Oklahoma Budget Overview: Trends and Outlook, October 2010

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OKLAHOMA BUDGET OVERVIEW

Trends and Outlook

Updated October 15, 2010

David Blatt

Oklahoma Policy [email protected] - (918) 794-3944

mailto:[email protected]

mailto:[email protected]



Oklahoma’s Path to Prosperity

OUR STARTING POINTGovernment is among our means of

achieving our common goals as astate --- alongside private businesses,non-profit organizations, faith groups

and families.




OUR STARTING POINT Our families, communities and businesses dependon our state and local governments to help:

Educate our children and train our workforce;

Protect our streets and investigate crimes;

Maintain and upgrade our roads and bridges;

Pay for the medical care provided by private doctors, nurses,therapists, home health aides, etc.

Ensure we have clean water and air;

Promote our small towns, rural areas, artists and investors;

Take care of those at risk of harm and abuse.

We cannot reach our goals and thrive as a statewithout effective public structures and systems.




We Already Lag Behind

Oklahoma already underfunds most of our publicstructures and falls short of many of our common goals asa state. For example:

Our teacher pay is among the lowest in the nation;

We have among the highest rates of heart disease, obesity,smoking, and uninsured;

Our community-based social service providers have gone yearswithout rate increases;

Many of our roads and bridges are in disrepair;

Our correctional facilities are overcrowded and understaffed.

The ongoing state budget crisis threatens a serious andlong-term corrosion of our public structures that willweaken our prosperity, security and well-being.



Budget Trends: FY ‘02 – FY ‘09




FY „02 – FY „09: Bust and Boom State budget suffered steep downturn, deep cuts, ’02 - ’04;

Strong economy led to robust revenue growth and increased stateappropriations between FY ‘06 and FY ’08.

Most agency appropriations frozen in FY ‘09

$4,981

$5,389 $5,491

$5,191 $5,145

$5,459

$6,217

$6,760$7,043 $7,089

$4,000

$4,500

$5,000

$5,500

$6,000

$6,500

$7,000

$7,500

FY'00 FY'01 FY'02 FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09

State Appropriations History, FY '00 - FY '09, in $ millions(includes supplementals, excludes one-times from Rainy Day spillover funds)



Where did the growth revenue go?

Increased State Appropriations, Selected Agencies,

FY ‟06 – FY ‟08

Dept. of Education: $453M

Health Care Authority: $289M

Higher Education: $271M

Human Services: $129M

Corrections: $80M

Transportation: $72.5M*


80 percent of new dollars went to six core agencies.

Covering rising costs of basic services and supportingtargeted investments for shared goals.



Lost Revenues from Select Tax Cuts Enacted 2004 - 2006

FY'05 through FY'10 (in $ millions)

$18.7$144.8

$333.3

$561.8$651.1

$776.9

$0.0

$200.0$400.0

$600.0

$800.0

FY'05 FY'06 FY'07 FY'08 FY'09 FY'10source: Oklahoma Tax Commission

Tax Cuts had a long-term impact Most of the cuts were to the personal income tax;

Tax cuts were stretched out over several years; full impactwill not be felt until FY ’11.




Tax Cuts had a long-term impact Revenue losses from tax cuts more than double the additional

revenue from “sin taxes” approved by voters in 2004 (lottery,

gaming, tobacco)


$41

$195

$239$287 $323 $335

$19

$145

$333

$562

$651$777

$-

$200.0

$400.0

$600.0

$800.0

$1,000.0

FY '05 FY '06 FY '07 FY '08 FY '09 FY '10

$ m i l l i o n s

Estimated Revenue Impact of New Revenue Measures Compared to Major TaxCuts, FY '05 - FY '10 (in $ millions)

Total New Revenue (Combined Lottery, Gaming, Tobacco) Total Lost Revenue (Major Tax Cuts)

New revenues do not include tribal tobacco tax proceeds. Revenue losses are Oklahoma Tax Commission

projections



Source: Center on Budget and Policy Priorities


ThingsAre Tough All Over

All but two states are experiencing the state fiscal crisis.

Combined state budget gaps for FY ’09 – FY ‘12 estimated toexceed $600 billion.




It‟s a Revenue Problem

Five consecutive quarters of worsening collections;

Revenue drops more than twice as steep as during thelast downturn.

-12.1%

-29.5%

2.3%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

Q1

FY

'02

Q3

FY

'02

Q1

FY

'03

Q3

FY

'03

Q1

FY

'04

Q3

FY

'04

Q1

FY

'05

Q3

FY

'05

Q1

FY

'06

Q3

FY

'06

Q1

FY

'07

Q3

FY

'07

Q1

FY

'08

Q3

FY

'08

Q1

FY

'09

Q3

FY

'09

Q1

FY

'10

Q3

FY

'10

Quarterly Year-over-Year Change in General Revenue

Collections, FY '02 - FY '10




It‟s a Revenue Problem FY ‘10 General Revenue 23 percent below pre-downturn (FY

‘08) levels;

FY ‘10 GR collections less than FY ’01 – without adjusting forinflation or population growth.

$4,717

$4,408

$4,174

$4,616

$4,966

$5,701

$5,935 $5,953

$5,545

$4,600

$4,000

$4,500

$5,000

$5,500

$6,000

FY '01 FY '02 FY '03 FY '04 FY '05 FY '06 FY '07 FY '08 FY '09 FY '10

General Revenue Collections,

FY '01 - FY '10 (in $millions)




FY „10 Initial Budget $7,231.2 million total, including $641 million ARRA (stimulus);

Increase in total appropriations of $106 million (1.5 percent);

State dollars only: $500 million less than in FY ’09;

Stimulus funds made it possible to minimize cuts or provide

small increases to ten largest state agencies and some smallerones.

$4,981

$5,389 $5,491

$5,191 $5,145

$5,459

$6,217

$6,760

$7,043

4,000

4,500

5,000

5,500

6,000

6,500

7,000

7,500

FY'00 FY'01 FY'02 FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09 FY'10

State Appropriations ARRA

$30ARRA

$7,125 $7,231

$641ARRA

$7,095State

$6,590State

State Appropriations History, FY '00 - FY '10 in $millions)(includes supplementals, excludes one-times from Rainy Day Spillover funds)




FY „10 : Off to a Very Rough Start

Collections through January were $864 million – 24.9 percent -below the estimate.

After seven months of significant shortfalls, collections startingin February came close to or exceeded the monthly estimate.

-$401

-$180 -$200

-$11-$72

-$864-$1,000

-$800

-$600

-$400

-$200

$0

Net Income

Tax

Gross

Production

Sales Tax Motor

Vehicle

Other

Sources

Total Gen.

Revenue

General Revenue Collections compared toEstimate, by Tax, FY '10 thru Jan (in $millions)

-$476

$17

-$238

$6

-$125

-$816-$1,000

-$800

-$600

-$400

-$200

$0

$200

Net

Income

Tax

Gross

Production

Sales Tax Motor

Vehicle

Other

Sources

Total Gen.

Revenue

General Revenue Collections compared toEstimate, by Tax, FY '10 thru June (in $millions)




FY „10 Shortfalls: What Response?

OSF cut agencies’ GR allocations by 5 percent beginning in August and by 10 percent beginning in December;

Borrowing from cash reserves of various funds;

Agreements announced by Governor, Speaker and

President Pro Tem in January and February: Continued 10 percent monthly cuts to GR for rest of year;

Averaged out to 7.5 percent of GR for full year.

Supplemental funding to various agencies to offset part of GR and HB 1017 shortfalls;

Additional revenues needed to balance from Rainy Day Fund,stimulus funds, other sources.




FY „10 Mid-Year Budget Agreement

Total revised budget was $272 million (3.8%) less thaninitial; $165 million (2.4%) less than FY ’09;

Almost $1.5 billion (21%) of revised FY ‘10 budget madeup of non-recurring money.

$6,793

$6,220$5,462

$301

$371

$435

$30$641

$838

$224

$4,000

$4,500

$5,000

$5,500

$6,000

$6,500

$7,000

$7,500

FY '09 FY '10 - Initial FY '10 - Revised

State Recurring Cash Stimulus (ARRA) Rainy Day Fund

State Appropriations, FY '09 - FY '10,

Total and by Funding Source (in $millions)

Total= $7,124 million Total= $7,231 millionTotal= $6,959 million




FY ‟11 Budget: The Challenge Escalates

Final FY ‘11 certification provided $1.8 billion lessrevenue for next year than FY ‘10 initial budget , $1.5billion less than final FY ‘10 budget

$7,043 $7,124 $7,231

$6,452

$6,959

$5,294 $5,415

$6,797

$4,000

$5,000

$6,000

$7,000

$8,000

FY'08 FY'09 FY'10 -

initial

budget

FY '10 -

projected

revenues

(Feb)

FY '10 -

Revised

FY '11 -

Certified

State $

(Dec)

FY '11 -

Certified

State $

(Feb)

FY '11 -

Gov

Budget

State Appropriations, FY'08-FY '11

(includes all revenues and supplementals;

in $ millions)




FY ‟11 Budget: The Challenge Escalates

2010 Session focused on which, if any, revenue measures wouldbe adopted to bridge the budget gap.

FY „11 budget gap exceeded $800 million - assumingmaintenance of FY „10 budget cuts, the use of all remainingstimulus funds, and 3/8ths of Rainy Day Fund.

Equivalent to an additional 12 percent cuts to all agencies of state government beyond the cuts already enacted.

Agency scenarios of how to absorb cuts of an additional 7.5percent to 15 percent in FY „11 left no doubt of the grave threatsthat would be posed to the state economy and to the health and

security of Oklahomans. Many cuts would be multiplied by loss of federal matching

funds.

See OK Policy, “Bridging the Budget Gap,” :http://okpolicy.org/files/bridgingthegap_1pg.pdf




FY ‟11 Budget Agreement

Total appropriations for FY ’11 = $6.714 billion.

7.2 percent decrease (-$517.5 million) from the initial FY ‘10budget and 3.5 percent decrease (-$245.4 million) from thefinal FY ‘10 budget after mid-year cuts

$4,906

$5,389$5,412

$4,922$5,073

$5,240

$6,217

$6,760$7,043

$7,095

$6,590

$5,897$5,802

$219

$30

$641

$838

$539

$75

$79

$269

$72

$224

$373

$4,000

$4,500

$5,000

$5,500

$6,000

$6,500

$7,000

$7,500

FY'00 FY'01 FY'02 FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09 FY'10 -

Initial

FY '10

- Final

FY '11

FIG. 1: State Appropriations History, FY '00 - FY 11(in $millions; FY '00-FY'10 includes supplementals, excludes one-times from

Rainy Day Spillover Funds )

State Revenues Federal Relief Rainy Day Fund





Appropriated over $1.35 billion in additional revenues on topof those certified in February. These included:

Remaining $539 million from the 2009 stimulus bill;

Remaining $373 from the Rainy Day Fund;

$450 million from assorted revenue enhancements: Suspending and deferring payment of tax credits;

Issuing and refinancing bonds;

Fee and permit increases;

Transfers of cash balances;

Enhanced tax collections.





Common Ed.,$2,375.6 , 35%

Higher Ed.,$1,003.5 , 15%

OHCA (Medicaid),$993.0 , 15%

DHS, $543.1 , 8%

Corrections, $462.1, 7%

Transportation,$114.8 , 2%

Mental Health,$187.7 , 3%

Career Tech, $142.0, 2%

Juv. Affairs, $99.2 ,1%

Public Safety, $88.4, 1%

All Other Agencies,$704.3 , 11%

TotalAppropriations:$6,713.7 millionIncludes stimulus,Rainy Day Fund

Total TenLargest:$6,009.4,89.5%

Notes:Transportation also received$65 from bond issue;OHCA includes $30m transfer from Insure Oklahoma Fund;excludes Health Carrier Access

Agency Appropriations – 10 Largest, Others, Total





Funding cuts limited to under 10 percent for most of the largeststate agencies;

However, over half of all appropriated agencies will absorb cutsof at least 15 percent for FY „11 compared to FY ‟09.

In some cases, appropriations cuts have been partly offset byfee increases. In addition, the Legislature has approved measures

to promote savings and efficiencies and give agencies and schooldistricts greater spending flexibility;

For most agencies and school districts, no additional funding tocover increased employee health care costs, general inflation or

rising caseloads for 2 or 3 consecutive years;

See OK Policy’s FY ‘11 Budget Highlights at:

http://okpolicy.org/fy-10-fy-11budget-

information




Impact of Cuts

Even with all the additional revenue to reduce the size of cuts , the toll on services and programs has been significant:

Department of Mental Health and Substance Abuse Services reducedbeds and closed centers for children’s mental health and adultsubstance abuse, cut contracts to all providers;

OJA cancelled youth detention and gang prevention programs, cutproviders 5 percent, authorized 22 furlough days;

OHCA cut some Medicaid benefits and reduced all provider rates by3.5 percent;

Health Department eliminated 17 child guidance centers serving pre-school children with developmental delays;

Department of Corrections cut contracts, eliminated programs,reduced staffing to under 75 percent of authorized levels;

School districts laid off teachers and staff, eliminated programs;

Most agencies leaving positions unfilled, offering buy-outs; someimposing furloughs.



Budget Outlook: Looking Ahead




Budget Outlook: This Ain‟t Over Yet

FY ‘11 GR collections through September up 6.8 percentfrom FY ‘10 – but 24 percent below FY ’09;

Collections through September 4.0 percent above theestimate.

1,136.3 1,127.4995.3

1,148.21215.6

1319.11435.9 1466.3

1567.8

1,105.91,180.6

$250.0

$450.0

$650.0

$850.0

$1,050.0

$1,250.0

$1,450.0

$1,650.0

FY '01 FY '02 FY '03 FY '04 FY '05 FY '06 FY '07 FY '08 FY '09 FY '10 FY '11

July- Sept. General Revenue Collections,

FY '01 - FY '11 (in Millions)





Substantial reliance in FY’10 –’11 on non-recurring revenuecreates significant problems for FY ’12 and FY ’13:

Over $1.1 billion in non-recurring revenues in FY ‘11 budget;

However, $167 million surplus in FY ‘10 collections,

likelihood of add’l cash balances building up; Extension of federal stimulus should be able to help

Medicaid and common education in FY ’12.

Federal

stimulus funds,

$539

Rainy Day

Funds, $373

Revolving fund

transfers, $73

Deferral of tax

rebate

payments, $81

Moratorium of

tax credits, $44

Other one-time

revenue, $36

Non-Recurring Revenue in FY '11 BudgetTotal Budget = $6,714 million; Total Non-Recurring

Revenues= $1,145 million)





Time-released tax cuts still kicking in:

Top rate will fall from 5.5% to 5.25% as soon asrevenues are projected to grow 4%... even if revenuesremain below pre-downturn levels;

Revenue impact of $120 - $170 million in FY ‘12 & FY ’13;

Effective January 1, 2012 – unless Legislature acts.

Additional revenues automatically allocated for ROADS andOHLAP.





Possible passage of SQ 744 (mandatory K-12 educationfunding increases) could throw everything into chaos.

$392 $415

$889

$1,696

$179 $217$(191)

$206

$572 $632 $698

$1,901

$(200)

$200

$600

$1,000

$1,400$1,800

$2,200

Yr 1 (FY '12) Yr 2 (FY '13) Yr 3 (FY '14) Total

Annual Mandatory Increase in K-12 Funding vs. Increased

Revenues, FY '12 - FY '14 (in $ millions) under SQ 744 Formula

Increased K-12 Spending Rest of Government Increased RevenueAssumes 10.5% annual revenue growth; 5% increase in Regional Per Pupil Expenditurein FY '13 and FY '14

See: “SQ 744 is the Wrong Solution for Oklahoma, Issue brief and fact

sheet at: http://okpolicy.org/sq-744





Revenues unlikely to recover to pre-downturn nominallevels prior to FY ’13.

$5,928 $5,981

$5,544

$4,439

$4,735

$5,275

$5,945

$4,000

$4,500

$5,000

$5,500

$6,000

$6,500

FY 07 (act.)FY 08 (act.)FY 09 (act.)FY 10 (est.)FY 11 (est.)FY 12 (est.)FY 13 (est.)

R

n$mio

Fiscal Year

Historical and Projected Revenue, FY'07-FY'13

General Revenue Fund

Estimates by OKPolicy - not based oncertification




Short-Term Recommendations:

Need for a Balanced Approach

1. Defer additional tax cuts until revenues fully recover;

2. Serious review of tax credits and exemptions to determinewhich are needed and effective;

3. Consider new revenue streams for the Medicaid program;

4. Consolidation of functions and agencies where duplicativeor unnecessary;

5. Prioritize prevention, diversion and surveillance overdetention;

6. Prepare for next downturn by strengthening our reservefunds and improving our forecasting capacities.



Long-Term Recommendations

1. Serious review of our tax system;

2. Scrutinize our programs and spendingcommitments;

3. Give control for making decisions about revenuesand spending back to our elected representatives.

Long-Term Fiscal Outlook



For More Information

• Updated Budget Information:okpolicy.org/current-budget-

information

• Oklahoma Policy Institute‟s OnlineBudget Guide

www.okpolicy.org/online-

budget-guide

http://www.okpolicy.org/online-budget-guide










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Oklahoma Budget Overview: Trends and Outlook, October 2010

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