An Incomplete Recovery–and a chance to do better

Today we published “An Incomplete Recovery: The State Budget Outlook 2012-2015.” This is the third of our annual series of forecasts for the state budget. Our goals for this project are both to inform leaders and citizens about the state’s likely fiscal path and to advocate for better fiscal policies and decisions.

“An Incomplete Recovery” sums up the forecast part of the story. These are the key findings:

• The General Revenue Fund (GRF), which makes up 76 percent of the state’s budget in FY ’12, will continue its slow recovery. As we discussed here, GRF revenue has now grown over the prior year for 18 straight months. Unfortunately, revenue still remains 15.9 percent below the peak levels of FY ’09. Our forecasts indicate it will be two more years, FY ’14, before GRF revenues reach pre-recession levels.
• Much of the revenue decline and subsequent slow recovery can be attributed to the severe economic downturn, but not all. Our forecasts show that decisions already made by prior legislatures, including income tax cuts, diverting revenues for road construction, and reinstating tax credits that were suspended during the worst of the downturn, will reduce revenues substantially between now and FY ’15.
• It will take some time for growth in the GRF to make up for loss of federal assistance, Rainy Day Fund monies and other non-recurring revenues that partially sustained the budget in FY ’10-’12. As shown in the graph below, we expect the FY ’13 budget to be just $160 million, or 2.5 percent, above the FY ’12 budget. Even by FY ’15, our most likely projection for the total budget is $7.52 billion. That’s only 5.5 percent over the budget six years earlier in FY ’09.

Thus, Oklahoma’s state government is poised not for real recovery, but for continued stagnation. When the budget finally exceeds the pre-downturn level, it will not even begin to support the services we offered before the recession. Inflation has increased the cost of services, population growth has increased the demand, and changing demographics (mainly an aging population) will create significant burdens on many services. At the same time, deficit reduction efforts  in Washington will is likely to increase fiscal stress on the states.

The rest of the story is our recommendations for dealing with the incomplete recovery. We advocate for a package of reforms that will allow state government to restore our economic and social well-being. These include:

• Creating a revenue structure that supports adequate, effective, and essential public services. We can do this by protecting the income tax against further deterioration, reducing wasteful and inefficient tax credits and exemptions, revitalizing the sales tax for the 21st century economy, and adopting combined reporting to equalize the tax burden between local businesses and large corporations.
• Implementing current services budgeting to help legislators and the public understand whether a proposed funding level for a particular service would expand it, shrink it, or keep it at its current level.  This can improve government efficiency by providing a regular, thorough examination of each program’s costs.
• Adopting PAYGO (pay-as-you-go) limitations that require policymakers to pay for the cost of any reduction in revenues or expansion of services.  Paying for these policy changes could take the form either of a revenue increase or cuts to other services. The undesirable alternative is to promise tax cuts or increased services and then not be able to deliver because the money isn’t there. See this post for more on current services budgeting and PAYGO.
• Instituting a formal long-range forecasting process so that we aren’t continually surprised by revenue fluctuations and so we can better understand whether current revenues are sufficient to support services.

Next month the state will release its first official revenue estimate for FY ’13. We should respond to that estimate with resolve to create and use new tools to keep our services viable and our economy competitive. The alternative – annual budget decisions that ignore the real costs of state services, hide fiscal impacts in future years, and define budgets by what we have instead of what we need –  has not served the state well through the downturn. It will work even worse in the incomplete recovery.