Governor’s Budget 2.0: Cuts are not inevitable

Last week, Governor Mary Fallin took the unusual step of delivering a second budget proposal for the upcoming fiscal year. Her new proposal, dubbed Executive Budget 2.0, adjusts for the changed circumstances since her first budget was announced in early February. Soon after her original budget was released, revised estimates increased the budget shortfall from $900 million to $1.3 billion.

By announcing a revised budget, Gov. Fallin was reminding legislators and the public that she intends to play an active role in the ongoing budget negotiations over the coming weeks and calling attention both to ideas she’d originally laid out in February and to new ones she’s now put on the table. Most importantly, Gov. Fallin was sending a strong signal that despite the enormity of the budget shortfall, deeper spending cuts to core public services are not inevitable.

It’s finally becoming widely recognized that this budget crisis could be an unprecedented disaster for Oklahoma. Most agencies started this year with funding down 20 percent or more compared to 2009, even before the mid-year cuts of up to 7 percent. After years of shrinking budgets, school districts and state agencies have no easy ways to cut more. Without significant new revenue, the consequences could be truly dire, including teacher layoffs and school closures, more severe overcrowding of correctional facilities, and the closing of nursing homes, hospitals, and other critical health care facilities.

To avert this outcome, the Governor’s Budget 2.0 proposes $1.26 billion in new revenue and revenue adjustments on top of the $5.851 billion that was certified by the Board of Equalization in February. With this additional revenue, the FY 2017 budget would be $6.990 billion, which is $149 million less than the initial FY 2016 budget and $185 million more than the actual FY 2016 budget after mid-year cuts and supplementals.

[pullquote]“Gov. Fallin was sending a strong signal that despite the enormity of the budget shortfall, deeper spending cuts to core public services are not inevitable.”[/pullquote]

Her revised FY 2017 budget is able to maintain several key agencies at initial FY 2016 levels (prior to mid-year cuts), including the State Department of Education, Career and Technology Education, the Oklahoma Health Care Authority, Department of Human Services, Department of Mental Health and Substance Abuse Service, Department of Corrections, and Corporation Commission. Several other agencies, including the Office of Juvenile Affairs and Indigent Defense System, are held flat at their revised FY 2016 levels (post mid-year cuts). Most other agencies, including the Regents for Higher Education and Department of Public Safety, would be cut an additional 4.5 percent on top of the 7 percent mid-year cuts. Most of these agencies also took 5 percent cuts to their initial FY 16 budgets, meaning they’re looking at state funding for next year at least 15 percent lower than in FY 2015. (Click here for FY 2016 appropriations by agency)

The revenue enhancements in her Budget 2.0 fall into four main categories:

• Taxes, $238.9 million: These proposals include $106.5 million from eliminating various sales tax exemptions; $97.3 million from eliminating the income tax ‘double deduction’, and $28.8 million from making the state earned income tax credit non-refundable;
• Apportionment Changes, $177 million: These proposals involve redirecting tax revenues that are currently allocated “off-the-top” for specific purposes to the General Revenue Fund. Of this total, $113.4 million is labeled “apportionment equity”, which would involve cutting most apportionments by an across-the-board percentage in times of budget shortfalls. Apportionments to the Tourism Department and Historical Society would be eliminated, and other apportionments would be capped at 2013 levels.
• Accounting Changes, $333.3 million: This category includes sweeping balances from agency revolving funds over to General Revenue ($125 million); certifying balances from the Cash Flow Reserve Fund ($125 million), and redirecting 10 percent of revenues to the General Revenue from from non-appropriated agencies, such as the Turnpike Authority, Oklahoma Employment and Security Commission and Grand River Dam Authority ($85 million).
• Transportation Bonds, $503 million: The state would issue some $500 million in bonds to cover transportation projects, which would free up revenues currently going to the Department of Transportation and to counties for roads and bridges.

In her initial budget, which included some $900 in new revenues, the Governor had intentionally not used any one-time revenues to avoid digging an automatic hole for future years. The $503 million transportation component of the new budget, which accounts for about 35 percent of the total, is unmistakably one-time revenue; this has raised concerns among many legislators.

While not all of the Governor’s proposals are likely to find favor with House and Senate negotiators, there are many other feasible revenue options that can be considered in developing the budget. The Governor’s revised plan does not include revenue from a possible increase in the tobacco tax, which is being actively considered to fund the Oklahoma Health Care Authority’s plan to expand insurance coverage and avert draconian provider reimbursement cuts. It does not include revenues from improving collection of Internet sales tax or expanding the sales tax on services. It does not propose cancelling the most recent income tax cut, which would boost revenues by some $150 million, and does almost nothing to rein in tax breaks for business. And it avoids using any of the $242 million that is available from the  Rainy Day Fund, an option which is being actively considered by legislative leaders.

The details still must be worked out, but the message to Oklahoma lawmakers and to the public is clear: there are enough good options out there to raise new revenues and avert deeper budget cuts. The largest obstacle is mustering the political will to do what it takes.