Grim revenue forecast points to hard choices ahead

Despite almost four years of economic growth, Oklahoma’s core services have never fully recovered from the steep drop in revenues and repeated budget cuts that accompanied the Great Recession. Now we are facing another stretch of rough budget times and hard choices.

Since the start of the current fiscal year, state General Revenue (GR) collections have been coming in below prior year totals and falling short of projections. The preliminary revenue estimates certified in late December by the State Board of Equalization confirm that this year’s revenues will continue to fall short and that there may be less money for next year’s budget than this year’s.

The December numbers certified by the Equalization Board provide three main takeaways:

1. Current year revenues are projected to  stabilize but fall short of projections. Through November, FY 2014 GR is running $147 million below the certified estimate from June, a drop; of 6.6 percent. For the full year, revenues are now projected to come in $135 million, or 2.3 percent, below the estimate. Since the budget provides for a 5 percent cushion between estimated revenues and appropriations, a shortfall of under 5 percent will not trigger mid-year budget cuts.  Most of the shortfall in the revised FY 2014 revenue projections involves weak performance from the corporate income tax (-$106 million below the estimate) and the sales tax (-$76 million). The Board also projects that FY 2014 revenues to the HB 1017 Fund will fall $35 million  below what was expected, due to weak corporate income and sales tax collections.
2. Next year’s revenues are expected to grow compared to this year’s revised estimate, but they will be less than this year’s initial estimate. General Revenues are expected to increase by $113 million, or 2.0 percent, compared to this year’s revised estimate. A rebound in corporate income tax and sales and use taxes account for most of the projected growth, while individual income tax and gross production tax revenues are expected to be flat. Individual income tax estimates take into account the Supreme Court’s ruling striking down the tax cut that was supposed to take effect in January 2015. FY 2015 GR will remain below nominal levels of seven years ago, a result of numerous factors, including an incomplete economic recovery, the growing cost of tax credits, and the diversion of a growing share of tax revenue to the ROADS Fund ($416 million in FY 2015) and other dedicated sources.
   3.  There looks to be less money available for appropriation in FY 2015 than in FY 2014. The Board certified $6.958 million as the expenditure authority for FY 2015 compared to $7.128 appropriated in FY 2014, a decrease of $170 million.  While there is expected to be slightly less revenue available in many of the funds used for appropriations, the biggest drop, $126 million, involves the loss of money appropriated last year from the Special Cash Fund.

The revenue picture might improve with February’s revised certification and with the injection of additional revenues from various sources, such as transfers from agency revolving funds. However, the task of constructing the FY 2015 budget will be  especially daunting given the pressing demands for additional state funding that have already been identified. Among the top needs:

• The Oklahoma Health Care Authority (OHCA) projects it will need $150 million in additional state dollars just to continue providing current services. Of the total, $45 million is due to a drop in the federal matching rate for Medicaid services, which will also have an impact of some $20 million on other agencies that operate Medicaid programs;
• The Department of Human Services requires at least $25 million to continue  to implement the child welfare legal settlement. The state has already been rebuked by the observers monitoring the settlement for falling behind in providing staff pay raises and reimbursement increases to foster care providers;
• The recent report on state employee compensation calls for $41 million in additional appropriations FY 2015 to begin to bring employee pay up to market levels;
• Pay raises are critically needed for Oklahoma’s public safety system. Pay and staffing for Oklahoma’s correction officers is  among the worst in the nation and staffing shortages are putting safety at risk. Oklahoma state troopers have not received a raise in seven years and now earn far below comparable officers;
• The State Department of Education is asking for a $174.9 million increase for FY 2015, including $81.4 more for the state aid formula. Since 2008, has made the largest percentage cuts to state aid funding in the nation, and schools are set to lose $31 million this year from the new exemption on intangible  property.

Declining revenues and growing needs at a time when funding levels have not recovered from the last round of cuts will require lawmakers to consider every possible option to bring the budget into balance. At the very least, this makes more urgent the task of curbing unnecessary tax breaks to the oil and gas industry, which are now costing hundreds of millions annually, and putting aside any talk of any further tax cuts. Other options that could be on the table include tapping the Rainy Day Fund, expanding collections of online sales tax, tightening the Quality Jobs program, and raising the gas tax to pay for increased transportation funding. OK Policy will explore all these options and others in greater depth and work with broad-based coalitions of supporters to encourage sound and responsible ways to address our budget woes.