Not to worry? Next year's budget projections likely to be met

Once bitten, twice shy. Or is it twice bitten, thrice shy?  Oklahoma’s budgeting laws try to protect against mid-year budget shortfalls by allowing the Legislature to appropriate only 95 percent of the certified estimate of General Revenue (GR) fund collections for the upcoming year. However, in each of the past two years, revenue collections have failed to reach the amounts appropriated by the Legislature. In FY’09, things started off well, but then revenues plunged  to such an extent that the final monthly GR allocation to each agency was cut by 5 percent (those cuts were later restored) . This fiscal year, which began last July 1, revenues immediately came in far below appropriated levels. Budgets were cut 5 percent a month beginning in August and then 10 percent each month since November; only large-scale borrowing, followed by an agreement to supplement collections with hundreds of millions from the Rainy Day Fund, additional stimulus dollars, and some available cash prevented mid-year budget cuts being even more drastic.

It is not surprising, then, that the funding levels announced in the FY ’11 budget agreement have been greeted with a certain amount of skepticism by some state agencies and school districts. A Tulsa World article on funding for common education, for example, included these reactions from Tulsa-area Superintendents:

“It will be good news if, when you get the details, if it is that type of cut,” Broken Arrow Superintendent Gary Gerber said, referring to the 2.9 percent budget cut. “But we have to take it with a grain of salt because we had a budget agreement last year and they proceeded to cut us every month of the entire school year…”

Union Superintendent Cathy Burden said that while she was pleased the district now has a number to work with, their budget will require careful scrutinizing before any major decision on staffing or plans for next year can be made.

Burden said her “cautiousness is based on the history of what happened this year” of promised 3 percent cuts almost doubling by year’s end.

Yet if this skepticism – which seems to be broadly shared, based on  conversations I’ve had in recent days  – is understandable,  it is also likely unwarranted. At least a decade of history suggests that the state’s forecasters tend to underestimate both how bad things will be in bad times and how good they’ll be in good times. Specifically, the revenue projections on which annual appropriations are based tend to consistently underestimate how much revenues will fall when the economy turns bad, but also underestimate how quickly and strongly revenues will recover once the economy improves.

This chart compares actual and estimated General Revenue collections since FY ’02:

In FY ’02 and FY’03, revenues came in 8.8 percent and 11.7 percent below the certified estimates, respectively. But once revenues began to recover they exceeded the estimate by 5.0 percent in FY ’04, 11.7 percent in FY ’05, and 10.7 percent in FY ’06. Over those three years, GR collections exceeded the estimate by almost $1.3 billion, more than filling the Rainy Day Fund to its constitutional limit and creating surpluses that were then available for additional spending priorities, the EDGE research fund, and tax rebates.

For next year, the Board of Equalization in February projected GR of $4.579 billion, which is an increase of  just $105 million, or 2.3 percent above the final updated estimates for FY ’10. Not only history but  recent trends in revenue collections suggest that this estimate is likely to be reached and surpassed.  After a devastating downturn, the past several months have shown clear signs of an upswing in the state’s economy and revenue collections.   UCO Economist Mickey Hepner recently forecast that FY ’11 revenues will grow by 3.3 percent to $4.623 billion, which is $43 million more than the official estimates released in February. For our part, OK Policy projected late last year that FY ’11 General Revenues would come in at $4.735 billion, which would represent an increase of 6 percent over FY ’10.

This isn’t to say that there’s no risk of shortfalls. The economic recovery remains somewhat fragile, carrying the threat of a double-dip recession that could send revenues reeling. The budget agreement also assumes a few hundred dollars from revenue enhancements such as increased sales tax collections and suspended tax credits that may not fully materialize.  And without question, the use of nearly $900 million of non-recurring federal Recovery Act dollars and Rainy Day Funds clouds the budget outlook past next year. But, all in all, we can predict with at least a little confidence that agency budgets should not be bit by the mid-year budget cut bug for a third time next year.