A balanced approach to the state budget: How are we doing?

Our friends at the Center on Budget and Policy Priorities (CBPP) have put out a new paper addressing the acute fiscal crisis facing states across the nation. As shortfalls reach a level where they are seriously compromising the ability of state government to provide core public services, the Center calls for a balanced approach that “ensures that no one segment of residents and businesses bears the brunt of recession-induced deficits.” Their seven components of a balanced approach are:

• Efficiency – focusing on the goals of expenditures and whether there are better ways to reach those goals;
• Using all available resources – employing reserves, rainy day funds, and federal fiscal relief funds responsibly and wisely;
• Scrutinizing all spending, not just what is appropriated through the budget – including programmatic expenditures made in the form of tax breaks;
• Improved collections – aggressively seeking taxes due that are not being paid;
• Tax increases – particularly those that have a more positive impact on the economy than spending cuts;
• Prioritization – making careful decisions based on goals and effectiveness when budgets must be cut; and
• Paying close attention to future impact while fixing today’s problems.

While the Center’s paper provides some examples of states pursuing each of these approaches, it doesn’t attempt to evaluate each state.  Here is my assessment of Oklahoma’s efforts in each of these domains:

1. Efficiency – The Legislature has devoted considerable attention in recent years to operating government more efficiently, especially in such areas as purchasing and information technology. The Governor’s budget proposes consolidating some 16 agencies as a way to achieve modest cost savings.  However, one area of potential savings discussed by the Center, that of criminal justice reform to reduce the number of non-violent offenders in prison, has been largely neglected in Oklahoma.
2. Using all available resources –  Oklahoma has been willing to allocate stimulus funds and, now, the Rainy Day Fund to mitigate the severity of budget cuts.   However, it needs to be acknowledged that the use of some $1 billion per year of stimulus and Rainy Day Fund money to stay afloat in FY ’10 and FY ’11 means that the state may actually face its most severe budget problems in FY ’12 and FY ’13.
3. Scrutinizing all spending –  The Center calls for careful scrutiny of tax breaks, which was one of the “Lessons from the Crisis” that OK Policy began to emphasize several months back. Now, elected leaders from both parties have joined the chorus insisting that the budget crisis provides a need and an opportunity to put the brakes on tax breaks.
4. Improved collections –  Governor Henry’s FY ’11 budget proposed a series of enhanced collection measures as a means of bringing the budget into balance. Some of the Governor’s proposals, including collecting sales tax from Internet and other remote sellers and revising vendor discounts, are specifically endorsed by the Center.
5. Tax increases –  So far, outright tax increases are “the elephant not being let in the room” in Oklahoma as a strategy for balancing the budget. The Center’s brief emphasizes that from an economic standpoint, raising taxes is substantially less harmful than cutting spending. According to the brief, ten states have raised overall revenues by more than 5 percent in 2008 or 2009.
6. Prioritization – The Center notes that some states have formal procedures to determine which programs are most effective that can be used to guide decisions about budget cuts. With a few exceptions, there has not been a formal process for setting priorities in Oklahoma during the downturn. The Legislature and Governor have largely avoided any direct role in deciding what to cut and what to protect, allowing monthly across-the-board budget reductions to take effect automatically and leaving the main responsibility for budgetary decisions to state agencies.
7. Considering the Future – The Center urges states to consider long-term fiscal sustainability by ensuring they can replenish their rainy day funds and by modernizing their tax systems. In Oklahoma, the budget crisis has generated bipartisan support not only for an increase in the cap on the Rainy Day Fund, but also creation of an energy stabilization fund to minimize the volatility of gross production taxes. However, the longer-term challenges of modernizing the tax system to help address the long-term fiscal gap, which can include broadening the sales tax base to include services and adopting combined reporting for multi-state corporations, have remained largely unaddressed.

Unquestionably, the budget crisis has helped put new ideas on the table both in terms of delivering services and generating revenues. Facing revenue shortfalls exceeding $1 billion in FY ’11 and the foreseeable loss of one-time revenues in the years following, Oklahoma’s ability to steer a balanced course will determine whether we can navigate this crisis without a major shipwreck.