OKPOLICY.ORG
As Oklahoma grapples with a deepening budget crisis, one of the greatest challenges our policymakers face is the absence of a full and forward-looking picture of the state’s financial situation to help guide tax and spending decisions.
Year after year, policymakers make short-term decisions, like approving tax cuts that take years to go into full effect and using cash reserves to balance the budget, without a clear sense of what they will mean for our longer-term outlook. The dearth of long-term thinking contributes to our large and growing structural budget deficit, where the our tax system is incapable of generating the revenues needed to pay for the ongoing cost of providing core services like education, roads and bridges, and public safety.
A new report from the Center on Budget and Policy Priorities makes a strong case that states, including Oklahoma, can do a much better job of budget planning by adopting some well-established best practices. Unfortunately, Oklahoma ranks among the worst states in the nation for adopting these best practices.
The report states:
A few improvements to state budget processes would make considerably more information available to policymakers and the public for budget debates. This would increase states’ ability to plan for the future, boosting the chances they will have the resources to invest in schools and other building blocks of strong economic growth and widespread prosperity. Better planning also can reduce uncertainty about future funding levels and tax rates, improving a state’s business climate.
The report recommends two key budgeting practices, currently used in many states but not in Oklahoma:
- Improving revenue forecasts by using a longer horizon and reaching consensus: Revenue forecasts should not just be for the current and upcoming fiscal year but at least five years, so that policymakers and the public can see how tax and spending proposals will affect future revenues. The report also recommends using a consensus forecasting process which means that the executive and legislative branches jointly produce a single revenue estimate.
Last year, the Oklahoma Tax Commission prepared a report that analyzed Oklahoma’s revenue forecasting failures and made recommendations for what the state might do to avoid similar problems in the future. The state has since enacted several reforms, including collecting additional data and bringing in more economists and industry experts to evaluate its revenue forecasting assumptions. But the state still fails to conduct any serious revenue forecasting beyond the next fiscal year.
- Preparing multi-year forecasts of the cost of existing programs and services: A current services budget “measures how much it will cost a state in an upcoming budget period to deliver the same quantity and quality of services it is delivering to residents in the current period budget.” Knowing the cost of maintaining the current level of services for a given program or agency in the years ahead by adjusting for inflation and population changes can help policymakers make informed choices about taxes and the budget.
The absence of a current services budget in Oklahoma was seen last year whenever policymakers and observers spoke of a $611 million budget shortfall. This often-cited measured the gap between certified revenues for the upcoming budget year (FY 2016) compared to current year appropriations (FY 2015). But in reality the gap was bigger because policymakers were wrongly assuming that agencies simply needed the same amount of money next year as this year to avoid cuts to services. Over time, as agencies face rising operating costs, growing caseloads and enrollment, and reduced funding from other sources, they often need additional funding just to maintain services at existing levels. A current services budget can provide a fairer and more realistic assessment of budget needs to guide policy choices.
[pullquote] “By preparing high-quality, multi-year revenue forecasts and multi-year expenditure forecasts on a current services basis, a state can give policymakers and residents the best possible information to debate potential policies.”[/pullquote]Putting it all together, the report notes that “(b)y preparing high-quality, multi-year revenue forecasts and multi-year expenditure forecasts on a current services basis, a state can give policymakers and residents the best possible information to debate potential policies.”
Oklahoma is among 26 states that currently lacks both multi-year revenue forecasts and current-services budgets. Twenty-two states currently employ one or the other of these budgeting tools, while three states – New York, Washington, and Alaska – use both.
A third promising budgeting tool, which builds on the first two but is more far-reaching, would be to adopt a “pay-as-you-go” (PAYGO) policy requiring any program increase or tax cuts be fully paid for to achieve budget neutrality. PAYGO holds policymakers accountable for the long-term impacts of revenue and spending decisions. When effectively implemented, it prevents decisions that harm the state’s long-term fiscal position. Treasurer Ken Miller endorsed a pay-as-we-go approach to reducing taxes several years ago, arguing that it could “be accomplished with fiscal discipline, better spending prioritization and a refined approach to budgeting.” No state has officially implemented PAYGO, but it is not technically difficult or expensive to implement.
The common thread to all these proposals is that they would provide policymakers with more and better long-term information about the state’s finances, encouraging them to make wiser decisions for the state. Now that we’ve seen a state budget crisis that has lasted through a full economic cycle of recession and recovery, with no real hope of subsiding in the future, it is urgent that policymakers adopt better budgeting tools to navigate the difficult route ahead.
