Life after Step Up?

Earlier this month, HB 1033xx, the main revenue measure based on proposals from the Step Up Oklahoma coalition, failed to gain the three-quarters support in the House needed to pass a revenue bill. Unlike a similar measure that failed in November’s special session with not enough Republican support, this time the bill’s fate was sealed by opposition from Democrats objecting to the mix of tax increases in the Step Up package.

HB 1033xx and its companion measures were projected to generate over $700 million in recurring revenue from a mix of new and increased taxes. This amount was expected to be enough to provide a substantial pay raise for teachers and, perhaps, state employees, and avert additional budget cuts for the upcoming budget year. 

The failure of the Step Up proposal has consequences for both the current FY 2018 budget and next year’s budget. But the prospects for another comprehensive revenue package in the aftermath of its defeat may not be as dire as many think.

This year’s budget is finally complete

Last year’s budget was thrown into a tailspin in August when the Oklahoma Supreme Court struck down the $1.50-per-package cigarette fee (for a full discussion, see our Frequently asked questions about Oklahoma’s special session). The ruling left a $214 million hole in the budget of three health care agencies that had been set to receive the new cigarette fee revenue – the Department of Mental Health and Substance Abuse Services ($75 million), Oklahoma Health Care Authority ($70 million), and Department of Human Services ($69 million) – and created the risk of massive cuts to these agencies’ services without additional funding.

Over the course of two special sessions, the Legislature has scrounged together enough funds to fill more than three-quarters of the $214 budget hole. Additional revenues came from a variety of sources, including the Rainy Day Fund, surplus cash from FY 2017, the County Improvement for Roads and Bridges fund, and increased gross production tax revenues from a higher rate on “legacy wells.” In the end, all but $46 million of the $214 million was replaced. The additional funding has been enough to allow the three health agencies to avert cuts to their providers and clients.

Last week lawmakers passed a new General Appropriations bill, HB 1020xx, that spread out the remaining shortfall by cutting almost all agencies by 0.66 percent from their initial FY 2018 appropriation. Since these cuts takes effect two-thirds of the way through the year, most agency’s monthly allocations will be 2 percent lower from March through June than in prior months (this spreadsheet compares FY 2018 initial and revised agency funding).

Lawmakers also provided additional funding for FY 2018:

  • $30 million to the Oklahoma State Department of Health in November to address that agency’s budget problems;
  • $31.8 million to the Oklahoma Health Care Authority in February (HB 1022xx) to support graduate medical education at the OU and OSU medical schools after the federal government withdrew Medicaid funds for these programs.

With these supplementals, total FY 2018 appropriations now stand at $6.864 billion, which is $16 million more than the initial budget passed last May (see chart below).

Next year’s budget shows modest growth

Last week the State Equalization Board certified a new and final set of budget projections upon which the FY 2019 budget will be built. Lawmakers will have $7.118 billion available to appropriate. This is $252 million, or 3.7 percent, more than current FY 2018 appropriations after cuts and supplementals.

Next year’s budget outlook is a major improvement compared to the large shortfalls that lawmakers have faced in recent years. However, it’s not the time to pop champagne to celebrate the return to good times. The $7.118 billion in certified FY 2019 funds includes $53 million that has already been appropriated for FY 2018 (HB 1020xx) and $110 million that has been appropriated to the Oklahoma Health Care Authority (HB 1022xx) for graduate medical education. In addition, the Legislature must fund several other obligations before any new funds can go to state agencies; these include replacing lottery funds for education that were supplanted last year ($19.9 million, SB 1582), shortfalls in the Ad Valorem Reimbursement Fund ($92 million), increased bond and lease costs ($25.5 million), and rising teacher benefit costs ($22 million). The combined cost of these expenditures is $325 million, which exceeds revenue growth by more than $70 million.

Beyond these binding obligations, lawmakers face a wide array of urgent funding priorities that have been neglected over many years of shortfalls and cuts. To cite just a few examples:

  • The State Department of Education has requested $288 million for a $5,000 teacher pay raise to address the immediate crisis in teacher recruitment and retention, as part of an overall requested increase of nearly $500 million that includes funding to help cover increased student enrollment, instructional materials, and other priorities.
  • Many state employee have gone almost a decade without a raise, and state employee compensation continues to fall further behind market rates, contributing to rising staff turnover and a rising number of vacant positions. A three-year plan to provide state employees a $2,500 raise would ultimately cost $246 million.
  • The Department of Corrections is seeking a more than $1 billion increase to build two new facilities to ease prison overcrowding, provide staff raises, and expand re-entry, mental health and substance abuse programs.
  • The Regents for Higher Education have requested an additional $18 million to restore scholarship programs and fully fund concurrent enrollment and over $100 million more for degree completion programs and initiatives.

Many other agencies will also need more funding in FY 2019 to absorb the loss of federal funds, reverse recent cuts to providers, fill critical staffing needs, and address rising operating costs.

Where to next?

After the failure of successive revenue proposals over the past year, is there still a chance that lawmakers will come together and agree to a comprehensive package with enough bipartisan support to clear the supermajority hurdle for new taxes?

The obstacles to a deal are certainly high. Previous failures to reach an agreement have raised the level of fatigue, frustration, and distrust among lawmakers in both parties. With elections and leadership races fast approaching, it may be harder to get lawmakers to cast more tough votes on taxes. And the improved budget outlook reduces the urgency of raising revenue to avert a full-fledged crisis.

Yet the cost of failure may be even greater for both parties and all Oklahomans.  Failing to reach a bipartisan revenue agreement will likely mean no raises for teachers and state employees and more budget cuts that will further damage our schools, health care, and public safety. An angry electorate could blame incumbents from both parties in upcoming elections for failing to fix the budget mess.

Fortunately, a deal is still possible.  For all the political drama of recent months, there is now a strong, bipartisan consensus that the state has a structural budget deficit that must be addressed with new recurring revenues. More than three-quarters of lawmakers have already crossed the political Rubicon by voting for bills to raise taxes over the past year.  Although there is disagreement on the details, the outlines of a bipartisan deal are in place: a higher gross production tax, cigarette tax, and fuel tax, coupled with limits on tax breaks for high-income individuals and an increase in tax credits for low-income households. These components are part of the plan proposed by State Auditor Gary Jones, which is one of several proposals that can be a basis for further negotiations.

This is truly a critical moment for Oklahoma. Failing to reach a real solution for our budget problems would be a massive and unacceptable failure to responsibly govern our state. Our lawmakers, and the constituents they represent, cannot let that happen.

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Former Executive Director David Blatt joined OK Policy in 2008 and served as its Executive Director from 2010 to 2019. He previously served as Director of Public Policy for Community Action Project of Tulsa County and as a budget analyst for the Oklahoma State Senate. He has a Ph.D. in political science from Cornell University and a B.A. from the University of Alberta. David has been selected as Political Scientist of the Year by the Oklahoma Political Science Association, Local Social Justice Champion by the Dan Allen Center for Social Justice, and Public Citizen of the Year by the National Association of Social Workers.

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