Is Oklahoma headed for a revenue shortfall?

The next legislative session is still four months off, and we’re nine long months out from the start of the next fiscal year. Yet concern is already mounting that the state’s protracted budget crisis is likely to get more severe. Last year, legislators used nearly half-a-billion dollars in one-time revenue to balance the budget, even as they slashed funding to state agencies by up to 7.25 percent. The reliance on one-time funding, along with the full cost of the income tax cut scheduled to take effect in January, another automatic funding increase for transportation, and continued low energy prices are contributing to fears of a budget shortfall for FY 2017 of anywhere from $600 million to $1.2 billion.

Separate but related to anxiety about the budget crisis facing us for next year is concern over whether this year’s revenue collections will meet projections. Last week, Finance Secretary Preston Doerflinger announced that August General Revenue (GR) collections had missed the certified estimate by 5.3 percent, or $22.9 million. Collections from gross production taxes and the sales tax both came in well below the estimate, while net income tax collections were slightly above.

In an editorial, the Tulsa World warned that “only two months into the state fiscal year, it’s starting to look like (this year’s) budget might not hold water.” For his part, Secretary Doerflinger noted that August’s weak revenue collections followed a fairly strong performance in July and that total general revenue through the first two months of the fiscal year is almost exactly in line with the certified estimate. However, he acknowledged grounds for concern: “Our focus is on whether revenues meet estimates because falling more than 5 percent off the estimate for the year for too long means automatic budget reductions could occur,” he said.

There’s no reliable way to predict what the revenue picture will look like over the coming months, although there are certainly troubling economic indicators. This year’s budget was built on projected energy prices of $57.55 per barrel of oil and $3.97 per MCF of natural gas.  However, oil prices have been below $50 per barrel since July, while natural gas is currently around $2.60 per MCF and has been below $3 almost continuously since June. While Oklahoma’s unemployment rate remains at a modest 4.6 percent, over the past six months, the state has lost 10,800 nets jobs and the unemployment rate has jumped 0.7 points, second most in the nation.

As we’ve discussed previously, one of the budget limits entrenched in Oklahoma’s constitution is that the Legislature may not appropriate more than 95 percent of certified funds for the upcoming year. This builds a 5 percent cushion into the budget in years when revenues come in below projections. When revenues fall below 95 percent of the certified estimate,  the Director of the Office of Management and Enterprise Services (in this case, Secretary Doerflinger) is required to declare a revenue failure and to reduce agency allocations by an amount sufficient to bring them into balance with actual revenue collections.

In practice, the Finance Secretary has considerable discretion in deciding when and by how much to implement mid-year budget cuts. OMES can and regularly does borrow from various state funds in order to make appropriations over the course of the year, as long as the funds are repaid in full before the end of the fiscal year in June. This means that even if revenues fall below the 5 percent cushion for the next couple of months, there are unlikely to be immediate cuts.

However, if revenues fall substantially below the estimate for an extended period, ultimately a revenue failure will be declared and cuts must be imposed, as has happened three times since 2000 (in FY 2002, 2003 and 2010; in FY 2009, cuts were implemented and then restored).  The dilemma is that the more months OMES waits to implement cuts, the less time agencies will have to spread them out.

One option for addressing a revenue failure is to tap the Rainy Day Fund. The Constitution provides that up to 3/8ths of the Rainy Day Fund is available for appropriation upon declaration of a revenue failure.  This was done in FY 2003 and 2010. With $387 million currently in the Rainy Day Fund, up to $145 million could be appropriated to help agencies get through this year. Of the remaining amount, 3/8ths could be used for next year’s budget if revenues are projected to decline, and the remaining 1/4th could be used upon declaration of an emergency.

It’s unfortunate that it won’t be until the Board of Equalization meets in late December that the state will get a formal forecast of what this year’s revenue picture looks like; in years when revenues begin to come in below projections, earlier forecasts would help guide decisions. In the absence of reliable forecasts, agencies will be well-advised to spend carefully this year, knowing that the full amounts they have budgeted based on last session’s appropriations may become unavailable.

It’s especially unfortunate that lawmakers are going ahead with a tax cut, that was supposed to be triggered only when there is revenue growth, in a year when ​Oklahoma’s already deep budget cuts may be getting even deeper.