Proposed budget leaves Oklahoma services massively underfunded

Note: This post was updated May 28th to reflect current information. The General Appropriation bill passed the Legislature and is awaiting action from Gov. Fallin.

After months of wrangling and stalled negotiations, legislative leaders finally introduced budget bills late Tuesday evening, just three days before the deadline to adjourn legislative session. Separate House and Senate versions of the General Appropriations (GA) bill were rolled out; however, the Senate refused to consider the House version of the budget, leaving the Senate’s bill, SB 860, as the only budget moving forward.

This budget appropriates $6.863 billion for FY 2018 — almost the same amount as FY 2017 after mid-year cuts and supplemental appropriations. Compared to the FY 2009 budget of eight years ago, this budget is 3.3 percent less in nominal terms and more than 15 percent less when adjusted for inflation. After inflation, the appropriations budget has shrunk by about $1.25 billion compared to FY 2009.

Even as they work to rush this budget through before adjournment, state leaders do not describe it in glowing terms. House Appropriations and Budget chair Leslie Osborne provided a blunt assessment when presenting the budget Tuesday evening: “These are horrible funding levels. We are massively underfunded in state government.” Governor Fallin said that “This plan keeps our government from shutting down… unfortunately it leaves many agencies facing cuts for the sixth year in a row.”

Finding the Revenue

Lawmakers developed the budget knowing they had about $800 million less revenue for FY 2018 than what they appropriated in FY 2017. The burning question all session was how to raise additional revenues to fill the budget hole and avoid devastating cuts to public services. Efforts to reach an agreement between Republicans and Democrats on tax increases that could clear the 3/4ths supermajority hurdle of State Question 640 fell apart on Monday. This led Republican leaders to move ahead with only revenue measures that they claim do not fall under the legal definition of a “revenue bill” and thus could be approved with a simple majority.

In total, the proposed $6.863 billion budget includes about $840 million more revenue than what was certified by the Board of Equalization in February.  The total include the following revenue sources:

• $1.50-per-pack smoking cessation fee, SB 845: $215 million (the bill is projected to raise $258 million in FY 2018, but the full amount has not been appropriated);
• Partial removal of sales tax exemption on motor vehicle sales, HB 2433: $111 million;
• Raising the tax rate on horizontal wells drilled prior to July 2015 from 1 percent to 4 percent, HB 2429: $95 million (Once the 4 percent rate expires, production will be taxed at 7 percent);
• Sunsetting rebates and exemptions on the gross production tax, HB 2377: $44 million.

Other tax changes, including compliance initiatives, eliminating vendor discounts, and capping the standard deduction are expected to generate about $58 million. Together, these changes to the tax code are expected to bring in about $520 million in FY 2018. Most of these measures, however, may be challenged in court for not following the constitutional requirements for revenue bills — namely, that they be introduced in the House, not pass in the last five days of session, and receive 3/4ths support in both chambers. Based on previous court decisions, the bill enacting the new fee on cigarettes will have to prove that its primary purposes is not to raise revenue, while the measures that eliminate or limit existing tax exemptions and deductions must prove that they do not levy taxes in the strict sense.

In addition to tax changes, the budget includes $81 million in appropriation from the Rainy Day Fund and over $265 million that was transferred from a dozen state funds. Of this total, over $200 million comes from three transportation funds: the ROADS Fund ($100 million), the State Transportation Fund ($54 million), and the County Improvement for Roads and Bridges Fund ($50 million). All that money, as well as some of the smaller tax changes, are one-time funds. The use of one-time revenues, totaling about $380 million, ensures that next year’s Legislature will again be facing a hole — albeit a smaller one than this year.

Notably, legislative leaders chose to abandon a bill (HB 2403) to cap itemized deductions at $17,000 a year that would have mostly affected the highest-income taxpayers. After revising an earlier measure by excluding charitable deductions from the cap, HB 2403 passed the House but was not taken up by the Senate. Despite being the focus of discussions for months, no bill to raise the 2 percent rate on new wells or to raise the top income rate on high earners was ever introduced.

More Cuts to State Government

The budget provides flat funding, small increases, or cuts of less than 1 percent to about twenty agencies. However, even those agencies will face considerable challenges and some may still be forced to cut services and programs:

• Common education was given a $22 million increase to cover increased employee health care costs. State aid funding, however, will remain $180 million below 2009 even as the student populations has increased by 50,000 students — the deepest cuts in per pupil state aid funding in the nation. Once again, the state has failed to fund textbook purchases, and none of last year’s deep cuts to programs and activities were reversed. And despite the solemn commitment of legislators to provide teachers their first pay raise in 11 years, the Legislature again failed to get that done.
• The Oklahoma Health Care Authority received a $34 million (3.5 percent) increase, but that is about $33 million less than the agency needs to keep providing the same services next year. That could lead to provider rate cuts of up to 5 percent. OHCA has already enacted about $450 million in SoonerCare cuts since 2010.
• The Department of Human Services will receive $18 million more for next year, but that falls more than $30 million short of what they need to protect existing services. The Legislature looks set to pass a bill (SB 848) that would prohibit DHS from making cuts to child welfare services and various programs that serve seniors and individuals with disabilities, which could force the agency to make massive cuts to other services to make up for the shortfall.
• The Department of Mental Health and Substance Abuse Services will see a 0.9 percent increase, but that is about $3 million less than it needs to avoid cuts and does nothing to reverse cuts made last year that limited services for over 70,000 Oklahomans with mental illness.
• The Department of Corrections is due to receive about $1 million more compared to FY 2017, an increase of less than 0.25 percent. The prison population, meanwhile, continues to grow by hundreds of inmates each year, and the agency’s facilities are dangerously overcrowded and in serious disrepair. DOC’s ambitious budget request demonstrated the dire needs of the agency. But under this budget, the agency’s highest budget priorities of a 5 percent raise for employees (many of whom qualify for food stamps) and $123 million in critical maintenance and repair projects will again go unaddressed, putting greater strains on the system’s human and physical resources.
• The Department of Veteran’s Affairs took a cut of less than 1 percent, but that will provide little chance of increasing staffing at veterans care facilities where staffing shortages have contributed to neglect and deaths of patients.  The Department has seen its state funding cut by over 20 percent since 2009.

Meanwhile, most agencies are facing cuts of just under 5 percent compared to last year. In most cases, this year’s cuts are stacked onto deep cuts from previous years. Higher education will have its state appropriation cut by another 4.5 percent, bringing its total cut since 2009 to over 25 percent. The result will be “additional furloughs and reductions of academic programs, personnel, student services, and college degree completion initiatives”, according to the State Regents, and no doubt further tuition increases will be on the table. Other agencies have been hit even worse: the Health Department is now down 29 percent from 2009, the Agriculture Department is down 33 percent, the Department of Environmental Quality is down 41 percent, and the Oklahoma Arts Council is down 46 percent.

Some lawmakers will claim that this budget was the best they could do given the size of the budget hole. But in fact, many reasonable revenue options were left on the table, including raising the gross production tax rate on new production, rescinding some of the income tax cuts of recent years, capping itemized deductions, eliminating the capital gains deduction, and many others. Oklahomans deserve better than a budget announced at the 11th hour that once again fails to uphold our obligations to the families and communities of this state.