Oklahoma’s budget outlook is improving, but major challenges remain

For the first time in four years, lawmakers may begin the 2018 session with more money to appropriate than the year before. This is undeniably good news, coming after multiple sessions when lawmakers started the year with shortfalls ranging from $180 million to over $1 billion.

At the same time, the anticipated revenue growth is modest, and by the time this year’s budget is finalized, next year’s projected surplus may turn into a deficit. In addition, the state faces significant increased costs to meet its spending obligations next year, as well as mounting pressures to address urgent funding needs across state government. The bottom line is that approval of permanent new revenues remain essential to put the budget on a stable and sustainable course.

Here are four major takeaways from the initial FY 2019 revenue estimates presented to the State Board of Equalization on December 20th:

Revenue collections are projected to rise by 8 percent

Next year’s collections to the General Revenue (GR) fund, the largest source of state appropriations, are projected to rise by some $425 million, or 7.8 percent, compared to this year’s certified amount. Increased sales tax (+$202 million, 9.9 percent) and individual income tax (+$117 million, 6.2 percent) collections account for more than three-quarters of GR growth. Mixed beverage receipt taxes are expected to rise by 51 percent, from $63 to $95 million, as a result of the changes to Oklahoma’s alcohol laws approved by voters last November.  Gross production tax revenues are projected to be almost unchanged. The HB 1017 Fund, which receives a share of many of the same taxes as the GR Fund, is expected to grow by $46 million, or 6.5 percent.

Revenue growth may fully offset the use of one-time funds

Healthy revenue growth is needed to dig out of the hole created by lawmakers over the past year. In order to balance this year’s budget, lawmakers appropriated $406 million in one-time revenues during the regular legislative session and $103 million during this fall’s first special session, according to a presentation made to the Equalization Board. This brings total one-time revenues in the current budget to $509 million — not including $30 million in emergency funding that was appropriated to the State Department of Health in special session.

Arriving at a fair comparison of this year’s total appropriations with the amount available to spend next year is complicated by several factors, especially because this year’s budget remains a work in progress. The certification packet reviewed by the Equalization Board show next year’s authorized budget ranging from $84 million more than this year (+1.2 percent) to $118 million less (-1.7 percent), depending on which revenues are included.

OK Policy’s figures show that the $6.907 billion available to spend next year is $97 million (1.4 percent) more than this year’s current budget, accounting for all appropriations made this year during both special sessions (including the $30 million to the State Health Department).  However, this comparison is very much a moving target. This year’s budget is still some $67 million short of fully funding the three health agencies affected by the loss of cigarette fee revenue. The amount available to spend next year will change with the revised and final Board of Equalization certification in February and could also be affected by any revenue measures still to be enacted in the special session expected to reconvene in January.

Lawmakers face substantial spending needs for next year’s budget

While there may be a slight increase in the money available next year, lawmakers will be faced with a wide array of spending obligations that will more than offset any possible surplus.

In its presentation to the Equalization Board, the Office of Management and Enterprise Services (OMES) identified increased obligations totaling $148 million, which included ad valorem reimbursement payments to school districts ($93 million), higher bond payments for the State Capitol and Department of Transportation ($21 million), and increased benefit costs for teachers and state employees ($28 million). In addition, the state could be facing the loss of federal Medicaid matching funds that have been used to help pay for the cost of graduate medical education as the result of a recent federal ruling disallowing these payments. If the federal decision is not reversed, $141 million in additional state dollars would be needed for FY 2018 and 2019 to preserve the programs at the OU and OSU medical schools, according to OMES.

While the above non-discretionary spending increases total $150 million to $300 million, lawmakers will face strong pressure to meet other funding priorities that have been neglected over many years of shortfalls and cuts. To cite just a few examples of many:

• The State Department of Education has requested $288 million for a $5,000 teacher pay raise to address the immediate crisis in teacher recruitment and retention, as part of an overall requested increase of nearly $500 million that includes funding to help cover increased student enrollment, instructional materials, and other priorities.
• The Department of Corrections is seeking a more than $1 billion increase to build two new facilities to ease prison overcrowding, provide staff raises, and expand re-entry, mental health and substance abuse programs.
• The Regents for Higher Education have requested $18 million to restore scholarship programs and fully fund concurrent enrollment, and over $100 million more for degree completion programs and initiatives.

Many other agencies will need more funding in FY 2019 to absorb the loss of federal funds, reverse recent cuts to providers, fill critical staffing needs, and address rising operating costs.

Permanent new revenues are still needed

The state’s short-term budget outlook is favorable, but the fact remains that it will to take a long time and a change in policy direction to dig us fully out of our budget hole, address our chronic budget shortfalls, and put the budget on a stable and sustainable path. This year’s initial budget was 15.6 percent, or almost one-sixth, below that of FY 2009, adjusted for inflation. The average salary of our state employees is 24 percent below the competitive labor market, and our teacher pay is among the very lowest in the nation. Our prisons are critically understaffed and overstaffed, we have among the highest rates of untreated mental illness in the nation, and nearly 7,500 Oklahomans with developmental disabilities must wait for up to 11 years to receive home-based services. Meanwhile, as a result of policy decisions, economic changes and other factors, Oklahoma’s state and local governments collect 20 percent less tax revenue as a share of personal income than the national average and 25 percent less than they did in the late 1990s.

Fortunately, elected officials and the public share a growing awareness that new permanent revenues are needed and a growing willingness to support a fair mix of higher taxes. Even if the immediate budget crisis is subsiding, this resolve to fix the budget should not.