Today OK Policy released “A New Fiscal Reality for Oklahoma: The State Budget Outlook, 2011-2014,” our second annual multi-year budget forecast. Click here for the full 10-page brief or here for the 1-page summary. Dangerously nerdy readers also can check out the 17-page technical memorandum that describes our assumptions and methods. If you just want the elevator speech, here it is:
We can choose to keep on emptying the revenue stream, spending on favored programs without demanding results, and taking life one fiscal year at a time, as we have through many years. Or we can choose to reevaluate our environment and craft a new fiscal approach that values good planning, effective spending, and generating sufficient revenue to make Oklahoma smarter, safer, and more competitive. We must choose wisely.
The forecasts indicate that Oklahoma is entering a period of economic recovery and that state revenues will stop falling and grow modestly. However, the state is not returning to the days of the mid-2000s when annual revenue growth sometimes approached 20 percent. Instead, we face a short-term outlook in which overall budgets are falling or flat; in FY ’14, three budget cycles from now, we project that the budget will still be less than FY ’08. The graph below shows how far budgets of the near future are likely to fall below those of the recent past.
Because our legal structure demands it and our political system encourages it, the Governor, Legislature, state agencies, and media will likely focus on just the first year of this multi-year problem. They’ll face a significant challenge in doing so, as our forecasts suggests the total budget will be nearly $400 million (6 percent) below the adopted FY ’11 budget. In facing that challenge, however, we should demand more than one-time fixes and budget cuts that assume (wrongly) that agencies can somehow keep absorbing reductions without real and long-lasting impacts on all Oklahomans. We should expect action that shows an appreciation for the effects of serial budget cutting, unwise erosion of the revenue base, and failure to think ahead.
Here’s what we think would constitute a wise approach to budgeting in the upcoming session:
- Acknowledge and investigate the impacts of two straight years of significant budget cuts before embarking on a third. Oklahoma’s education, health, mental health, environment, economic well-being and safety have been unacceptably compromised by these cuts. Instead of reflexively making (and quietly accepting) more cuts, it’s time to find and draw the line that a civilized society would not cross.
- Act now to bolster revenue for this year and future years. The reduction in the top income tax rate, which will be triggered under a law adopted back when the state enjoyed unprecedented revenue growth, should be delayed or repealed. Many of the short-term revenue fixes adopted last session, including deferring tax credits and exemptions, should be retained for at least three years and some should be made permanent. Other tax exemptions should be systematically reviewed; they should be retained only if they demonstrably improve our economy and society more than the public services we lose by retaining them. We also need to find a sustainable funding source for the growing and essential Medicaid program, before it consumes more of the state’s limited resources.
- Spend more wisely. We should combine agencies and programs where it is economical and feasible and shift spending toward programs that will pay off in reduced costs in the long term. Take control over our future finances by integrating multi-year forecasting into all major budget decisions, requiring fiscal impact analyses of all significant legislative actions, require that laws that cost revenue or increase spending be paid for by offsetting savings or new revenue, and establish larger and more efficient reserves so that future downturns are less devastating than we have allowed this one to become.
- Create a budget process and structure that better supports sound and responsible financial planning and management. We should expand our forecasting capacities, adopt pay-go budgeting requirements, and continue to strengthen our reserve funds.
Our fiscal environment has changed, probably permanently. The sooner we recognize the change and craft a budget approach that fits the new reality, the more likely our state can sustain the public services that citizens demand and deserve.