As Oklahoma grapples with a rapid decline in state revenue collections, agency budgets have already been cut once this year, and a second round of even greater cuts has just been announced. Oklahoma’s Rainy Day Fund was designed specifically to be used, in part, to address mid-year revenue shortfalls. The Legislature can and should tap the Rainy Day Fund to minimize the mid-year cuts and avoid the most severe damage to education, health care, human services, and public safety.
The state Constitution tries to cushion against mid-year budget cuts by allowing the Legislature to appropriate no more than 95 percent of estimates for the upcoming year from the General Revenue (GR) Fund and other certified funds. However, in years when collections come in below the 95 percent mark, the State Finance Director is required to announce a revenue failure and cut agency allocations from General Revenue across-the-board. Just before Christmas, Finance Secretary Preston Doerflinger announced a revenue failure that led to across-the-board budget cuts of 3 percent of every agency’s full-year allocation from the General Revenue Fund. The cuts totaled $177 million. Because the cuts were enacted half-way into the fiscal year, beginning in January agency’s monthly allocations have actually been cut by 6 percent.
Since the initial revenue failure, revenue collections have worsened, with GR collections in January missing the estimate by 17.2 percent. Through the first seven months of FY 2016, GR is now 8.2 percent below the estimate. The Board of Equalization in February certified a revised projection that GR for the full year would be 9.6 percent below the estimate. However, based on the most recent collections, Secretary Doerflinger announced that the second round of cuts would be 4 percent (on top of the initial 3 percent cuts) and total $236 million. Since there are only three months left in the fiscal year, agency allocations may need to be cut by 18 percent in April, May and June compared to initial monthly allocations to make up the complete shortfall (Click here for our spreadsheet showing the amount of the cut and revised appropriations for each agency).
Agencies and school districts have known of likely mid-year cuts since the start of the year, and most have taken steps to prepare themselves for a revenue failure. Still, many core agencies will be unable to absorb a second shortfall of this magnitude without serious harm. The Department of Corrections has announced it needs a $23 million supplemental this year to cover payroll, medical expenses and contracts with private prisons and county jails to hold state inmates. The first round of mid-year cuts led the Department of Mental Health and Substance Abuse Services to propose eliminating services provided by therapists in individual practice. The Department of Human Services and State Health Department have already slashed their workforce by offering buyouts to hundreds of employees. After being cut $47 million from the first revenue failure, common education faces the prospect of not only a second cut of $62 million to their GR allocation but also of a shortfall in funding of some $15 million that comes directly from gross production revenues. State Superintendent Joy Hofmeister called the second round of cuts brutal and heartbreaking, and she said many rural districts will be forced to immediately initiate a four-day school week for the remainder of the school year.
It’s time to use the Rainy Day Fund
The Rainy Day Fund expressly dedicates three-eights of its total for revenue failures. There is now a total of $387 million in the state’s Rainy Day Fund. Up to $145 million can be used to offset a portion of this year’s revenue failure, with the remainder potentially available to address some of next year’s $1.3 billion shortfall.
Given the severity of the revenue decline and the likelihood of a prolonged downturn, it’s understandable that legislators are reluctant to drain the Rainy Day Fund this year. At the same time, three-eighths of the Rainy Day Fund is available only in the case of current year revenue failures and can’t be used for next year’s budget. Leaving this portion untapped could force deeper cuts than are necessary this year. It would be better to use at least some of the $145 million to avoid another round of straight across-the-board cuts and minimize the impact on key education, health, human service, and public safety agencies, while developing a strategy for increasing revenues for next year and beyond to make it through this downturn and position the state for a more secure future.
The last two times the state has faced large mid-year budget shortfalls – in FY 2002 and FY 2010 – the Legislature tapped the Rainy Day Fund to help minimize cuts. It should absolutely do so again this session.