The Legislative Office of Fiscal Transparency (LOFT), a supercharged legislative audit agency created in 2019, presented its first “rapid response evaluation” to the Legislative Oversight Committee last week. The evaluation was of the State Board of Equalization (BOE) and assessed the accuracy and communication of the revenue certification processes. This is likely because of the uncertainty created last session as the pandemic turned the February certification upside down — and perhaps a feeling by legislators that they did not get accurate data from which certification decisions were being made.
The LOFT evaluation report recommends some potentially far-reaching changes in the way state government determines how much revenue will be available each year for appropriation. It recommends the first meeting of the BOE each year be held in October with the final certification in December. The BOE now meets every December and February. The current timing requires the governor to use the December certification to create his budget proposal while the legislature uses the February certification for the state budget, perhaps diminishing the usefulness of the governor’s budget.
Another LOFT recommendation is to expand the membership of the Board of Equalization by adding two outside members appointed by the legislature who would have expertise in forecasting the gross production tax and corporate income tax. These two revenue sources are volatile, often causing the certification to be somewhat inaccurate. The BOE is currently the statewide elected officials plus the Secretary of Agriculture.
Because of the volatility, LOFT recommended reducing reliance for the state budget on the gross production and corporate income taxes. It is unclear whether that means apportioning these revenues in a way that the general fund will be less affected or lowering these taxes because they are undependable from year to year.
The LOFT report makes numerous other recommendations including increasing the amount of savings permitted in the Rainy Day Fund or the Revenue Stabilization Fund, as well as reorganizing the way the Oklahoma Tax Commission and the Office of Management and Enterprise Services coordinate the effort to produce and monitor accurate, timely, and transparent BOE certifications.
I was on the conference committee in 1985 that wrote the constitutional provision creating the Rainy Day Fund and the current certification method. There have been minor changes since, but it basically exists as it was created 36 years ago. Before the 1985 amendment, the certification was calculated by adjusting the appropriations authority up or down based on averaging the revenue in preceding years. This didn’t work because if the economy turned down rapidly the formula allowed too much appropriations authority. As the economy recovered, averaging preceding years didn’t allow certifying the new revenue available. The current method of using revenue projections calculated by the Tax Commission and certified by the BOE has worked remarkably well through the years, but because of our oil and gas economy there are often going to be variances between projection and reality.
There was some sentiment in drafting the 1985 amendment to give the legislature appointing authority on the BOE, but ultimately, we decided it would be better to leave certifying the appropriations authority to the executive branch. I suppose we didn’t trust ourselves to be both the bookkeeper and the checkwriter. Given that the governor’s powers have recently been expanded, it might be worth revisiting that decision. The extra February certification was added in the 1985 amendment to give the legislature the most recent numbers available early in the legislative session. One has to wonder if an October certification, only three months into the fiscal year, would have much value.