This latest dispute is likely to further defer lawmakers’ attention from focusing on the challenges in constructing the budget for the year ahead. With less than three months until the Legislature’s scheduled adjournment, this is worrisome. For if this year’s budget situation has been bad, next year’s quite frankly, looks  catastrophic.

Let’s start by reviewing what had been decided for this year. The leadership agreement announced in mid-February called for 3/8ths of the Rainy Day Fund, or $223.7 million, to be used in FY ’10. Money from the RDF is targeted to the Department of Common Education ($193.7 million in HB 2352) and the Oklahoma Health Care Authority ($30 million in HB 2353).  Leadership has also decided to dig deeper into federal stimulus funds for FY ’10. Common Education is now set to receive an additional $37.1 million from the State Fiscal Stabilization Fund, while an additional $144.6 million of enhanced Medicaid matching funds, or FMAP, made available by the stimulus will go to the Health Care Authority and Department of Human Services (all but $3 million of this amount is to offset a loss in General Revenue, rather than being additional funds). Other additional revenues made available for Fy ’10 include $38.3 million in gross production taxes,  $30 from the Unclaimed Property Fund (in the disputed bill), and $15.7 million being transferred from the State Transportation Fund.

As can be seen from the Table, the Legislature has now used over $800 million in stimulus funds in the FY ’10 budget. When the Rainy Day Fund is added in, the amount of non-ongoing revenue being used this year exceeds $1 billion. According to my figures, these non-ongoing revenues will account for some 15  percent of this year’s total state appropriations, which look to be some $6.965 million.

How big of a hole does this leave for next year? The Board of Equalization has certified $5.415 billion in available revenue for FY ’11. Using the revised FY ’10 appropriations as the starting point, there is a $1.55 billion revenue gap.

Available non-recurring revenue will close this gap some, but far from entirely. There has already been agreement to use an additional 3/8ths, or $223.7 million, of the Rainy Day Fund in FY ’11 (This would leave the fund with just under $150 million that is available upon declaration of an emergency). The State Fiscal Stabilization Fund, which can only fund Common Education and Higher Education, has a remaining balance of $199 million.  The amount of enhanced FMAP still available is less certain, because it involves multiple agencies and depends on actual expenditures. But the allocation of the additional $145 million in stimulus funds to the FY ’10 Health Care Authority and DHS budgets significantly worsens the FY ’11 outlook.  At this point, however, there is likely well under $300 million of remaining enhanced FMAP funds available.  (That number could, however, rise if the enhanced FMAP rate is extended for an additional two quarters as part of the jobs bill currently being considered by Congress).  Along with the remaining State Fiscal Stabilization Funds, we can expect to have under $450 million in stimulus funds for FY ’11, or $350 million less than in FY ’10.

The bottom line is that even after Rainy Day Funds and stimulus, there looks to be some $850 million less available revenue next year than this year. That’s equal to 12 percent of total state funding for this year applied across all government agencies. We can’t forget that many state agencies have already absorbed 5 – 7 percent cuts going into FY ’10 and up to 7.5 percent mid-year cuts, forcing furloughs, lay-offs and closures. We can’t forget that even agencies that have been partially protected by stimulus funds and supplementals have already been forced to reduce payments to health care providers and cut back services to seniors, children with mental illness, and other vulnerable populations.

The Governor in his FY ’11 Executive budget offered a series of revenue-enhancing proposals that together were estimated to generate over $700 million, including expanded tax collections of remote sales,  additional bonding, and suspension and elimination of tax breaks. Not all the Governor’s ideas are likely to fly. But if and when the final remaining FY ’10 issues are resolved, it will be urgent to start concentrating really seriously about what revenue options and cost-cutting measures should be on the table for next year to avoid a budgetary apocalypse.

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We all will be asked to sacrifice. But we cannot balance the budget at the expense of the most vulnerable among us.

His speech was most eloquent, perhaps, when he spelled out what’s really at stake when it comes to cutting government:

As we proceed, I implore you to remember there are very real – and human – consequences to budget cuts. The men and women who make state government work are not numbers on a spreadsheet.

Government is the schoolteacher grading papers at night. It is the meat and poultry inspector ensuring a safe food supply. It’s the child welfare specialist investigating suspected child abuse. It’s the nursing home attendant caring for a loved one … the speech pathologist working with special-needs children … the corrections officer tasked with keeping dangerous criminals behind bars.

The challenge for the Governor, and for legislators hoping to mitigate the of budget cuts and protect core government services, is how to balance the budget when revenues are projected to come in some $800 million below initial appropriations for this year and when certified state revenues for FY ’11 are some $1.9 billion below the initial FY ’10 budget of $7.2 billion. Other than making the case for tapping the state’s Rainy Day Fund, the Governor’s speech itself offered no details on how to accomplish this task. However, the Executive Summary to his FY ’11 does lay out the Governor’s strategy for bringing the budget into balance.

The broad outlines of the Governor’s approach are as follows. First off, as announced last week in an agreement between the Governor, House Speaker, and President Pro Tem, the FY ’10 revenue shortfall will be filled in part by across-the-board annual budget cuts averaging 7.5 percent of funding from General Revenue. These cuts, which amount to some $465 million, are to be offset by some $180 million in supplemental funding divided between common education, higher education, Medicaid and corrections. That still leaves an FY ’10 gap of over $500 million, which the Governor proposes to fill with $485 million from the Rainy Day Fund and transfers from agency revolving funds.

For FY ’11, the budget would be balanced as follows under the Governor’s plan:

• FY ’10 cuts would be annualized and increased by an additional 0.5 percent to 3 percent for all agencies.  In addition, pass-through funds to several agencies would be suspended. In total, this represents some $380 million in budget reductions for FY ’11 compared to initial FY ’10 appropriations;
• $696 million in remaining stimulus funds;
• $67 million in Rainy Day Funds.  (This would leave the RDF with some $44 million);
• $53 million in anticipated savings from agency consolidations and consolidation of information technology services;
• $233 million from new bond issues that would free up General Revenue;
• $85 million in transfers of cash balances from revolving funds;
• $239 million from a variety enhanced tax collection proposals, particularly increased sales tax collections on Internet sales and automated enforcement of vehicle insurance.
• $103 million from eliminating or suspending various tax credits;
• $58 million from increases in fees and permits.

Two points need to be made about these budget balancing proposals. First, many of those I spoke with at the Capitol who had learned of the Governor’s ideas for generating additional revenues and savings through efficiencies were skeptical that the proposals would gain legislative support or would have the fiscal impact promised in the budget. Without these measures, however, cuts would have to be even deeper than those the Governor recommends. (On the other hand, if the revised certification to be presented later this month to the Board of Equalization projects stronger revenue collections over the next 17 months than December’s initial estimates, the budget gap will not be as sizable.)

Secondly, even with these optimistic assumptions about savings and new revenues, the impact of the proposed funding levels in the Governor’s budget remain extremely worrisome.   With a few exceptions, most agencies are facing FY ’11 funding that is 10 to 17 percent below their budgets for FY ’09. Even those core agencies in education, health and human services, and public safety that are partially protected will take cuts in FY ’10 and FY ’11 and are not funded in FY ’11 to deal with rising operating costs and caseloads.

The bottom line is, for all of us who count on government – on those school teachers, safety inspectors, child welfare specialists, nursing home attendants, and corrections officers – to protect our safety and well-being and make us a stronger state, this fiscal storm still looks to have a devastating effect.

To see OK Policy’s updated spreadsheet of agency-level and overall appropriations for FY ’09 through FY ’11, and related budget information, click here.

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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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