Revenue forecast confirms need for caution

On Tuesday, the Board of Equalization certified a preliminary estimate of the revenues available for next year’s budget. The numbers confirm that while the worst of the fiscal crisis is over, the state is experiencing a slow, incomplete recovery that will fall far short of restoring key services to pre-downturn levels.

The preliminary FY ’13 estimates, developed by the Oklahoma Tax Commission and Office of State Finance, will form the basis for the Governor’s Executive Budget that will be delivered in early February; the Board will meet again in mid-February to provide revised estimates that will be binding on the 2012 Legislature. As we see in the chart below, collections to the General Revenue (GR) fund are expected to continue their recovery next year from their collapse during the recession of 2008-09. Next year’s GR is estimated at $5,540 million, which is 19.9 percent greater than FY ’10.  Yet next year’s revenues are expected to remain 7 percent below their levels of six years ago (FY ’07), even as the cost of providing services rises due to inflation, population growth, and increased caseloads.

We can see, too, that next year’s revenues are projected to grow only very modestly – $82 million, or 1.5 percent, compared to this year.  This slow growth projection reflects, in part, uncertainty about the strength of the economic recovery over the coming months and the assumption of less robust oil and gas revenues in the coming year. But it also reflects policy decisions made by previous Legislatures. In particular, the reduction in the state’s top marginal income tax rate from 5.5 percent to 5.25 percent, set to take effect on January 1st, will reduce revenues by $70 million in FY ’13 on top of a $50 million partial-year impact in FY ’12. Additionally, the state is obligated to pay back deferred tax credits to the oil and gas industry beginning in FY ’13, with a fiscal impact of $50 million. Also, the income tax revenue going directly to the ROADS Fund for transportation projects will increase by $41.7 million in FY ’13.

What do these revenue projections mean for the FY ’13 budget? The Board of Equalization was presented initial estimates of  how much will be available for the Legislature to spend in the upcoming year. This amount includes available cash balances and projected collections from non-certified funds, such as the 1017 Education Reform Fund. The estimate of $6,531 million for FY ’12 is almost identical to the current year appropriated budget of $6,511 million. As we can see from the chart, based on the initial certification, next year’s budget would remain almost $600 million below its pre-downturn peak and would not even return to FY ’07 levelsBy the time the Legislature meets and begins work on next year’s budget, there is a good likelihood that additional revenues will be available. Based on strong revenue collections in recent months, February’s re-certification is expected to be higher than December’s. In addition, there should be a considerable cash reserves built up over the past two years that the Legislature can appropriate for next year.

Still, the consensus among the state’s elected leaders is to expect a flat state budget next year. Many agencies need additional funds to deal with rising costs and increased caseloads and enrollment, as well as to restore essential staffing and programs that have been eliminated over the past three years of budget cuts. The state has fallen short of its obligations for teacher health care costs and stipends for Board certified teachers. We are $28 million behind in payments to local governments for emergencies. We have been among the worst in the nation for maintaining our roads and bridges.

In this context, the statement by Senate Pro Tem Brian Bingman deserves to be taken seriously:

We should celebrate the positive indicators of recovery while proceeding with thoughtfulness and caution in the coming fiscal year.

This caution means this in not the time to consider major expansions of government programs. Agencies will have to continue to find savings where they can and find ways to operate at less than full capacity. Likewise, politicians need to show discipline. As we claw out of our deep budget hole and struggle to bring state finances back into into balance,  promising tax cuts may be politically appealing, but is not the fiscally responsible way.

ABOUT THE AUTHOR

David Blatt helped found OK Policy in 2008 and became the organization's Executive Director in 2010. David previously served as Director of Public Policy for Community Action Project of Tulsa County and as a budget analyst for the Oklahoma State Senate. He has a Ph.D. in political science from Cornell University and a B.A. from the University of Alberta. David has been selected as Political Scientist of the Year by the Oklahoma Political Science Association, Local Social Justice Champion by the Dan Allen Center for Social Justice, and Public Citizen of the Year by the National Association of Social Workers. He lives in Tulsa with his wife, Patty Hipsher, a special education teacher in Broken Arrow, and their son, Noah.

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