Lawmakers this year have approved over half a billion in new taxes to pay for a package of spending measures, including increased pay for teachers, support staff, and state workers, and increased operating support for schools. While the new obligations are almost fully funded for the first year, in future years legislators are counting on growth revenue from an expanding economy to meet the spending commitments they’ve already made and to do more for education and other critical priorities.
But leaving economic uncertainties aside, there’s a hitch. Under a law passed quietly in 2016, several hundred million dollars could be directed automatically to a new budget reserve fund in FY 2020, rather than being available to meet funding commitments. Unless lawmakers revisit the law this session, they may find themselves facing major unexpected budget problems a year from now.
The Revenue Stabilization Fund
In 2016, the Legislature passed HB 2763, creating a a new reserve budget fund, the Revenue Stabilization Fund (RSF), intended to help the state save more money for future economic downturns. Unlike the state’s existing Constitutional Reserve Fund (or Rainy Day Fund), which receives deposits when actual revenue collections exceed projections, the new fund is designed to grow in years when collections from the state’s most volatile revenue sources — the gross production taxes on oil and gas, and the corporate income tax — are coming in above recent averages.
Under the new law, which took effect in 2017, the Board of Equalization every February compares the amount of money to be apportioned to the General Revenue Fund (GR) for the upcoming year with the average collection of the last five years for each of these taxes. If collections for the upcoming year are projected to be above the five-year average, then 100 percent of the difference from each tax is to be deposited in reserve funds [see Schedule 5 of the Feb. 2018 certification packet to see how this is calculated]. For the gross production taxes, the entire amount would go to the Revenue Stabilization Fund; for the corporate income tax, 25 percent would go the Rainy Day Fund and the remainder to the Revenue Stabilization Fund. Similarly to the Rainy Day Fund, the Legislature could withdraw from the RSF only in the case of a mid-year revenue failure or declining total revenue for the upcoming year.
When the law was enacted in 2016, legislators knew that the state was in the midst of a prolonged budget downturn from which it would take several years to recover. Accordingly, they decided that the new provisions would not be triggered until actual General Revenue collections for the preceding fiscal year exceeded $5.7 billion (at the time, GR was just over $5.0 billion). The past two years, GR has remained well below the threshold so the new law hasn’t kicked in. However, the most recent projections are for FY 2018 GR to hit $5.775 billion, and recent revenue collections have been exceeding the estimate. It is therefore quite likely that HB 2673 will be triggered next February.
Over $300 million could be deposited to the Revenue Stabilization Fund next year
If the threshold is met next year, a substantial amount of money that would have been available for appropriation will instead go the Revenue Stabilization Fund in FY 2020. Had the threshold been met this year, there would have been a total of $183 million deposited to reserve funds from the gross production tax on natural gas and oil (corporate income tax collections are below their five-year average and are likely to remain so next year). Next year’s gross production tax collections are almost certain to grow substantially from this year due to law changes that have raised the gross production tax rate from 2 to 5 percent on new wells. If production and prices continue at current levels, next year’s collections could be projected to be $300 million to $400 million above the benchmark five-year average. That entire amount would be distributed to reserve funds under the provisions of HB 2763.
“Next year’s collections could be projected to be $300 million to $400 million above the benchmark five-year average. That entire amount would be distributed to reserve funds under the provisions of HB 2763 .”
In addition, lawmakers this session are considering a pair of measures – SJR 35 and HB 1401 – that would create at least one additional reserve fund that would receive a portion of revenues from the gross production tax. If approved by the voters this November, SJR 35 would direct the first 5 percent of the gross production tax on oil and gas to the Oklahoma Vision Fund effective July 2019; that would mean a deposit of some $20 – $30 million in FY 2020 based on current projections. (HB 1401, a companion measure to SJR 35, as currently written would allocate 20 percent of GPT revenue to the Oklahoma Legacy Fund; however, its author has told OK Policy that HB 1401 will be amended to align with SJR 35).
What can be done?
As we have noted, the education plan enacted this session already faces a shortfall of some $116 million in FY 2020 as funds from the $1 per-pack increase in the cigarette tax are shifted from General Revenue to the Health Care Enhancement Fund. Health care agencies and advocates have been repeatedly assured that those revenues will be used to increase health care spending and not simply supplant other funds that are already in the health care budget. In addition, lawmakers have provided repeated assurances that this year’s funding increases for education and state employees are intended only as the beginning of a multi-year effort to restore funding for schools and provide teachers and state employees a fair and competitive salary.
Honoring these promises and commitments, as well as funding the other obligations of state government, will require considerable growth revenue. The several hundred million dollars that is likely to flow to the Revenue Stabilization Fund will make that challenge exceptionally difficult.
Lawmakers can and should revisit HB 2763 to avoid that situation. Total annual deposits to the RSF could be capped at a certain dollar amount — say $100 million — or as a percentage of the difference between projected collections and the five-year average — perhaps 25 percent.
The intention behind the Revenue Stabilization Fund was sound: Oklahoma should be saving more money, especially from oil and gas revenues in years when production is strong. But as with many laws, the consequences are not always clear until after the law has been passed. Now is the time to give this law another careful look.