Is this state fiscal crisis worse than the 1980's? Yes and no…

In writing about the state’s current budget woes, I’ve tended to say that Oklahoma is in the midst of its worst fiscal crisis since the oil bust of the 1980’s. Whether we were around during those days or not, I think most of us have a sense that the situation back then was genuinely catastrophic for state finances. So it came as something of a surprise to go back through historical data on state revenue collections and discover the following:

The graph shows that the current decline in revenue collections dwarfs that of the 1980’s in magnitude, and in all likelihood, in duration. In the 1980’s, General Revenue (GR) collections declined by 10 percent between FY ’83 and FY ’84 but had recovered by FY ’85. After having fallen last year, this year’s GR collections are projected to come in 26 percent below FY ’08 and to remain essentially flat in FY ’11. Our forecasts are for revenues to remain below pre-downturn levels until at least FY’13.

The simple explanation for the relatively minor dip in revenue collections over the course of the oil bust of the 1980’s is that the Legislature and Governor stepped in and raised taxes. Although they required bitter and bruising political battles during the Governorship of George Nigh, the willingness to increase taxes managed to avert catastrophic cuts to public services (here’s the start of an article from 1983 reporting that schools were facing cuts of 25 percent)

With passage of SQ 640 in 1992, the political and constitutional obstacles to tax increases have been seen as insurmountable, which is why the relatively minor downturn of the early 2000’s had a considerably larger impact on revenue collections than did the 1980’s oil bust.  At the same time, during the more recent downturns, two important funding sources that were unavailable in the 1980’s have been at the Legislature’s disposal to mitigate the severity of budget shortfalls: the Rainy Day Fund, created in 1985, and state fiscal relief from Congress. From 2002-04, the state budget was aided by some $340 million from the Rainy Day Fund and $200 million in federal fiscal relief. So far, during the current downturn, state revenues have been supplemented by $640 million in federal funds from the stimulus package, with an additional $1.3 billion of state fiscal relief and Rainy Day Fund money at its disposal.

However, even these supplements look to fall short of making up for the steep plunge in revenue collections that the state is experiencing. The budget reductions of at least 5 to 10 percent that state agencies are confronting this year and next, and perhaps beyond, would inflict cuts and layoffs that could stall the economic recovery, in addition to inflicting real harm to vital public services. As a result, calls are increasing on the federal government to provide another round of state fiscal relief (see this blog post from UCO economics professor Mickey Hepner and this short podcast from the Center on Budget and Policy Priorities making the case for fiscal relief).  And while outright tax increases are not now on anyone’s agenda in Oklahoma, the need to explore “revenue enhancements” and perhaps re-examine tax breaks are being discussed.

The Rainy Day Fund and help from Congress mean that the choices facing today’s elected officials are not quite as difficult as those confronting their predecessors 25 years ago. But this crisis is real, and real leadership will be needed to get us through.