…and two steps back. First look at the state’s FY 2021 budget and what must happen next

[Read Fiscal Year 2021 Budget Highlights Report]

In what was likely the most unusual — and contentious — budget process in state history, the Legislature passed the state budget for FY 2021, which starts on July 1. Most allocations to agencies are in the state’s General Appropriations bill (SB 1922), which the Legislature passed despite the Governor’s veto. This and several other bills laid out the state government’s $7.7 billion budget (click here for a detailed appropriations summary). The budget is $283 million (3.7 percent) below the original budget for FY 2020 and just $46 million (0.6 percent) over the final budget for FY 2019. 

Legislative leaders, particularly Sen. Roger Thompson and Rep. Kevin Wallace, chairs of their respective appropriation committees, should be commended for their efforts to explain the budget, which provided a level of communication that exceeded recent standards. They held a lengthy and detailed press briefing, patiently explained the budget and related bills in the Joint Committee on Appropriations and Budget, as well as on the floors of the House and Senate. Similarly, leaders in both chambers allowed more time for questions and debate than when considering prior budgets. This was new and needed relative transparency in the budget process. Hopefully, our Legislative leaders are lifting the veil on the state’s opaque budget process, and we encourage them to bring the process fully into the open next year. 

Savings and creative financing cushioned the pandemic-driven drop in tax revenue

While falling oil and gas prices were already a concern, the coronavirus turned a modest revenue decline into something much worse. In February, the Board of Equalization’s binding budget estimate called for a $95 million (1.1 percent) budget reduction. Shortly after that, oil prices collapsed and even went negative, while the economy closed down to reduce the spread of COVID-19. As a result, the world and U.S. economies began to shrink, unemployment soared, and tax revenue started to fail. The Board of Equalization declared a revenue failure for the current budget year (FY 2020) and took the unusual step of recommending a smaller budget for next year than it did in February. The $95 million shortfall was now expected to grow to $1.366 billion.

While the Legislature was dissatisfied with the lack of documentation for the Board of Equalization’s reduction, it accepted the Board’s estimate and then worked to identify other sources to minimize the reductions in state agency budgets, employment, and services. It held the total budget reduction to $283 million by:

  • dipping into savings that had grown over the last two years; The budget for FY 2021 uses $243.7 million from the Rainy Day Fund and $162.5 million from the Revenue Stabilization Fund. House Appropriations and Budget Chair Kevin Wallace estimated that about $240 remains in savings accounts.
  • temporarily reallocating funds that normally go to retirement funds for teachers, firefighters and law enforcement officers and to transportation. These bills have the effect of borrowing $292 million in FY 2021 and $112 million in FY 2022. The retirement funds would be repaid over the following five years and the transportation funding would be restored through a bond issue. As did the general appropriations bill, these measures become law over the Governor’s vetoes.
  • tapping new sources such as the Opioid Settlement Fund and revolving funds in the Medical Marijuana Authority, Department of Veterans Affairs, and the Department of Tourism. These revolving funds are made up of fees and other revenues collected by agencies and normally are spent by agencies outside the normal budget process.

Most agencies and services will receive cuts, but the budget supports a few increases and new initiatives

Most of the 64 state agencies that receive state funds through the budget will see 4 percent budget reductions in FY 2021. The State Department of Education, the largest single state agency, will be reduced by 2.5 percent. Other agencies have essentially flat budgets. 

Several agencies will see budgets reduced by 5 percent or more, including the departments of Corrections, Mental Health and Substance Abuse Services, Agriculture, Public Safety, Veterans Affairs, and Environmental Quality, along with the Office of Management and Enterprise Services, the State Bureau of Investigation, and Oklahoma Historical Society. In most cases, these reductions reflect removal of one-time projects from FY 2020 rather than reductions of ongoing services. 

Five agencies have increases of 5 percent or more, including the Military Department (for flood repairs and facility renovation), the Election Board (to match federal funding for protective equipment and for security), the Attorney General and District Courts (for opioid initiatives), the Oklahoma State University Hospital Authority (for facility improvements and physicians’ retirement), and Tourism and Recreation (to take over operation of the Quartz Mountain Arts and Conference Center).

The budget includes several new initiatives. Bonds were authorized to make new capital investments including renovation at Quartz Mountain and other state parks, replacement of the Oklahoma Department of Human Services’ Greer Center for adults diagnosed with both mental illness and intellectual disabilities, and for repairs to high-hazard dams. The Legislature appropriated $10.2 million of the Opioid Settlement Fund for grants to local governments for opioid use disorder  prevention, treatment, and support. The budget also provides a $2 hourly pay raise for Department of Corrections employees who did not receive last year’s increase.

The budget came close but in the end failed to fund Medicaid expansion. The Legislature increased the fee charged to hospitals that receive Medicaid and redirected cigarette tax revenue to fund Medicaid expansion, which was scheduled to start on July 1. However, the Governor’s veto of the hospital fee leaves the expansion plan in doubt until voters weigh in on State Question 802 on June 30.

The budget roller coaster never returns to its highest point

This budget reverses progress made the two previous years in restoring essential state services. Adjusted for inflation and for population growth, the FY 2021 budget is $3.5 billion, or 31 percent, below the FY 2000 budget and is the second lowest budget in the past 20 years. The chart below shows that each recession has cut into state funding and that each recovery has increased spending, but never to the level of the previous peak. While this year’s circumstances are different, the pattern is not. We are letting our state government and services be eaten away, in one giant bite every four or five years.

It doesn’t have to be this way

If we keep doing things the way we have, the downward trend will continue in the next budget (FY 2022) because there will be less savings and other one-time funding sources available. Revenue growth also is likely to be slow at best. 

It doesn’t have to be that way. The same leadership that rose to the occasion in difficult times can help prevent a repeat budget shortfall next year and build a stronger base for dependable growth. Starting right now, the Legislature and Governor should dedicate time into putting the budget on a more stable and sustainable path. They can open up the budget process so that budgets are written, debated, amended, and adopted in the open and on the same schedule as all other legislation. This would allow Oklahoma to operate its budget process in a manner similar to virtually every other state’s budget process. They can start the budget process by asking what our state’s needs and opportunities are, rather than simply how much money we have available. They can shift spending away from reaction and treatment and towards investment and prevention. They can reduce the dependence of our government and economy on volatile petroleum markets. They can provide our local communities with fair and stable revenue options. They can revise our tax system to increase stability, reliability, and fairness.. They can limit tax breaks to those that directly benefit the majority of businesses and people in our state, rather than those that favor a few well-connected special interests. These steps are necessary. They are achievable. And they can make a huge, positive contribution to our state’s short- and long-term growth.

ABOUT THE AUTHOR

Paul Shinn

Paul Shinn is a Budget and Tax Senior Policy Analyst with OK Policy. Shinn has held budget and finance positions for the Oklahoma House of Representatives, the Department of Human Services, the cities of Oklahoma City and Del City and several local governments in his native Oregon. He's also taught political science and public administration at the University of Oklahoma, University of Central Oklahoma, and California State University Stanislaus. While with the Government Finance Officers Association, Paul worked on consulting and research projects for the U.S. Environmental Protection Agency, the U.S. Department of Transportation, and several state agencies and local governments. He also served as policy analyst for CAP Tulsa. He holds a Ph.D. in Political Science from University of Oklahoma and degrees from the University of Oregon and the University of Maryland College Park. He lives in Oklahoma City with his wife Carmelita.

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