Budget road certain to be rocky

As we look ahead to next year’s state budget, one thing is for certain: it’s going to be a very rocky ride.

Last month, the Board of Equalization certified $298 million less revenue for next year’s budget than was appropriated this year. As we discussed in this blog post, the initial certification assumes that tax collections will grow next year, despite low energy prices; the shortfall is due to the use of over $400 million in one-time funds from cash reserves and agency revolving funds to balance this year’s budget, as well as a quarter-point cut in the income tax that last year’s Legislature scheduled to take effect at the start of 2016.

When the Board of Equalization meets again in February to certify a final revenue estimate, the shortfall may, in fact, be even larger. The preliminary estimate was based on projected average oil prices of $59.97 next year, which is more than $10 per barrel higher than the current price. But even if the shortfall doesn’t grow,  state leaders are warning that budget cuts are imminent. House Speaker Jeff Hickman, for example, stated that “state agencies should be making preparations now, in their current budgets, for fewer dollars in next year’s budget.”

The prospect of another round of budget cuts is deeply troubling. Oklahoma’s budget has never fully recovered from the economic downturn of 2009-10. In nominal terms, this year’s total state appropriations is just 1 percent larger than six years ago; adjusted for inflation, the budget is $680 million, or 8.6 percent, below FY 2009. Agencies continue to struggle to handle rising caseloads and higher costs with less dollars and fewer employees. To cite just a few examples: State per pupil funding for public schools has been cut by over 20 percent since 2008 when adjusted for inflation, leading to larger class sizes, fewer course offerings, and growing teacher shortages. There are 1,000 more prisoners in our public penitentiaries than seven years ago but 400 fewer corrections officers to maintain order, creating a dangerous situation for guards, inmates, and the public. Last year the Medicaid program implemented $75 million in cuts in the form of lower provider rates, reduced health benefits, and increased co-payments.

As a result of chronic underfunding, unavoidable cost increases, and changing circumstances, many critical agencies need additional funding next year just to maintain existing programs at current levels. For example:

• The Oklahoma Health Care Authority needs some $100 million more to replace one-time carryover funding and a lower federal match rate, plus additional funds to cover enrollment growth and medical inflation;
• The Department of Mental Health and Substance Abuse Services needs an additional $10.2 million to replace declining federal Medicaid match, maintain drug court slots, and reimburse local law enforcement for transportation, among other things; 
• The Department of Corrections has requested $26.2 million for the growing inmate population in contracted facilities and $14.6 million for salary increases to address critical retention and recruitment issues;
• The Department of Human Services needs $15.9 million to continue implementation of the court-monitored Pinnacle Plan for child welfare reform.

Other areas of government also face urgent needs. With teachers having gone seven years without a statutory pay raise and the state facing increasingly severe recruitment and retention challenges, the Department of Education has requested $213 million to cover a $2,500 teacher pay raise, along with an additional $84 million to cover increased flexible benefit costs and to boost state aid funding and reading remediation.  While some state employees received raises last year, most did not, and additional dollars will be needed to stay on track with the state’s multi-year compensation plan. The state must also appropriate funds to begin making bond payments for Capitol repairs.

What, then, are the options to make up for the shortfall and address some of this year’s increased spending needs? There are three major possibilities:

• The Legislature could transfer money from agency revolving funds. Speaker Hickman has stated that “balances in the state’s revolving funds total $1 billion, some of which should be available in the budget-making process.” The problem with this approach is that most revolving funds are made up of fees intended for specific purposes.  Last year, the Legislature pulled almost $200 million from revolving funds, in most cases without consulting with the concerned agencies. Two of those transfers – from the Trauma Care Revolving Fund and the Oklahoma Higher Learning Trust Fund – were struck down as improper by Attorney General Scott Pruitt. We can expect much closer scrutiny this year of attempts to use fund revolving funds to balance the budget.
• The Rainy Day Fund has a current balance of $535 million, up to one-quarter of which ($133.8 million) could be appropriated upon declaration of an emergency by the Governor and a 2/3rds vote of the Legislature (or a 3/4th legislative vote in the absence of an emergency declaration by the Governor).
• The Legislature could eliminate or narrow any number of tax breaks or improve the collection of taxes. The cost of business tax breaks has more than doubled to over $750 million just between 2012-14, according to a recent Oklahoma Watch report, and there is widespread agreement on the need to curb inefficient tax incentives. As we discussed last session, sensible tax reform options include eliminating the double deduction of state income tax, adopting combined corporate reporting, and enhancing collection of taxes from online sales. However, gaining legislative approval for any tax change that will raise revenues will be politically challenging.

Although the recent drop in energy prices are playing a role, “the budget challenges awaiting lawmakers this year are of their own making,” as a recent Oklahoman editorial noted. Lawmakers will need open-mindedness and resolve to devise solutions of their own making to address these challenges.