterday, it’s clear that the major additional revenue sources used to reduce the budget shortfall – federal stimulus dollars, Rainy Day Fund reserves, cash balances – will be either entirely or largely unavailable in FY ’12 and FY’13. We can expect revenue growth to partly fill those holes, but to a considerable extent, this budget only pushes problem further down the road. This dependence on one-time revenues to plug budgets is perhaps the inevitable consequence of the staunch unwillingness of leaders of both parties to consider outright tax increases or more sustainable revenue sources as part of the solution to Oklahoma’s budget crisis, as many other states have done.

Over the final days of session, the Legislature will need to approve budget bills and bills to implement the various revenue proposals. It is likely that there will be continued discussions and debate as details of the agreement come to light, particularly over funding levels for certain agencies and the specifics of some of the key revenue enhancements. For now, the main reactions are likely to be a guarded sense of relief of having been spared the worst and ongoing concern over the continued struggles ahead.

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In recent blog posts, we have laid out the potential toll that cuts of this magnitude could have on Oklahoma families, businesses and communities. The Oklahoma Health Care Authority is considering the elimination of prescription drug coverage, diabetes supplies and kidney dialysis treatment for adult Medicaid recipients. The State Health Department warns of an inability to respond in timely fashion to man-made disease occurrences and natural disasters. The Department of Human Services confronts rate reductions that could push private sector providers of services to Oklahomans with developmental disabilities out of business. Similar stories are being told across the spectrum of state government of cuts that would undo progress made in recent years and set our state back years, if not decades.

The argument that OK Policy and others have made over recent months is that balancing the budget through an exclusive reliance on deeper spending cuts is a choice, not an inevitability. A balanced approach to the budget gap includes new revenue sources along with budget cuts, efficiencies, and the use of reserves. The Governor initiated the discussion by proposing over $700 million of revenue enhancements in his FY ’11 budget proposal, including eliminating and suspending selected tax credits, increasing tax enforcement capacities, and expanding our bonding capacity. With this revenue, agencies would still be facing additional cuts of 0.5 to 3 percent in FY ’11 – still painful, but far from the most devastating scenarios. Other revenue ideas have surfaced from other quarters, including one that OK Policy has promoted to do away with the deduction of state income taxes for those who itemize on their state tax returns.

With the end of the legislative session fast approaching, the budget remains unsettled. We know that various revenue options are being discussed by legislative leaders and the Governor, but that nothing has been decided. While there is general agreement that the consequences of not generating additional revenues would indeed be dire, it is still unclear whether there is sufficient political will to adopt revenue solutions. There are some at the Legislature who seem positively excited by this opportunity to shrink the size of government, and others who declare themselves open to new revenues in principle, but are quick to oppose any specific attempt to raise a fee or close a tax loopholes that risks being politically unpopular. Some seem eager to stand aside and let the worst happen so they can blame the consequences on their opponents.

In short, if the ultimate budget decisions are left to the mercy of political calculations, the outcome is likely to be little or no additional revenue and the full-fledged budget catastrophe that agencies and advocates have warned of.  But that is not the only, or inevitable, outcome. Our elected officials need the political will and courage to make the difficult decisions necessary to pull us back from the abyss. In this time of crisis, we need our elected officials to lead.

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