Fearlessly forecasting–into the past

Once again, OK Policy is getting in touch with its inner dweeb (as if the outer dweeb wasn’t scary enough) and beginning work to develop new four-year forecasts of revenue and budgets for the state of Oklahoma. We’ve written elsewhere of our concerns (and others’) about Oklahoma’s official revenue forecasting and how we’ve designed fiscal policy to depend on poor forecasting. We won’t repeat those arguments now, though we certainly reserve the right to do so later.

Good forecasting starts with a sober look back at previous efforts. We first undertook the forecasting project in 2009, in response to rapidly falling state revenues. Our first forecast brief, released in November of that year, used six different models to forecast state General Revenue Fund (GRF) revenues for four years (here’s a summary of how those forecasts are developed). With the books now complete on FY ’11, we can look back to judge how we did and compare our performance with the official projections certified by the Board of Equalization.

The graph below compares all of our forecasts and official state estimates to the actual revenue.  Note that we’ve added a red bar to the first three forecasts in order  to show the $309 million in net new revenues adopted by the Legislature during the FY ’11 budget process. Neither OK Policy or the Board of Equalization could have known these would be adopted in making the early forecasts.   Adjusting for these changes, our initial forecast was the highest. It also proved to be the most accurate–just $94 million, or 2 percent, below actual revenues. The state’s official estimates moved up slowly throughout the period but remained well below the actual result. Adjusting for later revenue law changes, the first official estimate was $380 million, or 7 percent, below the actual revenue. The final estimate, more than halfway through the year, was still $188 million, or 4 percent, below the mark.

Looking back has helped us not only to better understand the dynamics of revenue and forecasting, but also to appreciate the changing dynamics of the budget cycle. When we started this project two years ago, we wanted to get a better picture of how far revenue would fall, for how long, and what the recovery might look like. Now that economic recovery, however halting, has set in, we need to turn our attention to whether the resulting revenue growth will make up for the end of one-time revenue fixes that balanced the last two budgets, as well as estimating how much revenue growth we can expect for how long. Our prior efforts have suggested that revenue will not return to pre-downturn levels until FY ’13 or ’14.

The need for better and longer-range forecasting has not diminished. We’ll incorporate what we’ve learned into work that’s now underway on developing new FY ’12-’15 forecasts. The state can do the same in preparing the Board of Equalization estimates for December. As always, we encourage a more inclusive and transparent forecasting process, and we implore both executive and legislative leaders to create an official long-term forecasting process.