Revenue forecast confirms need for continued caution

In late December, 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 now far behind us, the state remains in the midst of a slow and incomplete recovery and will continue to struggle to restore services to adequate levels.

The preliminary FY 2014 estimates, developed by the Oklahoma Tax Commission and Office of State Finance, will form the basis for the Governor’s Executive Budget to be delivered in early February. As we see in the chart below, collections to the General Revenue (GR) fund are expected to continue to recover from their collapse during the recession of 2008-09. Next year’s GR is estimated at $5,938 million, which is 29 percent higher than in the depths of the recession in FY 2010.  Yet next year’s revenues are expected to remain slightly below their levels of six years ago (FY 2008), even as the cost of providing services rises due to inflation, population growth, and increased caseloads and school enrollment.

The preliminary estimate is for next year’s revenues to grow by 6.5 percent, or $271 million. Revenues are expected to grow most strongly from the corporate income tax (+17.3 percent, or $61.7 million), with the sales tax (+4.8 percent, $93 million), and individual income tax (+3.0 percent, $61.7 million) also rising. Gross production taxes are expected to increase slightly over this year, but remain well below historic levels, the result of low prices and the ballooning cost of credits for horizontal and deep well drilling.

The Board of Equalization was also 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 $7,046 million for FY 2014 is an increase of $222 million, or  3.2 percent, over current year appropriations.

As with revenues, next year’s budget would still fall short of a full return to pre-downturn heights, without taking into account inflation, population growth, and increased caseloads and enrollment in the intervening years. With state employees having gone six years without a raise, steep cuts in per pupil school funding, severe understaffing at correctional facilities, new obligations from the child welfare lawsuit settlement, rising health care costs, and other obligations, the competition for available growth revenues will be fierce.

The Board of Equalization will reconvene in February to certify a revised revenue estimate that will be binding on the 2013 Legislature. There’s no way to know if the revised estimate will be higher or lower than December’s. But bear in mind that the preliminary estimate assumed that no deal would be reached in Congress to avert the automatic tax increases that were scheduled to take effect January 1st.  This week’s deal to prevent the expiration of those federal tax cuts will reduce Oklahoma state revenue, since some federal tax cuts will also mean less tax revenue for the state. The impact is likely to amount to tens of millions of dollars, although the precise amount is still being calculated.

All this means that Governor Fallin, Finance Secretary Preston Doerflinger, Senate President Brian Bingman, and others are right to urge caution in crafting next year’s budget. 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,  protecting our revenue base and making sure that we can pay for the services and programs we expect from state government is the fiscally responsible way.