State revenue forecasts: Looking backward

Last year at this time, OK Policy began a revenue forecasting project. Our efforts stemmed from the limitations of official revenue forecasting efforts, which are limited to two annual forecasts prepared for the Board of Equalization, issued in December and February, each covering only the remainder of the current year and the year ahead. In stepping into this void, we had several goals:

1. To help state leaders, agencies, and citizens better understand and prepare for the impacts of the FY ’10 budget shortfall;
2. To encourage the legislature and governor to develop a cohesive plan for managing the shortfall while minimizing impacts on  services that Oklahomans depend on;
3. To better understand how long the revenue downturn would last and the path back to normal revenue levels; and
4. To encourage the state to build better forecasting and financial planning into the budget process.

Our forecasting brief summarized our forecasts and recommendations. This post looks back at how well those forecasts worked.

The graph below suggests that our efforts were generally on target. The graph shows our six forecasts, along with the “middle scenario” and the actual revenue the state received. (Our technical memorandum describes how each forecast was devised.)

Actual General Revenue Fund (GRF) revenues for FY ’10 (which ended June 30, 2010) were $4.6 billion, as shown on the right-hand bar of the graph. Actual revenues were 15 percent below the original appropriation and a 17 percent drop from the previous year.  Our forecasts, which were based on the first three months of the year, showed a very wide range of $3.8 to $5.3 billion, with a middle scenario of $4.44 billion.

The first goal, to improve understanding of the situation and inform legislative action, requires that forecasts early in the year be reasonably accurate. Here’s how we fared on that count:

• The middle scenario, which we suggested should be the basis for legislative planning, was 3.5 percent under the actual revenue.
• Three of our six forecasts came within $160 million (less than 4 percent) of actual revenue. Interestingly, all three were exceedingly simple forecasts. Scenario 1 just assumed that revenue would bottom out in the second quarter of the year and then recover at the same rate that it had fallen over the previous year. Scenario 3 assumed a repeat of the 2002 downturn, but with greater depth. Scenario 4 assumed that the revenue from the first three months would be the same proportion of annual revenue as it had been in previous years.
• The other three forecasts were off by more than $400 million. Two of these, scenarios 5 and 6, used projections of economic growth and natural gas prices to project revenue. While our models fit what had happened up until FY ’09 quite well, they did not work well for FY ’10. The other forecast that missed the mark, Scenario 2, assumed that revenues would stay at the bottom for another quarter, which, thankfully, proved not to be the case.

We can claim partial success on our other goals. While the seven-month wait for legislative action was painful, the Governor and Legislature acted early in the session to adjust budgets and to use Rainy Day Fund and additional stimulus funds, as we had recommended, to help make up for falling GRF revenue. They seemed to embrace our second and third goals by planning the FY ’11 budget with an understanding that recovery would be slow, as we had forecast, and that FY ’12 would be just as difficult due to continued slow growth and falling stimulus revenue.

Results were mixed for our final goal, to improve forecasting and financial planning. The official forecasting process is unchanged. Legislation introduced by Rep. Ryan Keisel,  HB 2796, which would have required new Board of Equalization forecasts during revenue shortfalls and created a broader and more transparent forecasting process, failed to receive a hearing. The legislature made some progress toward our recommendations to reserve more revenue for future downturns by passing HB 3032 to create a new reserve from gross production taxes, but the bill was vetoed by Governor Henry.  The legislature also put State Question 757 on this November’s ballot, so voters can choose to increase the maximum amount of the Rainy Day Fund from 10 percent of General Revenue collections to 15 percent.

During the coming months we’ll develop new forecasts for FY ’11 through FY ’14. We’ll continue to advocate for more frequent and transparent forecasts and for wise reserve policies.