FY '12 revenue certification: It still adds up to more hard times

The State Board of Equalization met yesterday to certify preliminary revenue estimates for the upcoming budget year, FY ’12. These estimates will form the basis for the Governor’s Executive Budget that will be delivered in early February; the Board will meet again in mid-February to provide revised estimates that will be binding on the 2010 Legislature.

The preliminary FY ’12 estimates, developed by the Oklahoma Tax Commission and Office of State Finance, suggest that state revenue collections will continue to recover from their precipitous drop during the economic downturn, but that the recovery will remain slow and incomplete. As we see in the chart below, FY ’12 collections to the General Revenue (GR) Fund are expected to be $5.103 billion. That is an increase of  $500 million, or 10.9 percent, from FY ’10 but some $850 million, or 14 percent, below the pre-downturn peak of FY ’08. Next year’s collections will remain considerably below levels of six years ago, even as the cost of providing services rises due to inflation, population growth, and increased caseloads.

Next year’s estimated GR is a mere $53 million, or 1.1 percent, above projected collections for the current fiscal year. The slow growth rate reflects, in part, conservative assumptions about the strength of the economic recovery over the coming months, but also the impact of policy decisions made by previous Legislatures. In particular, FY ’12 revenue growth is expected to be sufficient to trigger a cut in the top income tax rate from 5.5 percent to 5.25 percent effective January 1, 2012. This tax cut is expected to have a revenue impact of $61.5 million in FY ’12 and a total impact of $120 – $150 million when fully phased in by FY ’13.  Also, the statutory allocation to the ROADS Fund for transportation projects will increase by $37.5 million in FY ’12, while the allocation for OHLAP college scholarships will increase by $6.5 million. The FY ’12 projections also reflect a loss of $67.5 million in GR as a result of federal tax changes recently adopted by Congress – a subject we will explore further in a subsequent blog post.

What do these revenue projections mean for the FY ’12 budget? In addition to certifying next year’s estimated collections for the GR Fund and other state funds, the Board of Equalization was also presented initial estimates of the FY ’12 Expenditure Authority, which represents the total amount that is available for the Legislature to spend in the upcoming year. This amount includes available cash balances and projected collections from non-certified funds, such as the 1017 Education Reform Fund. The initial Expenditure Authority of $6.104 billion for FY ’12 is some $600 million less than the actual FY ’11 budget of $6.7 billion, which included substantial amounts of revenue from the Rainy Day Fund and federal stimulus dollars.

The real size of the looming budget shortfall is already a matter of some dispute. Treasurer Meacham issued a press release Monday stating that the FY ’12 shortfall – or the difference between this year’s budget and next year’s assuming the use of all available revenues –  will be $226 million. In addition to the $6.104 billion represented in the FY ’12 Expenditure Authority, the Treasurer’s number includes some $105 in leftover federal stimulus funding in the form of an enhanced Medicaid matching rate and some $250 million in “5 percent money” – the money that is expected to accumulate at the end of  this year if, as expected, GR collections hit 100 percent of the certified estimate. (The Legislature can only appropriate 95 percent of the certified GR estimate; FY ’11 revenues are currently running at 102.7 percent of the estimate through November and the official projections are for GR to come in at 101.2 percent for the full year).  Deciding whether the “5 percent money” is available for appropriation will be  one of the big choices facing the Legislature and Governor in crafting next year’s budget.

Even if there is agreement to spend the “5 percent money”, and even if, as Treasurer Meacham expects, February’s revised revenue estimate looks slightly better than December’s, the challenges ahead remain enormous.  Any additional cuts will be hard to absorb when agencies have already undergone two years of reducing or eliminating programs, services and staffing. We know that several state agencies, most notably the Department of Corrections and the Oklahoma Health Care Authority, will require significant funding increases just to maintain basic operations. Many agencies need additional funding to restore cuts to core services and to address the cumulative impact of several years of rising costs.

As we wrote in our recent brief on the state budget outlook (which, incidentally, forecast FY ’12 GR collections within $20 million of the December certification), we are in the midst of an extended situation where state revenue collections, under current policies, are inadequate to meet the cost of adequately funding state services. We must continue to give serious consideration to a full range of options to bring the budget into alignment, including making smarter expenditure decisions and accepting such sensible revenue options as suspending tax cuts at least until the tax collections have recovered to pre-downturn levels, doing away with unnecessary and inefficient tax breaks, implementing a hospital provider assessment, and broadening the sales tax base. Otherwise, the extreme underfunding of state services, which threatens to leave us even further from our goals of a prosperous, healthy and secure state, will only get worse.