Budget outlook offers opportunities, but challenges remain

After a decade of ongoing shortfalls and repeated cuts to core services, Oklahoma’s finances are finally in recovery. Revenues are growing and lawmakers are expected to have substantially more money for next year’s budget, according to initial projections that were presented last month to the State Board of Equalization.

At the same time, the state budget remains a long way from full recovery, and clouds on the economic horizon throw the optimistic projections about next year’s budget into doubt. These concerns, as well as past experiences of reacting to moments of prosperity with short-sighted policies, should lead lawmakers to take a cautious approach to next year’s budget while building on last year’s progress in increasing investments in the cornerstones of a prosperous and healthy state.

Here are OK Policy’s five major takeaways from the revenue numbers presented to the Equalization Board on December 19th:

1. There could be a record Rainy Day Fund deposit at the end of the year

Through the first five months of the current budget year, FY 2019, collections to the General Revenue (GR) Fund are running $95 million, or 4.0 percent, above the estimate. This surplus is expected to grow to $421 million, or 6.4 percent, by the end of the fiscal year, according to the initial FY 2020 certification presented to the Equalization Board in December. The entire $421 million GR surplus would be deposited to the state’s Rainy Day Fund at the end of the current fiscal year.

If these projections are met, this would be the second straight year that the RDF deposit would be the largest since the fund was established in the late-1980s; this year’s deposit was $381.6 million and brought the current balance to $454 million. Oklahoma’s Constitution caps the RDF at 15 percent of the General Revenue Fund certification for the preceding fiscal year, which would be about $925 million. It is therefore unlikely that the cap will be hit this year.

2. The Legislature could have over $700 million more to spend next year

Lawmakers will have $8.287 billion available to appropriate for FY 2020, according to the initial estimates certified by the Equalization Board in December. This is $612 million, or 8.0 percent, above the amount lawmakers had available to appropriate last year, and $720 million, or 9.5 percent, more than the Legislature actually appropriated for FY 2019 (The $108 million difference involved prior year supplemental appropriations). The initial certification will be used by Gov. Stitt to develop the FY 2020 Executive budget that he will submit at the start of the legislative session in February. A revised estimate that will be binding on the Legislature will be certified in February.

3. The budget is still a long way from full recovery

There was real progress made in 2018 in putting the state’s finances on more solid footing and funding desperately-needed increases for teachers, state employees, and health care providers. But the state’s funding challenges unfolded over at least a decade and can only be addressed by several more years of continued progress.

• This year’s appropriated budget of $7.567 billion is $788 million, or 9.4 percent, below the FY 2009 budget of a decade ago, adjusted for inflation (see chart). The gap is even greater if one compares this year’s budget to the early 2000s. In inflation-adjusted terms, the budget in FY 2001 was $1.016 billion, or 11.8 percent, larger than today’s.
• Most state agencies are receiving far less state funding now than they were ten years ago, without even accounting for inflation. Of 65 state agencies that receive state appropriations, 39 have been cut by 20 percent or more compared to FY 2009.

After many years where budgets have been cuts and critical investments have been deferred, it is clear that there are many compelling funding priorities that lawmakers must consider to achieve a budget that meets the needs of Oklahomans. To cite just a few examples:

• Oklahoma public schools employed some 1,500 fewer teachers in 2018 than in 2010 while serving 40,000 more students. Other than money dedicated to this year’s teacher raises, total state aid funding this year remains $170 million less than in FY 2019. In order to hire enough additional teachers to meet the class size limits adopted in the early 1990s, the state Department of Education is requesting an additional $273 million for FY 2020. In total, the Department has identified $440 million in additional state funding needs to support public school students and teachers;
• Oklahoma’s college and universities have been cut by $263 million, which is one-fourth (25.3 percent) of their state funding, since FY 2009. The Regents for Higher Education have requested a $101.5 million, or 13 percent, funding increase for FY 2020, with funds targeted to increase faculty salaries ($38.7M), restore base operational funding ($50.5M), and support financial aid and scholarship programs ($12.3M);
• The Department of Corrections has requested $1.57 billion in additional funds to address critical space and staffing shortages and crumbling infrastructure;
• Oklahoma state employees received pay raises of $500 to $2,000 this year, but that leaves a substantial gap between their compensation and market rates. To close the gap and address high turnover rates, the Oklahoma Public Employees Association is advocating for a $5,000 across-the-board pay raise for state employees, which they say would cost an estimated $185 million.

All told, state agencies have requested more than $2 billion in additional expenditures, according to House Appropriations Chair Kevin Wallace.

4. The economy provides reason for concern

The budget projections presented to the Board of Equalization last month were based on the best economic projections at the time. In general, economists are forecasting that Oklahoma’s economic momentum will continue into 2019 and that “the state’s economy is on good footing heading into 2019.”

There are, however, reasons to believe that the projections may be unduly optimistic. The initial FY 2020 certification includes $833 million to the General Revenue Fund from oil and gas taxes, an increase of $278 million, or 50 percent, from the amount appropriated for FY 2019. The certification is based on an average oil price next year of $54.89 and an average natural gas price of $3.03. But energy prices are falling, with oil tumbling from $75 a barrel in October to under $50 since late December, while natural gas has fallen from over $4 in November to slightly under $3 currently (prices as of January 8th). As Speaker Charles McCall cautioned, if energy prices remain at these levels, it’s quite possible the Board of Equalization will revise its estimate downward in February.

More generally,  U.S. economic growth is expected to slow in 2019, and while few are now predicting a recession, recent stock market losses, the threat of escalating trade wars, and political instability, here and abroad, could trigger a significant economic slowdown. These developments could affect the February re-certification, as well as create a risk of revenue failures in FY 2020.

5. Now is the time to invest in Oklahomans

Too often in the past, Oklahoma’s elected officials have squandered periods of prosperity by making decisions that offered short-term gain but left the state ill-prepared for the next economic downturn and longer-term challenges. In particular, Republicans and Democrats alike responded to the last economic boom of the mid-2000s by slashing the state’s income tax by more than one-fifth and handing out an array of lavish tax breaks, especially to energy producers. Once the Great Recession hit in 2009-10, these policy decisions made the economic downturn far deeper and longer than it would otherwise have been. It took years to reverse course, especially in the face of the three-quarter legislative supermajority needed to raise taxes.

If our new generation of elected officials learns from the past, they will start by protecting the revenue base and rejecting the lure of tax cuts. They then have the opportunity to reverse a decade of budget cuts and build on the progress made with last year’s teacher pay raises by reinvesting in core areas of government that are the bedrocks of healthy communities, thriving families, and a strong economy. They should also correct one of the most unfortunate policy decisions of recent years and give a boost to low-wage working families by restoring the refundable state Earned Income Tax Credit.

With our  finances finally in better shape, elected officials must seize the opportunity to make wise decisions that will promote broad-based prosperity for Oklahomans.