Inital thoughts on the FY11 budget agreement

Legislative leaders and the Governor yesterday announced their agreement on the FY ’11 budget. We’ve posted the press release here and the document that was provided comparing appropriations for each agency for this budget year and next, and listing the additional revenues that were agreed on in addition to the $5.4 billion in state revenues certified by the Board of Equalization in February. The Oklahoman’s Paul Monies has created a nifty visual breakdown of where the money is going  using a program called Many Eyes.

Overall, the proposed budget appropriates at least $6.676 billion in FY ’11. This is $256 million, or 3.7 percent, less than the final FY ’10 budget of $6.931 billion, and $556 million, or 7.7 percent, less than the $7.231 billion initial FY ’10 budget that the Legislature decided upon last session. Most notably, to make the budget balance and limit the magnitude of budget cuts, leadership agreed to appropriate some $1.4 billion in additional revenues that were not initially certified. This total amount includes $496 million in federal funds for education and health care that were part of last year’s Recovery Act and the remaining $372.8 million from the state’s Rainy Day Fund reserve (however, $100 million of this amount is to be set aside for FY ’12). The remaining $630 million of additional revenues is to be generated by a wide variety of mechanisms, including fee increases, enhanced tax collections,  increased bonding, suspending tax credits, deferring payments, and transferring available cash balances.

With a few exceptions, agencies will absorb additional funding cuts in FY ’11 of 7 percent or less beyond those already enacted over the course of FY ’10. Several of the largest agencies providing core state services will see smaller cuts, including Common Education and Career Tech (-2.3 percent), Higher Ed (-3.3 percent), Public Safety (-1.0 percent), Corrections (-3.0 percent) and Mental Health and Substance Abuse Services (-0.5 percent). The Department of Human Services will receive an increase of 4.0 percent compared to its final FY’10 appropriations while Rehabilitation Services will be boosted by 3.7 percent. The Oklahoma Health Care Authority will be appropriated $17 million, or 1.8 percent, less than FY ’10; however, in addition to this basic funding, the agreement also includes $78 million for OHCA from a “1% Health Care Access Payment.” This led the agency to issue a statement (not yet available online) stating that it expects to be able to maintain the Medicaid program in the upcoming year without cutting benefits or provider rates.

Given the daunting challenges they faced in constructing the FY ’11 budget, the bipartisan team of budget negotiators deserves considerable credit for their willingness to propose new revenues to limit the size of overall budget cuts and preserve essential services. This is not the full-fledged catastrophe that many expected and feared, and shows that legislative leaders and the Governor were guided by a genuine desire to minimize the damage. We are especially grateful that leadership heeded the calls of advocates to protect our most vulnerable populations by targeting available funds for Medicaid, human services, mental health and rehabilitative services, as well as ensuring that education and public safety were spared the full brunt of cuts.

At the same time, there are two principal concerns that must be expressed. First, despite the genuine efforts made to limit budget cuts, we cannot expect everything to be fine next year. Many agencies will be facing additional cuts of 5 to 7 percent in FY ’11 on top of the 10 to 14 percent cuts already enacted in FY ’10. Even agencies that have been cut less than the full 15 to 20 percent will face severe challenges in fulfilling their fundamental missions with reduced resources, particularly given mandatory increases for employee health care and retirement costs, general inflation, and in some cases, new mandates and growing caseloads.  It is likely that most agencies will continue to operate under budgetary duress in the coming year, with continued unfilled vacancies and staffing reductions, and potentially continued or increased furloughs and involuntary layoffs, which will continue to corrode the public structures we depend on to ensure the security, health and prosperity of of our families and communities.  The impact of continued cuts and underfunding will need to be closely followed and monitored over the coming months.

Secondly, next year’s budget, like this year’s, is balanced through the use of substantial one-time and non-recurring revenues. While the specifics of all the additional revenue proposals are not yet fully clear from the information that was released yesterday, it’s clear that the major additional revenue sources used to reduce the budget shortfall – federal stimulus dollars, Rainy Day Fund reserves, cash balances – will be either entirely or largely unavailable in FY ’12 and FY’13. We can expect revenue growth to partly fill those holes, but to a considerable extent, this budget only pushes problem further down the road. This dependence on one-time revenues to plug budgets is perhaps the inevitable consequence of the staunch unwillingness of leaders of both parties to consider outright tax increases or more sustainable revenue sources as part of the solution to Oklahoma’s budget crisis, as many other states have done.

Over the final days of session, the Legislature will need to approve budget bills and bills to implement the various revenue proposals. It is likely that there will be continued discussions and debate as details of the agreement come to light, particularly over funding levels for certain agencies and the specifics of some of the key revenue enhancements. For now, the main reactions are likely to be a guarded sense of relief of having been spared the worst and ongoing concern over the continued struggles ahead.