This is a revised and updated version of a page authored by Paul Shinn from OK Policy’s Online Budget Guide

Oklahoma’s Rainy Day Fund helps protect against economic downturns. The Rainy Day Fund (formally known as the Constitutional Reserve Fund) was created in 1985 in response to a dramatic revenue downturn. It is designed to collect extra funds when times are good and to spend those funds when revenues cannot support ongoing state operations.

Money flows in to the Rainy Day Fund when revenue is more than estimated. Any General Revenue Fund collections beyond 100 percent of the estimated amount must be deposited into the Rainy Day Fund (unless it already has the maximum amount specified by the Constitution, 15 percent of the current revenue estimate for the General Revenue Fund).

The Constitution allows the Fund to be spent in four instances: Read the rest of this entry »

Yesterday, State Finance Director Preston Doerflinger announced that March General Revenue (GR) collections came in 9.3 percent above March 2010 and 10.5 percent above the certified estimate.  This marked the 11th straight month that GR showed improvement over the prior year. For the 3rd quarter of FY ’11, GR was up just under 14 percent from FY ’10. This marked the strongest year-over-year growth since 2005, the peak of the last economic cycle.

All major tax categories increased in March over the same month a year ago with the exception of the personal income tax. In a press release, the State Finance Directors downplayed the importance of this drop: Read the rest of this entry »

When we discuss government budgets, direct spending receives the most attention by far. Less noticed is the substantial expenditure on tax credits and incentives, what some have called the “submerged state.”

That inattention may have allowed several unconstitutional measures to sneak through in Oklahoma. At the end of 2010, outgoing Attorney General Drew Edmondson issued an opinion on the constitutionality of Oklahoma tax credits. The opinion was requested by Rep. David Dank, R-Oklahoma City, who chairs the House Revenue and Taxation subcommittee. An AG opinion does not have force of law–only a court can legally determine constitutionality–but it can provide guidance to lawmakers and the courts. 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.

The latest revenue collections announced today (PDF) by Treasurer Scott Meacham continue to confirm that while revenues are recovering from their precipitous drop during the worst of the downturn, the recovery is slow and far from complete.

September’s General Revenue (GR) collections totaled $459.7 million, which is $25.9 million, or 6.0 percent, above last year and $7.5 million, or 1.7 percent, above the certified estimate. For the now-completed first quarter of FY ’11, collections are running $74.8 million, or 6.8 percent, ahead of last year, and $45.4 million, or 4.0 percent, above the certified estimate that formed the basis of this year’s appropriations.

As can be seen from the first chart, monthly collections have come in between 5 and 10 percent above the same month for the prior year in four of the past five months. While this shows that a recovery is under way, the gains have been far less than we might hope given the magnitude of the drop between January 2009 and February 2010.

Read the rest of this entry »

The recent history of state appropriations, displayed here from our FY ’11 Budget Highlights fact sheet, shows a  series of successive ups and downs:

We see that the state appropriated budget for the current year, FY ’11, is 5.8 percent less than two years ago and slightly less than the budget in FY ’07.  With revenue collections having plummeted by more than 20 percent compared to pre-downturn levels, only the  adoption of various revenue enhancements and the injection of almost $2 billion in non-recurring revenues from the federal stimulus bill, Rainy Day Fund and other sources have averted more drastic cuts to agency budgets. Still, over half of all appropriated state agencies will have absorbed funding cuts of at least 15 percent, and across state government, shortfalls have forced agencies to eliminate programs and services, reduce hours of operation to the public, cut payments to private providers, and lay off or furlough employees (our online budget presentation runs through the full story).

Some have drawn a different conclusion from these numbers.  If you look at the period prior to the downturn, you see a substantial increase in the state budget – about $1.9 billion in growth between FY ’04 and FY ’08. Doesn’t that suggest that state government grew too big, and that the current period represents more of a healthy correction that a crisis? In addition, even with the cuts of the last two years, state appropriations remain 8 percent higher than they were in FY ’06.  If the state could operate with a $6.2 billion budget six years ago, surely it should be able to manage with a $6.7 billion budget in FY ’11? 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 »

Anyone hoping for signs that the state’s budget woes had already hit bottom found little to cheer in Tuesday’s  revenue announcement [PDF] from Treasurer Scott Meacham. August General Revenue (GR) collections came in nearly 32 percent below one year ago. As the chart below shows, this is the worst monthly performance compared to the prior year since the state fiscal crisis hit in January. Read the rest of this entry »

As a follow-up to our earlier post about the announced cuts to state agencies resulting from the shortfall in July revenue collections, we have prepared a spreadsheet that shows how much of a cut each agency will receive in dollar amounts and as a percentage of the initial FY ’10 appropriation. The spreadsheet also includes total FY ’09 and FY ’10 appropriations amounts for each agency. The August cuts, totaling $21.9 million, represent 5 percent of one month’s appropriation from the FY ’10 General Revenue Fund (GRF). This latest development continues to tighten the squeeze on agency budgets.  In June, the state implemented 5 percent across-the-board cuts to agency  allocations as a result of shortfalls in last year’s revenues collections. Most agencies also saw their initial FY ’10 funding reduced by up to 7 percent, at the same time as they are struggling to meet rising employee health care and retirement costs, and in some cases, dealing with growing demands for services as a result of the downturn.

Overall, the August cut represents 0.30 percent of total state appropriations for FY ’10. However, as not all agencies are funded entirely through the GRF, “across-the-board cuts” do not affect all agencies in exactly the same way. This is shown in the graph below, which depicts the cut that the ten largest state agencies must absorb as a share of their total annual appropriation. The Department of Transportation, which is appropriated entirely out of the State Transportation Fund, has not had its funding cut at all. The Department of Education, which receives funding in part through the 1017 Education Reform Fund, the Lottery Fund, and others, was cut by just under 0.3 percent. In addition, this year’s budget included over $600 million in federal stimulus funds from the American Recovery and Reinvestment Act, which is unaffected by the state revenue shortfall. This explains why the cut to the Oklahoma Health Care Authority, which benefits from an enhanced federal Medicaid match under the stimulus bill, was just 0.25 percent of total appropriations. In total, about 30 percent of total state appropriations in FY ’10 – some $2.1 billion – came from funds other than current year GR.

This so-called across-the-board distribution of budget cuts is the only one that can be implemented under the state Constitution and statutes without the involvement of the Legislature. But it does not necessarily reflect the ability of agencies to avoid making cuts that threaten essential public services.  If we are going to be able to navigate these revenue shortfalls in ways that cause the least harm to the health, well-being, and security of Oklahomans, we need to make sure we understand the ways these unequal cuts impact the various agencies’ ability to provide services to the people of Oklahoma. Only then can we determine if across the board cuts will be able to be endured by all agencies or if a different approach is needed.

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.

Treasurer Scott Meacham today released revenue collections for the final month of the just-completed fiscal year, FY ’09. As was widely expected, the numbers were dismal: June General Revenue (GR) collections came in 30.1 percent below last year and 26.2 percent below the estimate.

As the chart that we have prepared shows, June’s numbers marked the sixth straight month of increasingly weak collections. Over the first half of FY ’09, revenues came in 8.6 percent above the prior year; over the final six months, collections were off a whopping 27.5 percent. For the full year, GR was down 7.3 percent compared to the prior year and was off 7.2 percent from the certified estimate.

The question that already has people’s attention concerns the revenue outlook for the current fiscal year that began July 1st. Will we hit the official estimate, or at least come close enough to avoid having to declare a mid-year budget shortfall and start reducing agency allocations and/or accessing the Rainy Day Fund? The Treasurer indicated today that he anticipates that a revenue shortfall is probable.

It will all depend on the timing and extent of the economic recovery. But given the consensus forecast of the recovery beginning towards the end of 2009 and gaining steam in 2010, the likelihood is that the FY ’10 revenue picture will look like a mirror image of FY ’09, with revenues under-performing during the first half of the fiscal year and then rebounding during the second half.

Source: Tulsa World, June 5, 2009

On Thursday, Treasurer Scott Meacham declared a revenue shortfall for the current budget year, FY ’09, and announced that state agencies would be required to take an across-the-board cut in their allocations for June, the final month of the fiscal year. After five straight months of steeply declining revenues, General Revenue Fund (GRF) collections in May reached the point where they had fallen below 95 percent of the certified estimate upon which FY ’09 appropriations had been allocated.  Through May, GRF collections were at 94.9 percent of the estimate. This translates to a shortfall of $6.8 million.

The constitutional language related to revenue shortfalls is found in Article 10, Section 23.10; the relevant section states:

(T)he Legislature shall provide that all appropriations shall be reduced to bring them within revenues actually collected, but all such reductions shall apply to each department, institution, board, commission or special appropriation made by the State Legislature in the ratio that its total appropriation for that fiscal year bears to the total of all appropriations from that fund for that fiscal year.

Read the rest of this entry »