Dealing with revenue shortfalls–this year and beyond

Last week, State Treasurer Scott Meacham unveiled the the state revenue report for June, 2009. Revenue was below the previous year, for both  the last  month and the fiscal year as a whole, as we reported earlier.

It’s natural to wonder what could happen in the just-started budget year, FY ’10. Even though it will be a month until the first months’ revenue are known, Meacham was willing to speculate:

It appears very likely at this point that Fiscal Year 2010 revenues will be less than
originally estimated by the tax commission. That means a revenue shortfall is probable.

This week, Meacham and others are talking about what to do about it. According to the Tulsa World,

Cutting appropriations to agencies would be the first action. Meacham is asking state agency directors, many of whom are dealing with 7 percent cuts this fiscal year, to look for further reductions because of the likelihood of a revenue shortfall. … If the revenue shortfall is prolonged or steep, budget cuts likely won’t be enough, Meacham said. When cuts start affecting employees and vital services, the rainy day fund has to be considered.

It may be premature to declare a revenue shortfall when we haven’t seen any revenues for FY ’10. While recent trends have been quite discouraging, most economists expect a rebound to take hold soon.A growing economy in the spring of 2010 can make up for some bad months this summer and fall. Further, our Constitution only allows the Legislature to appropriate 95 percent of certified revenues; we can absorb a 5 percent shortfall for the year.

Whether or not there’s a shortfall, though, we can assess the tools we have available and see if we can improve them in a way that helps this year and beyond. We should use these tools–now and in the future–to be sure we maintain adequate and consistent public services for Oklahomans. Here are some suggestions:

1. Be ready to call a special session of the Legislature later in the fall. Treasurer Meacham and Governor Brad Henry can only make across-the-board cuts. We elect the Legislature to determine if cuts affect employees and vital services and select the best course. Let’s demand that they make strategic, rational cuts–if any cuts are needed–that maintain the programs we need to weather the recession and invest in the coming recovery.
2. Be ready to use the Rainy Day Fund to help fill a shortfall if it does materialize. The Fund was created for this purpose and three-eighths of it may be used ONLY for this purpose. The graph below shows that $224 of the $597 million in the fund could be used to shore up agency budgets and maintain services.
3. Improve the Rainy Day Fund rules. First, we should be able to use the Fund when we need it most. Our earlier FY ’10 budget brief suggests that revenues are likely to start climbing next year, FY ’11. Under the current rules, most of the Rainy Day Fund is off limits when state revenues are climbing. Regardless of the FY ’11 revenue, we still will be in a recession. Our earlier brief shows how we could use the Fund effectively and responsibly when revenue is climbing slowly but is still below earlier levels. Second, we should consider a higher cap on the Fund, so it can help us through prolonged downturns in the future.
4. Get serious about revenue and expenditure forecasting. We should demand the state create and update professional five-year forecasts of revenues, expenditures, and service levels so we can see where we’re headed in the long run and make the best decisions for the next few years, not for the next few months.

Oklahoma has tools to deal with this recession without panicking. Our conservative revenue forecasting process gives us a cushion to withstand modest shortfalls. Our Rainy Day Fund was designed to deal with larger budget gaps and we are fortunate to have sufficient resources to do so. And our Legislature can craft a revised budget that best gets Oklahoma through another round of trying budget times.

We could do better, though. Using the Rainy Day Fund during the recovery would maintain services when they are needed and prepare state agencies and programs to make investments in and during the economic recovery. Long-term forecasting would help us identify shortfalls sooner, understand their real impacts, and address them strategically rather than haphazardly. Using–and improving–our tools can help us be sure that Oklahoma adequately invests in services.