Making sense of the mid-year “revenue failure”

budget cutsToday Finance Secretary Preston Doerflinger officially declared a revenue failure, triggering $176.9 million in cuts in agency allocations for the current budget year, FY 2016.

The revenue failure is the result of revenue collections coming in well below the official estimate upon which this year’s appropriations were based. Through the first five months of Fiscal Year 2016, revenues to the General Revenue Fund (GRF) are $101.9 million, or 4.6 percent, below the official estimate. However, the Board of Equalization this week certified revised projections for FY 2016 showing GR falling 7.7 percent, or $444.3 million, below the initial estimate the Board approved in June for the full year.

The state Constitution specifies 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 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 reduce agency allocations by an amount sufficient to bring them into balance with actual revenue collections. This marks the fifth revenue failure since 2000. Previous mid-year budget cuts occurred in FY 2002, FY 2003, FY 2009 (although those cuts were later restored) and FY 2010.

Although today’s official projections are for a 2.7 percent GR shortfall over the course of the year, Doerflinger opted to impose 3 percent cuts in order to “give an extra cushion” should actual revenue collections continue to perform below projections.

Of the $444 million drop in current projected revenues compared to the June estimates, $258 million is due to declining sales and use tax revenues and $189 million is due to declining gross production tax revenues on oil and gas. Combined personal and income tax collections are expected to come in close to initial estimates.

All budgets will be cut equally; some will be cut more equally than others

Revenue_Sources_2016Some state agencies will be affected by the revenue failure more than others. The Constitution specifies that in the event of a revenue failure,  each appropriated agency must be cut in equal proportion to their share of total appropriations from the General Revenue Fund. In that sense, the cuts are across-the-board. However, while many appropriated agencies receive 100 percent of their state funding from the GRF and will take the largest cuts, others are fully or partly funded from other funds and will take smaller cuts or no cut at all.

This year, of total state appropriations of $7.138 billion, just over three-quarters – 76.4 percent – came from current year General Revenue. The remaining $24.6 percent, or $1.681 billion, came from other funds, including the HB 1017 (Education Reform) Fund, Constitutional Reserve Fund, the Cash Flow Reserve Fund, the State Transportation Fund, agency revolving funds and numerous other sources. In some case, the funding sources for specific agencies are set out in statutes; in others, the Legislature simply decides each session on the mix of funding streams.

As can be seen in the Table below, among the ten largest state agencies, only one – Office of Juvenile Affairs – is 100 percent funded by GR and will be cut by the full 3 percent. The Department of Education, the largest state agency, is 62.8 percent funded by GR; it is looking at a 1.9 percent overall cut. The Department of Transportation receives no money from the General Revenue Fund but had its allocation from the ROADS Fund cut by 3 percent.

Seven appropriated agencies will be spared because they were fortunate to receive no funding this year from GR:  Commissioners of Land Office, School of Science and Math, Corporation Commission, Department of Environmental Quality, Department of Labor, Tourism and Recreation Department, Council of Law Enforcement Education and Training (CLEET), and Bureau of Narcotics and Dangerous Drugs. The District Courts receive only 4.7 percent of their appropriations from GR.

It’s important to note that because the cuts will take effect in January, six months into the fiscal year, the impact on monthly allocations over the remaining six months of the year will be amplified. In essence, an agency taking a 3 percent cut will see its monthly allocation cut by 6 percent beginning in January.

The Legislature could decide to use up to 3/8ths of the Rainy Day Fund, or $144 million, to help address the revenue failure.

FY16cuts3The impact on agency budgets

The mid-year budget cuts come on top of years of persistent cuts and flat funding. As we discussed in our FY 2016 Budget Highlights, this year’s initial budget was $719 million, or 9.1 percent, below FY 2009, adjusted for inflation. Of 72 appropriated agencies, 62 received budget cuts or flat funding this year, with cuts ranging from 0.25 percent to 7.25 percent. Almost half of appropriated state agencies remain more than 20 percent below pre-recession funding levels. The State Health Department, for example, which will take a full 3 percent mid-year cut, started this year down 19.2 percent from 2009.

These mid-year cuts will cause serious pain to core state services. Common Education, which already has seen state aid funding fall $173 million below FY 2008 levels without adjusting for population growth or inflation, faces a mid-year cut of $46.8 million. Higher Education, already operating with $76 million less in state support than in FY 2009, now faces an additional $27.4 million cut. The Department of Corrections, which is already at over 110 percent inmate capacity in its facilities with under 70 percent staffing, faces an $11.8 million cut. The Oklahoma Health Care Authority, which pre-emptively approved a 3 percent  cut in provider reimbursement rates effective in January totaling $25.0 million in state funds, will need to cut an additional $2.4 million, losing over $6 million in federal matching funds. DHS, which had to cut providers of services for those with disabilities 3.5 percent at the start of the fiscal year, will be cut another $18.7 million.The Department of Mental Health and Substance Abuse Services must implement $9.8 million in cuts; the Office of Juvenile Affairs, which started this year down 12 percent from FY 2009 and recently lost its Executive Director, will be cut an additional $3 million.

The Board of Equalization also certified initial projections showing the Legislature having $900.1 million less to spend in the next fiscal year than was appropriated for the start of the current year.

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Former Executive Director David Blatt joined OK Policy in 2008 and served as its Executive Director from 2010 to 2019. He previously served as Director of Public Policy for Community Action Project of Tulsa County and as a budget analyst for the Oklahoma State Senate. He has a Ph.D. in political science from Cornell University and a B.A. from the University of Alberta. David has been selected as Political Scientist of the Year by the Oklahoma Political Science Association, Local Social Justice Champion by the Dan Allen Center for Social Justice, and Public Citizen of the Year by the National Association of Social Workers.

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