As state leaders struggle to find solutions to this year’s revenue shortfalls and funding gaps, it is not too soon 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 second in a four-part series that will recommend changes to our budget and tax system, looks at options for strengthening our budget reserve funds.  Our first post recommended enhanced and expanded budget forecasting; subsequent pieces will consider multi-year revenue commitments and tax expenditures. Together, our proposals are designed to improve the Legislature’s ability to manage budget downturns.

Like most every state, Oklahoma has established a budget reserve fund to put money aside during times of robust growth that is then made available to cushion the impact of economic downturns.  Oklahoma’s Constitutional Reserve Fund, known as the Rainy Day Fund (RDF), was created by a vote of the people in 1985. Under the Constitution, deposits are made into the Rainy Day Fund of all General Revenue (GR) collections that exceed 100 percent of the final certified estimate made by the State Board of Equalization for a given year. Deposits are capped at 10 percent of the General Revenue Fund certification for the preceding year.  If the RDF is already at its cap, additional surpluses spill over to the General Revenue Fund. Read the rest of this entry »

If state fiscal conditions can be likened to the weather, it’s been apparent for many months that Oklahoma is in the midst of a toad strangler of a rain, to borrow the Tulsa World’s colorful characterization. Going into the current fiscal year, the state faced projected revenue shortfalls of over $600 million.  While most agencies had their budgets cut by 5-7 percent, the use of some $640 million of federal stimulus dollars allowed the largest core agencies to receive smaller cuts or small increases, while the Rainy Day Fund was left intact. This year’s revenue collections, however, are coming in nearly 25 percent below the certified estimate. Agency budgets have been cut 5 percent each month, which has forced a growing number of agencies and school districts to reduce staff and scale back or eliminate core programs. Read the rest of this entry »

Yesterday’s announcement of state revenue collections for September marked the end of a truly dismal quarter. Collections for the 1st quarter of FY ’10 were 29.5 percent below the first three months of FY ’09. The graph below shows that this continued and amplified the trend of the final two quarters of last year, when revenues  dropped by 15.3 percent and 26.3 percent, respectively. The graph also shows how much more severe the current fiscal crisis is than the one earlier this decade, where the worst quarter saw revenues fall by just over 12 percent.

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Last week, OK Policy convened a meeting of over 30 representatives of non-profit and advocacy organizations to discuss the state’s budget situation. We begin with a presentation on budget trends and outlooks, which can be viewed on our website; the meeting then turned to a discussion of the impact of the budget crisis on the organizations’  programs and clients, and what can be done about it. Read the rest of this entry »

As you’ve no doubt already heard, the worst fears about state revenue collections in the beginning of the new fiscal year were confirmed yesterday with the release of July General Revenue (GR) collections. The Treasurer’s office announced that July revenues were down 26.3 percent compared to a year ago and came in 18.1 percent below the certified estimate upon which current year appropriations were based. This year’s July GR collections were not only $120 million below last year’s; they were the lowest since FY ’03, at the depth of the previous recession, without adjusting for inflation or the growth in the overall state budget in the intervening years. The sole glimmer of good news in yesterday’s announcement: July’s 26.3 percent decline in revenue collections compared to the same month in the prior year was actually slightly less than the year-to-year declines suffered in June (- 30.1 percent) and May (-27.7 percent). This suggests that the state budget may have already hit rock bottom. However, the climb back up will likely be long and will definitely be hard.

July’s revenue shortfall led Treasurer Scott Meacham to implement an immediate 5 percent across-the-board cut to agency appropriations for the month of August. The Treasurer said that he will be meeting with Governor Henry and legislative leaders to discuss how to handle the budget crisis, stating:

“We have several options. These include potential use of the Rainy Day Fund, tapping additional federal stimulus money and other responses,” Meacham said. “However, I would warn state agencies that additional cuts may very well be coming.”

For now, implementing cuts to all agencies in equal proportion to their share of appropriations from the GR fund is the only course that is constitutionally available. This approach, however, is unable to take into consideration the differing capacity that agencies have to absorb budget reductions and the differing impact of potential cuts on services that are essential to the health, well-being, and security of Oklahoma families and communities. In a blog post last month, OK Policy suggested an approach for dealing with shortfalls, including being ready to call the Legislature back into Special Session in the fall and tapping the Rainy Day Fund to minimize the extent and severity of cuts. We will continue to monitor the budget situation closely, and in collaboration with policymakers and partners in the community, be working to develop recommendations and strategies for how to proceed.

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 »

Just a day after Governor Brad Henry signed the state budget for FY ’10, Oklahoma Policy Institute released its annual budget review. And the new fiscal year, which starts July 1, promises to be an interesting one:

all agencies face a tight and difficult year ahead as they wrestle with increases in mandatory operating expenses and, for some, rising caseloads in a downturn, with flat or reduced funding.

This year, the adoption of the budget is just the start of a process that will unfold over the next 13 months. Agencies must allocate appropriated  and other funds to their programs, figure out how they’ll cover all these built-in cost increases, adjust service levels and, in all probability, adjust again later in the year. We won’t know until next June or later how it all worked out.

But it does start at the beginning, and that’s where our budget review helps. It is the first comprehensive look at the budget process and the outcomes it led to. Here’s what you’ll find inside:

1. Analysis of the speedy drop in available state revenue.
2. Details of how federal stimulus money and state revenue changes allowed the overall budget to grow slightly.
3. A rundown of how individual agencies fared and what that says about state priorities.
4. Further analysis of problems to watch for as the year unfolds.
5. A look ahead to the FY ’11 budget and beyond.
6. Recommendations to improve budgeting processes and to increase funding of state services in the economic recovery.

Once you’ve read the budget brief, you’ll be caught up with us and ready to see the rest of the budget picture develop.

Stateline.org is an indispensable–and free–source of news and analysis on just about every aspect of state government. Last week, staff author Pamela M. Prah provided an excellent analysis on the state of California’s budget crisis and–more importantly for us–what other states can learn from it.

California has always been a trendsetter. What happens in California often pops up elsewhere. Which raises this question: Are the perpetual billion-dollar deficits that haunt California state government unique to the Golden State or the harbinger of what other states can expect?

Here’s a quick rundown of what’s gotten California in trouble–a budget deficit left wide open by voters’ rejection of several tax and budget measures yesterday– and our take on how Oklahoma compares:

1. California depends too much on a small group–wealthy taxpayers–for its revenue. In California, a higher tax rate for very high income families and businesses and a capital gains tax are great when the economy is strong, but revenue from the rich plummets when the economy turns down. Oklahoma doesn’t have this problem. If anything, we go too far in the other direction. We depend too much on lower-income taxpayers since our income tax applies at very low income levels.
2. California’s budget has been gridlocked lately due to divided government. Republican Governor Arnold Schwarzenneger and a legislature dominated by liberal democrats disagree fundamentally on what government should be doing. The result is nasty partisan battles, short-term fixes, and a growing gap between revenues and promised spending. Oklahoma has divided government, too, though the parties are reversed. This year’s budget agreement–which took weeks to negotiate, helped some interests while cutting many core services, and ignored long-term problems and opportunities–shows we have a little California in us, too.
3. California is one of 16 states that requires a super-majority vote to increase taxes. So is Oklahoma, thanks to State Question 640. According to Prah, this requirement makes it harder to modernize the tax code to keep up with the changing economy and growing public expectations. Read the rest of this entry »

State Rainy Day Funds have one sole purpose: to be used during economic downturns to minimize the extent of cuts to public services and to avert tax increases. Prior to this downturn, Oklahoma has been able to build up our Rainy Day Fund to just under $600 million. OK Policy just released a new issue brief arguing that, with the state facing a large budget shortfall and the prospect of cuts of 7 to 10 percent for most agency budgets, now is the right time to use a portion of the Rainy Day Fund.

Our argument is based on projections suggesting that revenues will begin to recover after next year, even as it takes several years to return to pre-downturn levels. Under the constitutional rules governing the Rainy Day Fund, once revenues begin to rise compared to the prior year, most of the Fund cannot be appropriated, even if there remain ongoing shortfalls compared to pre-downturn levels. This creates the strong possibility that unless we use a portion of the Fund next year, we will end up making deeper and more painful cuts than are necessary while leaving most of the Rainy Day Fund untouched during one of the worst recessions in decades. As we stated in a press release, “we could be facing a situation where the people and communities of Oklahoma are about to get drenched by budget cuts, while we are left holding on to an unopened umbrella.”

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In spite of all the attention paid in Oklahoma in recent weeks to such urgent matters as the Ten Commandments, stem cells, and the Flaming Lips, the real work of the 2009 legislative session has been unfolding largely behind the scenes as key legislative leaders from the House and Senate try to hammer out an agreement on the budget for the upcoming year, FY ’10. From conversations I had last week at the Capitol  with a number of  legislators, fiscal staff, lobbyists, and agency personnel, it appears that the main outlines of the budget have been decided, although some key issues and details remain to be determined.

For those who have not been following closely, the main parameters for the budget were set in February, when the Board of Equalization certified available appropriations for FY ’10 at $644 million less than the budget for the current year. When adjustments were made for one-time money in this year’s budget and other issues, the shortfall approached $900 million. Although the state has built up the Rainy Day Fund to just under $600 million, of which up to $375 million could be made available for FY ’10, Governor Henry and legislative leaders have consistently expressed their unwillingness to tap into reserves to mitigate the shortfall. Also in February, Congress passed the $787 billion stimulus package (the American Recovery and Reinvestment Act, or ARRA), which included funding expressly intended to help states plug budget shortfalls over the next two years. State fiscal relief primarily assumed the form of a State Fiscal Stabilization Fund ($578 for Oklahoma, of which $473 million can be used only for education and $105 million available as general purpose funds) and enhanced federal Medicaid funding ($800 – $950 million for Oklahoma, available back to October 2008).

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