State Budget Update: Bringing the pain

In spite of all the attention paid in Oklahoma in recent weeks to such urgent matters as the Ten Commandments, stem cells, and the Flaming Lips, the real work of the 2009 legislative session has been unfolding largely behind the scenes as key legislative leaders from the House and Senate try to hammer out an agreement on the budget for the upcoming year, FY ’10. From conversations I had last week at the Capitol  with a number of  legislators, fiscal staff, lobbyists, and agency personnel, it appears that the main outlines of the budget have been decided, although some key issues and details remain to be determined.

For those who have not been following closely, the main parameters for the budget were set in February, when the Board of Equalization certified available appropriations for FY ’10 at $644 million less than the budget for the current year. When adjustments were made for one-time money in this year’s budget and other issues, the shortfall approached $900 million. Although the state has built up the Rainy Day Fund to just under $600 million, of which up to $375 million could be made available for FY ’10, Governor Henry and legislative leaders have consistently expressed their unwillingness to tap into reserves to mitigate the shortfall. Also in February, Congress passed the $787 billion stimulus package (the American Recovery and Reinvestment Act, or ARRA), which included funding expressly intended to help states plug budget shortfalls over the next two years. State fiscal relief primarily assumed the form of a State Fiscal Stabilization Fund ($578 for Oklahoma, of which $473 million can be used only for education and $105 million available as general purpose funds) and enhanced federal Medicaid funding ($800 – $950 million for Oklahoma, available back to October 2008).

From what we have heard (which tracks closely with an AP article running this morning) , under the emerging budget deal, most agencies will be facing cuts in appropriations of 7.5 to 10 percent in FY ’10. For common education, higher education, the Oklahoma Health Care Authority, and other agencies that provide Medicaid-funded services (primarily the Department of Human Services), these cuts will be partially or fully offset by federal stimulus dollars.  The State Fiscal Stabilization Fund dollars reserved for education will be divided proportionately between common education and  higher education based on their current share of the budget, with half made available for FY ’10 and half held for FY ’11. It is not clear how the general purpose stabilization dollars will be allocated, or the extent to which enhanced federal Medicaid dollars will be used to supplant state dollars that can then be shifted to fund other agencies. Apparently, appropriations subcommittees have received small allocations that they can use to mitigate the severity of cuts for selected agencies. At this time, there is no intention to use any of the Rainy Day Fund for FY ’10.

It is clearly way too early to gauge the impact that the budget agreement will have on state agencies and state services. Even the core education and health agencies that may avoid cuts in overall appropriations due to stimulus funds will struggle to operate on flat funding while absorbing rising operating and employee benefit costs. Other agencies which were not the beneficiaries of stimulus largess – which includes the state Health Department, Office of Juvenile Affairs, Corrections, Public Safety, and others – may have no alternative but to reduce their workforce, raise user fees, and slash programs and services.

Unfortunately, projections from the Rockefeller Institute of Government and others make clear that we are looking at only the first year of what is assured to be a prolonged budget crisis extending at least through FY ’11 and FY ’12. There are three considerations that will make navigating the years ahead especially challenging for Oklahoma, even if revenue collections begin to recover in 2010:

• The Legislature in past years enacted tax cuts that are still scheduled to kick in over the coming years. In 2010, the standard deduction is scheduled to increase and the estate tax is slated to expire. In addition, once revenues are projected to rise, our top income tax rate automatically falls from 5.5 percent to 5.25 percent. These tax cuts will all have the effect of slowing revenue growth coming out of the downturn.
• The Rainy Day Fund (RDF) may be largely unavailable to help mitigate shortfalls after FY ’10. The constitutional provisions governing use of the fund are such that once revenues are projected to rebound, as they may in FY ’11, the state can  access only one-quarter of the RDF upon declaration of an emergency (see this OK Policy brief that addresses the Rainy Day Fund).  This raises the prospect of implementing deep, extended budgets cuts while our reserve fund goes largely unused.
  
• Federal stimulus funds, for the most part, are available only through FY ’11, raising the prospect of large budget holes beginning in FY ’12.

OK Policy is working on finishing up a full-length issue brief examining the budget outlook and proposing short-term and longer-term recommendations for how to navigate the crisis.