After two revenue failures, Oklahoma will end the year with surplus. What?

Bad haircutThis weekend, The Oklahoman reported the unexpected news that state finance officials now expect to end the current fiscal year with a cash surplus of at least $100 million. After two mid-year revenue failures that led to across-the-board budget cuts of 7 percent, many people are left wondering what in the world is going on. Here’s the explanation.

What happened?

Each February, the Board of Equalization certifies how much revenue the state expects to collect in the upcoming fiscal year. The state Constitution tries to cushion against mid-year budget cuts by allowing the Legislature to appropriate no more than 95 percent of the expected revenue. In years when collections come in below the the 5 percent cushion, the Office of Management and Enterprise Services (OMES) is required to announce a revenue failure and make across-the-board cuts to agency allocations from the General Revenue Fund.

That’s the situation Oklahoma faced this year as falling oil and gas prices, weak corporate tax collections, and a softening economy led to revenue collections falling below projections. In late December, Finance Secretary Preston Doerflinger announced a revenue failure that led to across-the-board budget cuts of 3 percent of every agency’s full-year allocation from the General Revenue Fund. Following the first revenue failure, revenue collections worsened, with General Revenue collections in January missing the estimate by 17.2 percent. It was clear that a second round of across-the-board cuts would be needed; the question was how much to cut? 

As of February, General Revenue was coming in at 8.2 percent below the estimate for the first seven months of the fiscal year. That month, the Board of Equalization certified a revised projection that General Revenue for the full year would be 9.6 percent below the estimate. The 5 percent cushion and the initial round of 3 percent cuts would cover 8 percent of this shortfall. This suggested that additional cuts of 1.5 to 2 percent would be needed to bring the General Revenue fund into balance for the full year. Instead, Secretary Doerflinger ordered that the second round of cuts would be 4 percent, bringing the total cuts for the year to 7 percent. (The Legislature subsequently reduced the cuts for common education and Corrections with supplemental appropriations.)

It turns out that the second mid-year cut was substantially larger than it needed to be. With the 5 percent cushion and 7 percent cuts, GR would need to come in at 12 percent below the initial estimate for the full year to hit the mark precisely. March revenue collections actually came in above the estimate. Even though April and May revenues have been around 13 percent below the estimate,  for the 11-months year-to-date, General Revenue is now 9.1 percent below the estimate. This is slightly less than the shortfall projected by the Board of Equalization in February.

The deeper than necessary cuts mean that through May, the General Revenue surplus is $166.6 million. Even allowing for the possibility of further declines in June, the state will likely end the fiscal year with a more than $100 million surplus, according to the OMES deputy budget director.

GR_Allocation 2016What happens now?

There does not seem to be clear rules for what to do when mid-year cuts are made based on a revenue failure and revenues subsequently exceed the revised projections. When asked by The Oklahoman, Secretary Doerflinger said that it’s premature to talk about the surplus before the fiscal year ends. Presumably agencies will be rebated all or some of the surplus in proportion to the amount they were cut in FY 2016 (see chart above). This wouldn’t happen until after June revenue collections are announced in July. Alternately, a special session could be called to allow the Legislature to decide on how to allocate the surplus.

“These cuts created substantial hardship for state agencies and the clients they serve. DHS, for example, was forced to defer cash payments to low-income seniors and those with disabilities. The Department of Mental Health and Substance Abuse Services cut provider rates, deferred provider payments, and reduced services for over 70,000 clients with mental illness.”

Lessons to learn

The puzzle here is why, if in mid-February the Board of Equalization projected a shortfall 1.6 percent greater than what was accounted for with the initial mid-year cuts, OMES chose to cut agencies by a further 4 percent in early March. These cuts created substantial hardship for state agencies and the clients they serve.  DHS, for example, was forced to defer cash payments to low-income seniors and those with disabilities. The Department of Mental Health and Substance Abuse Services cut provider rates, deferred provider payments, and reduced services for over 70,000 clients with mental illness.

OMES was clearly looking to err on the safe side and to avoid at all costs a third revenue failure at the very end of the fiscal year if revenues continued to come up short. That caution is understandable. Yet as we got closer to the end of the year and a surplus became increasingly probable, OMES chose not to share this news, which could have been helpful to agency leaders in making budget decisions going into the new year.  The OMES May revenue news release was silent about the looming surplus, focusing instead on the impact of tax credits for wind producers.

More importantly, the fact that OMES seems to have unilateral authority to decide the amount and timing of mid-year cuts, as well as what to do with surpluses if they cut too much, is problematic. Putting in place a formal process for managing revenue failures that includes greater input and oversight would be a worthy reform for legislators to consider next session.

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ABOUT THE AUTHOR

Former Executive Director David Blatt joined OK Policy in 2008 and served as its Executive Director from 2010 to 2019. He previously served as Director of Public Policy for Community Action Project of Tulsa County and as a budget analyst for the Oklahoma State Senate. He has a Ph.D. in political science from Cornell University and a B.A. from the University of Alberta. David has been selected as Political Scientist of the Year by the Oklahoma Political Science Association, Local Social Justice Champion by the Dan Allen Center for Social Justice, and Public Citizen of the Year by the National Association of Social Workers.

7 thoughts on “After two revenue failures, Oklahoma will end the year with surplus. What?

  1. Thank you for the succinct explanation. One that further verifies that those currently in power in Oklahoma will lie, cheat, steal and obfuscate in order to accomplish their own ends. The means to do so are simply any they choose without consideration of human decency or fairness. A farce and a travesty. I wish I believed in karma.

  2. Have the legislature place the money cut from five (5) line items back into the State Department of Education budget as line items so the schools will actually receive the money. These line items are:
    1. Textbook funding
    2. Alternative Education
    3. Reading Sufficiency Fund
    4. Ace Technology
    5. Ace Remediation

  3. Is this just another example of how Oklahoma’s failure to plan long-term has led to unnecessary hardship for those least able to fight back? Are we being well-served (or served at all) by OMES? My answer to the first question is Yes and my answer to the second is No. Given all that has happened, it is definitely time to replace Mr. Doerflinger with someone more competent.

  4. Agree with Ms. Cardenas! The Capitol must be laughing now; as we pay their salaries, elect them to office. We giveth, and WE can taketh away!
    #NoConscience! Affecting the frail elderly, those that have no ability to fight back & the leadership of our State/Fed Agencies who believed what they were being told. Isn’t there something in Law about Misrepresentation??! #GetOutAnVote!

  5. What should we do with the surplus money? The answer is clear: cut taxes to the rich and the oil/gas industry!

  6. This article is very informative, but there is no mention of the impact on the lives of state employees who were targeted. Programs and services that so many people poured themselves into were disrupted and many were discontinued. Assurances made to clients based on directives from state offices were not upheld making the workers who actually face the consumers seem untrustworthy. Then there were the buyouts which seemed generous to those in the private sector but were actually veiled forced retirements. This entire thing was such a ruse.

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