In mid-April, State Finance Director Preston Doerflinger sent a letter to state agency directors alerting them to “the possibility of a revenue failure declaration for Fiscal Year 2014… following unusually weak General Revenue Fund (GRF) collections in February and March.” Agencies were put on notice that their budget allocations for the final months of FY 2014 could be cut if next month’s revenue collections don’t improve.
Here are answers to the questions that have been keeping you awake nights about the when, why and hows of revenue failures.
Q: What is a revenue failure?
A: One of the budget limits entrenched in Oklahoma’s constitution is that the Legislature may not appropriate more than 95 percent of certified funds for the upcoming year. This builds a 5 percent cushion into the budget in years when revenues come in below projections. When revenues fall below 95 percent of the certified estimate, the Director of the Office of Management and Enterprise Services (in this case, Secretary Doerflinger) is required to declare a revenue failure and to reduce agency allocations by an amount sufficient to bring them into balance with actual revenue collections. Through April, General Revenue Fund collections are 5.2 percent below the certified estimate; in February and March, collections came in 8.0 and 9.1 percent below the estimate respectively. Currently, the shortfall compared to the 95 percent threshold is $9.9 million. If collections came in at 0.2 percent below the 95 percent threshold for the entire year, the shortfall would amount to some $11.8 million.
Q: Why are we facing a revenue failure in FY 2014?
A: Secretary Doerflinger identified several factors as responsible for weak GR collections. These include:
- major decreases in corporate tax collections;
- recent increases in tax credits claimed by business;
- gross production tax revenue loses related to horizontal drilling incentives and deferred rebates;
- ongoing increases in the off-the-top apportionments away from the GRF to other sources.
We discussed these issues at length in our blog post, ‘The mystery of the disappearing tax revenue’. The State Auditor and Inspector’s Office has also produced a report exploring the drop in corporate income tax collections.
Q: How likely is a revenue failure?
Much will hinge on April collections. Due to the April 15th tax deadline, April is the single largest revenue month of the year. OMES is saying that if collections are within 95 percent of the estimate in April, it should be enough to avoid a revenue failure. But if April collections are again below the 95 percent mark, cuts are certain.
Q: How much will budgets be cut?
A: This isn’t clear. The decision on when and how much to cut will depend on the size of the projected shortfall. The mid-April letter indicated that cuts would “likely be less than 1.5 percent.” A 1.5 percent overall cut to remaining allocations would represent a total fiscal year budget reduction of 0.25 percent for many agencies. However, this represents the top end of current projected cash flow scenarios. If collections remain at 0.2 percent below the threshold and agencies are cut by that amount, the total cut would equal $11.8 million and agency allocations for May and June would be reduced by no more than 1.2 percent, representing a total fiscal year budget reduction of 0.2 percent.
Q: Will all agencies be cut equally?
Yes and no. The Constitution specifies that in the event of a revenue failure, each appropriated agency must be cut in equal proportion to their share of total appropriations from the GRF. In that sense, the cuts are across-the-board. However, while most appropriated agencies – including the Departments of Corrections, Public Safety and Health - receive 100 percent of their state funding from the GRF, some are fully or partly funded from various other funds. Among the appropriated agencies that receive no GRF money in FY 2014 are the Commissioners of Land Office, House of Representatives, Senate, Legislative Services Bureau, Department of Transportation, and Council on Law Enforcement, Education and Training. Agencies that receive less than 75 percent of their funding from the GRF are the Water Resources Board (70 percent), Department of Education (63 percent), Office of Management and Enterprise Services (58 percent), Civil Emergency Management (35 percent), and District Courts (28 percent). Overall, 78 percent of FY 2014 appropriations were from the GRF.
Non-appropriated agencies will not be affected by a revenue failure.
Q: How often do revenue failures occur?
This would be the fifth revenue failure since 2000. Previous mid-year budget cuts occurred in FY 2002, FY 2003, FY 2009 (although those cuts were later restored) and FY 2010.
Q: If a revenue failure is declared, is there any way to assist agencies facing cuts?
The Constitution provides that up to 3/8ths of the Rainy Day Fund is available for appropriation upon declaration of a revenue failure. While the Rainy Day Fund was tapped to address mid-year shortfalls in FY 2003 and 2010, that is unlikely to happen this year. The Legislature could also approve a supplemental appropriation using available cash to assist particular agencies.