Energy Stabilization Fund proposal would help avoid wild budget swings

House Speaker Chris Benge this week was joined by Republican Senator Patrick Anderson and Democratic Senator John Sparks in unveiling a proposal to create a new budgetary reserve fund to help cushion the state from a repeat of the extreme revenue volatility seen in recent years. The proposal, introduced as a committee substitute for the Speaker’s bill HB 3032, is for gross production tax collections exceeding a 3-year moving average to be set aside into an Energy Stabilization Fund. When gross production taxes fall below their 3-year average, revenues would automatically flow back to the General Revenue Fund. In addition, interest from the Fund’s principal would be dedicated to enhanced energy recovery research.

According to a spreadsheet accompanying the Speaker’s press release, had the Energy Stabilization Fund been in effect over the past decade, its balance wold have grown to $909 million by FY ’09, of which $576 million would have flowed back to the GR Fund this year and next (FY ’10-11) as collections fell. What’s not clear from the House analysis is what impact an Energy Stabilization Fund would have had on deposits to the Rainy Day Fund over the past decade. This is worth exploring, especially in light of current efforts to increase the cap on the Rainy Day Fund. However, when we recently ran some numbers on a similar proposal, we found that mid-2000s revenue growth was vibrant enough to have allowed for the Rainy Day Fund to be filled up to its 10 percent cap and beyond even with surplus gross production revenues directed to a separate reserve.

The creation of a second reserve fund specifically based on gross production revenues echoes a proposal offered recently by OK Policy as one of our recommendations for reforming our budget and tax system based on lessons from the current downturn.  Our suggestion, which took shape in legislation introduced this session by Senator Kenneth Corn, would have directed gross production revenue growth above 12 percent to a reserve fund, while similarly providing for an automatic transfers from the energy reserve fund back to GR when collections fell below three-year averages.  At the time, we wrote:

Together, increasing the cap on the Rainy Day Fund and creating a specific Gross Production Tax Reserve would greatly increase available reserves heading into a downturn and cushion the magnitude of budget cuts once revenues fall. Increasing the size of our reserve funds would involve accepting more modest spending growth during the peak years of growing revenues. That is a trade-off most Oklahomans are likely to endorse.

HB 3032, which passed the Appropriations and Budget, now goes to the full House. We congratulate the Speaker and his colleagues on promoting this idea, and hope that the next time our economic hits a rough patch, the Energy Stabilization Fund is in place to help avert a full-fledged budget crisis.