The 5 percent solution?

After two straight years of cuts, the state’s budget situation remains dire. Despite the economic recovery and improving revenue collections, the state faces a huge shortfall for next year. The substantial non-recurring revenues that were used to balance the budget over the past two years, including federal stimulus dollars, state reserve funds, and assorted one-time revenue enhancements,  have mostly dried up.  The Board of Equalization has certified some $500 million less in available revenue for FY ’12 than what was appropriated for the current year budget. As we stated in our recent issue brief on protecting core services:

The impact (of budget cuts) is being felt by Oklahoma families, businesses and communities in far-ranging ways… Deeper cuts will further impinge the ability of state agencies to fulfill their core missions and may seriously affect the well-being of schoolchildren, seniors, persons with disabilities, correctional and public safety officers, and other members of our communities.

In this context, the Governor and legislative leaders are actively considering additional ongoing or one-time revenue sources that could avert truly catastrophic cuts to core services. One option being discussed is appropriating this year’s “5 percent money” for next year’s budget.  This post explains the “5 percent option” and suggests why, on balance, we think a portion of this money should be used, along with other revenue solutions.

Under Article X, Section 23 of the Oklahoma Constitution, the Legislature may appropriate no more than 95 percent of the estimated revenue for the upcoming year certified by the State Board of Equalization. There are seven certified funds, of which the largest and most important is the General Revenue (GR) Fund. The “5 percent money” refers to the balance, or cushion, between 100 percent of the certified GR estimate and the amount the Legislature can appropriate. If GR comes in above 95 percent of the estimate, the 5 percent money becomes available on July 1st of the next year. Normally, that money stays in the GR Fund and is then appropriated for the year after.  GR above 100 percent of the estimate all goes to the Rainy Day Fund.

The certified GR estimate  for the current year, FY ’11, was $4,888.6 million. The Legislature appropriated $4,6444.2 million in GR, leaving 5 percent money of $244.4 million. Through the first nine months of FY ’11, GR has come in at 104.2 percent of the certified estimate, and monthly collections are on an upward trajectory. It is now highly likely that GR for the full year will come in above 100 percent of GR. This means that on the first day of FY ’12, $244.4 million of GR will become available. The question facing those negotiating the  budget is whether to appropriate some or all of that $244.4 million in FY ’12, or whether to hold it in the GR Fund for appropriation in FY ’13.

The idea of using the 5 percent money, first proposed by then-Treasurer Scott Meacham in December, has been endorsed by several elected officials. As House Appropriations and Budget Committee Chair Earl Sears said:

There are (Republican legislative) members out there that say those funds should not be used at this time… That philosophy is there, and what has pre-empted that philosophy is we’ve got a $500 million shortfall.

However, Senate leaders seem less open to appropriating this year’s 5 percent money for next year’s budget.

While opponents of using the 5 percent money haven’t formally laid out their position, three concerns seem to be involved.  The first involves the legality of appropriating the 5 percent dollars, especially since those revenues will not become available until the start of next fiscal year. However, while it hasn’t been done before, there seems to be nothing that expressly prohibit the use of this year’s 5 percent money for next year’s budget.

A second concern is that revenue collections could end up falling short of 100 percent of this year’s estimate  by year’s end. This could be addressed by appropriating less than the full $244.4 million of 5 percent money in case of a late-year collapse in collections. Since we’ll have nine to ten months of actual collections to go on, budgeting this year’s 5 percent money in next year’s budget actually involves less uncertainty than the normal practice of appropriating next year’s budget based on estimated collections.

The final concern is that including up to $244 million in 5 percent money in next year’s budget is short-sighted policy in light of the state’s ongoing fiscal challenges. The state is already staring at shortfalls for FY ’13  due to the end of federal stimulus dollars and Rainy Day Fund money,  the full phase-in of the cut to the top income tax rate, and deferred payments on tax credits owed to the oil and gas industry and others.  Together, these factors mean $300 to $400 million of this year’s budget will not be available next year. This gap may equal or exceed revenue growth, even assuming a continued economic recovery. Using all of the 5 percent money in FY ’12 could thus create dependence on money that may not be available in the future.

Given the tension between the need to avert truly catastrophic budget cuts next year and the prospect of continued shortfalls on the horizon, the right answer regarding the 5 percent money should be neither all nor nothing. We believe the best approach is to use a portion of this year’s 5 percent money in next year’s budget while adopting other measures that would bring in additional revenues for next year and beyond. Balancing the budget with a portion of the 5 percent money is, quite simply, preferable to balancing the budget by endangering the core service in public safety, health care and education upon which Oklahomans’ prosperity, security and well-being depend.