Preliminary FY 2013 budget outlook shows continued challenges ahead

Oklahoma’s fiscal situation presents an apparent paradox. We have now seen state tax collections rise for five consecutive quarters and exceed prior year collections by 10.5 percent. At the same time, the state budget is still being cut. This year’s budget of $6.511 billion is $255 million, or 3.8 percent, smaller than last year’s and $614 million, or 8.6 percent, less than FY ’09.  Budget cuts are continuing to affect all areas of state government, with agencies and school districts forced to reduce and eliminate programs, lay off staff, and curtail services to the public. Unfortunately, looking ahead to FY ’13, we should anticipate minimal restoration of the funding cuts that have been absorbed these past three years, even if the state’s economic recovery continues.

The explanation for the paradox of deeper cuts coinciding with growing revenue is two-fold. First, revenue growth associated with the economic recovery has been insufficient to return to pre-recession levels. General Revenue collections in FY ’11 remained 16.5 percent below FY ’08 and substantially below levels of five years ago. Just as significantly, the rebound in state tax collections has been unable to compensate fully for the loss of substantial non-recurring revenues that were used to limit cuts. In particular, the legislature used large amounts of federal stimulus funds and state rainy day funds to balance the budget in the first two years of the crisis. It also adopted various other ‘revenue enhancement measures’ to address the shortfall, including suspending or deferring payment of tax credits, issuing bonds, transferring cash and revolving fund balances, and raising fees.

The state budgets in both FY ’10 and FY ’11 included well over $1 billion in non-recurring revenue from the federal stimulus bill, Rainy Day Fund, and other sources. This year’s budget was supplemented by less than half that amount of non-recurring revenue – some $450 million, which partially bridged the budget shortfall. But at the same time, one-time revenues in the FY ’12 budget, along with spending obligations and the full implementation of tax cuts, creates significant holes for the FY ’13 budget that will curtail any efforts to restore agency budgets back towards pre-downturn levels.

Some of the identifiable items contributing to the FY ’13 budget hole include:

• Some $300 million in one-time revenues in the FY ’12 budget. This includes $100 million each from the Rainy Day Fund and final round of federal stimulus funding; $70 million that was freed up by issuing transportation bonds, and $32 million in transfers from various revolving funds;
• Some $60 million from the full-year implementation of the cut in the top personal income tax rate effective January 2012 (an initial $38 million revenue loss from the tax cut was part of the FY ’12 budget) ;
• An additional $37.5 million obligated to the ROADS fund;
• An estimated $150 million from the end of the two-year moratorium placed on various income and gross production tax credits in 2010. While some credits were suspended for two years, in other cases, the state simply deferred payments and will be liable beginning in FY ’13 for credits  accrued during the moratorium.

Partially offsetting the hole, with revenue collections having met and exceeded projections this past year, there is likely to be considerably more cash available for appropriation in FY ’13 than in FY ’12. Yet even assuming $150 million more available cash, this leaves a hole of some $400 million just to bring the FY ’13 budget back up to FY ’12 levels.

The great unknown in the equation is anticipated state revenue collections. The state’s first official revenue estimate, based on economic projections for the upcoming year, will not be released until December (OK Policy will be releasing its annual forecast in November).  Revenues would need to grow by about 7 percent next year to generate $400 million more dollars. While such growth is certainly possible, the recent slowing of the national economy and the highly fragile nature of the recovery makes it hard to anticipate that next year’s revenue growth will be exceptionally robust.

There are other factors that will complicate the budget situation between now and the time the Legislature gets to work next February, including possible FY ’12 supplementals for common education and other agencies, mandatory funding increases just to keep Medicaid and other programs at existing levels, and the impact of potential federal funding cuts. However, if our projections at this point lack precision, the overall picture seems clear: more hard travels along the road to a budget recovery.