The State Budget Outlook: A New Fiscal Reality

Updated July 19, 2011

David Blatt Oklahoma Policy Institute

dblatt@okpolicy.org - (918) 794-3944

Oklahomas Path to Prosperity

OUR STARTING POINT

Government is among our means of achieving our common goals as a state --- alongside private businesses, non-profit organizations, faith groups and families.

Oklahomas Path to Prosperity

OUR STARTING POINT

Our families, communities, and businesses depend on 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, hospitals, etc. Ensure we have clean water and air; Promote our small towns, rural areas, artists, and investors;

Support those at risk of harm and abuse.

We cannot reach our goals and thrive as a state without effective public structures and systems.

Oklahomas Path to Prosperity

We Already Lag Behind
Oklahoma already underfunds most of our public
structures and falls short of many of our common goals as a state. State and Local Spending per Person by Function, 2007-08
$9,000 $7,000 $5,000 $3,000 $1,000 -$1,000
Spending per Person

Oklahoma US Average

Source: U.S . Bureau of the Census

Total per capital state and local spending is $1,627 (18 percent) less than the national average;
We spend below the national average in just about every category of expenditure;

Oklahomas Path to Prosperity

We Already Lag Behind
Our average teacher pay is 42nd in the nation (2007); We rank in the bottom 10 states in smoking, obesity, job-related deaths, access to health insurance and doctors, and days lost to mental and physical illness (2007); We are 4th in total prisoners per capita and 1st in female incarceration rates (2009); We rank 9th worst among the states in road condition, with 29.5% of roads in mediocre or poor condition (2005). The ongoing state budget crisis threatens a serious and long-term corrosion of our public structures that will weaken our prosperity, security and well-being.

Budget Trends: FY 02 FY 09

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 state appropriations between FY 06 and FY 08.
Most agency appropriations frozen in FY 09
State Appropriations History, FY '00 - FY '09, in $ millions (includes supplementals, excludes one-times from Rainy Day spillover funds) $7,043 $6,760 $6,217
$5,389

$7,500 $7,000
$6,500

$7,089

$6,000 $5,500 $5,000 $4,500 $4,000 FY'00 FY'01 FY'02 FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09 $4,981 $5,491
$5,191

$5,459 $5,145

Budget Trends: FY 02 FY 09
Where did the growth revenue go?
Increased State Appropriations, Selected Agencies, FY 06 FY 08 Dept. of Education: $453M Human Services: $129M

Health Care Authority: $289M Corrections: $80M Higher Education: $271M Transportation: $72.5M*

80 percent of new dollars went to six core agencies. Covering rising costs of basic services and supporting targeted investments for shared goals.

Budget Trends: FY 02 FY 09
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 impact will not be felt until FY 13.
Lost Revenues from Select Tax Cuts Enacted 2004 - 2006 FY'05 through FY'10 (in $ millions) $800.0 $600.0 $400.0 $200.0 $0.0 $18.7 FY'05 $144.8 $333.3 $561.8 $776.9 $651.1

FY'06

FY'07

FY'08

FY'09

FY'10

sour c e : Ok l a homa Ta x C ommi ssi on

Budget Trends: FY 10 FY 12

Budget Trends: FY 10 FY 12
Things Are Tough All Over
All but four states faced budget shortfalls in FY 11.

Combined state budget gaps for FY 09 FY 12 estimated to exceed $600 billion.

Source: Center on Budget and Policy Priorities

Budget Trends: FY 10 FY 12
The Recession Hit in Late 2008
Monthly Unemployment Rate, National and Oklahoma, May 2008 to May 2011
10.5 9.5 8.5 7.5 6.5 5.5 4.5 3.5 2.5 Apr-08 5.3% 9.1%

Oct-08

Apr-09 National

Oct-09

Apr-10

Oct-10 Oklahoma

Apr-11

Budget Trends: FY 10 FY 12
Its a Revenue Problem
Five consecutive quarters of worsening collections;

Revenue drops more than twice as steep as during the last downturn.
Quarterly Year-over-Year Change in General Revenue Collections, FY '02 FY '11
30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% -40.0% Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY 11 '02 '02 '03 '03 '04 '04 '05 '05 '06 '06 '07 '07 '08 '08 '09 '09 '10 '10 '11 -12.1% -29.5% 12.9%

Budget Trends: FY 10 FY 12
Its 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 for inflation or population growth.
General Revenue Collections, FY '01 - FY '10 (in $millions)
$6,000 $5,500 $5,000 $4,500 $4,000 FY '01 FY '02 FY '03 FY '04 FY '05 FY '06 FY '07 FY '08 FY '09 FY '10 $4,966 $4,717 $4,408 $4,174 $5,701

$5,935 $5,953 $5,545

$4,616

$4,600

Budget Trends: FY 10 FY 12
FY 10 Initial Budget
$7,231.2 million total, including $641 million ARRA (stimulus); Increase in total appropriations of $106 million (1.5 percent);

Stimulus funds made it possible to minimize cuts or provide small increases to ten largest state agencies and some smaller ones.
State Appropriations History, FY '00 - FY '10 in $millions) (includes supplementals, excludes one-times from Rainy Day Spillover funds)
7,500 7,000 6,500 6,000
$5,389 $5,491 $5,191 $5,145 $5,459 $6,217 $6,760 $7,043

$7,125 $30
ARRA

$7,231

$641
ARRA

$7,095
State

5,500
$4,981

$6,590
State

5,000
4,500 4,000 FY'00 FY'01 FY'02 FY'03 FY'04 FY'05 FY'06 ARRA FY'07 FY'08 FY'09 FY'10 State Appropriations

Budget Trends: FY 10 FY 12
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 starting in February came close to or exceeded the monthly estimate. Response was monthly budget cuts (average of 7.5 percent of GR allocation); use of additional stimulus and Rainy Day Funds.
General Revenue Collections compared to Estimate, by Tax, FY '10 thru Jan (in $millions)
$0 -$200 -$400 -$600 -$800 -$1,000
Net Income Gross Sales Tax Tax Production Motor Vehicle Other Sources

General Revenue Collections compared to Estimate, by Tax, FY '10 thru June (in $millions)
$200 $17

-$11

$6
-$125

-$72

$0 -$200 -$400 -$600 -$800 -$864

Total Gen. Revenue

-$180
-$401

-$200

-$238 -$476

-$1,000
Net Gross Sales Tax Income Tax Production Motor Vehicle

-$816
Other Total Gen. Sources Revenue

Budget Trends: FY 10 FY 12
FY 10 Mid-Year Budget Agreement
Total revised budget was $272 million (3.8%) less than initial; $165 million (2.4%) less than FY 09; Almost $1.5 billion (21%) of revised FY 10 budget made up of non-recurring money.
State Appropriations, FY '09 - FY '10, Total and by Funding Source (in $millions)
$7,500 $7,000 $6,500 $6,000 $5,500 $5,000 $4,500 $4,000 FY '09 State Recurring Cash FY '10 - Initial Stimulus (ARRA) FY '10 - Revised Rainy Day Fund

Total= $7,124 million $301 $30

Total= $7,231 million $641 $371

Total= $6,959 million $224 $838 $435

$6,793

$6,220 $5,462

Budget Trends: FY 10 FY 12
FY 11 Budget: The Challenge Escalates
2010 Session focused on which, if any, revenue measures would be adopted to bridge the budget gap.

FY 11 budget gap exceeded $800 million - assuming maintenance of FY 10 budget cuts, the use of all remaining stimulus 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 7.5 percent to 15 percent in FY 11 left no doubt of the grave threats that 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

Budget Trends: FY 10 FY 12
FY 11 Budget Agreement
Total appropriations for FY 11 = $6.714 billion. 7.2 percent decrease (-$517.5 million) from the initial FY 10 budget and 3.5 percent decrease (-$245.4 million) from the final FY 10 budget after mid-year cuts.
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 )
$7,500 $7,000 $6,500
$838 $539 $30 $641
$224

$273

$6,000
$7,095

$5,500 $5,000 $4,500 $4,000 FY'00 FY'01

$75 $5,389 $4,906

$79 $269 $5,412 $4,922 $5,073 $72

$7,043

$219 $6,217

$6,760

$6,590
$5,897 $5,902

$5,240

FY'02

FY'03

FY'04

FY'05

FY'06

FY'07

FY'08

FY'09

FY'10 Initial

FY '10 Final

FY '11

State Revenues

Federal Relief

Rainy Day Fund

Budget Trends: FY 10 FY 12
FY 11 Budget Agreement
Appropriated almost $1.4 billion in additional revenues on top of those certified in February. These included: Remaining $539 million from the 2009 stimulus bill; Additional $273 from the Rainy Day Fund; $580 million from assorted revenue enhancements. Funding cuts limited to under 10 percent for most of the largest state agencies; However, over half of all appropriated agencies absorbed cuts of at least 15 percent for FY 11 compared to FY 09;

Budget Trends: FY 10 FY 12
Budget Outlook: This Aint Over
Center on Budget and Policy Priorities: 2012 Could Be Worst Year Yet For States Slow economic growth and loss of federal assistance equates to ongoing and worsening problems

Budget Trends: FY 10 FY 12
Weve Gotta Admit, Its Gettin Better
Revenues are showing steady improvements

Change in Monthly General Revenue Collections, Compared to Same Month Prior Year, Jan '09 - June '11
30.0% 20.0%
13% 20% 16% 12% 13% 9% 10%

10.0%
0.0% -10.0% -20.0%
-22% -8% -17% -19% -21% -28% -26% -30% -32% -30% -24% -31% -29% -7% 1.6% 0%

10% 6% 2% 5% 6% 3%

9%

-30.0% -40.0%

Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11

Budget Trends: FY 10 FY 12
Weve Gotta Admit, Its Gettin Better
Most major taxes are showing a healthy recovery the income tax and gross production taxes are rebounding most slowly
% Variance by Tax in General Revenue Collections from Prior Year, FY '11 vs. FY '10
120% 100% 80% 60% 40% 20% 0% Personal Corporate Gross Income Tax Income Tax Production Tax Sales Tax Motor Vehicle Tax 10.2% 9.9% 10.1% 34.8% 10.5% 110.8%

1.5% Other Sources

Total

Budget Trends: FY 10 FY 12
Budget Outlook: This Aint Over
FY 11 GR collections up $487.1 million - 10.5 percent - from FY 10; Remained 14.2 percent below FY 08 and well below FY 06 levels. Actual GR collections surpassed estimate by 4.5 percent Year-end surplus ($219.4 million) will be deposited in Rainy Day Fund
Annual General Revenue Collections, FY '01 - FY '11 (in Millions)
7,000

6,000
5,000 4,717 4,408 4,174 4,616

5,701 4,966

5,935

5,953

5,544 4,621

5,108

4,000
3,000 2,000 1,000 0 FY '01 FY '02 FY '03 FY '04 FY '05 FY '06 FY '07 FY '08 FY '09 FY '10 FY '11

Budget Trends: FY 10 FY 12
Building the FY 12 Budget
FY 12 revenue projected to grow 5 percent from FY 11.

Modest revenue growth in FY 12 a result of:

Forecasts of an uncertain economic recovery, and Policy decisions made in prior years, including: Time-released tax cuts that will lower the top income tax rate from 5.5 to 5.25 percent in 2012; Revenue impact of $38M FY 12, ~$120M FY 13 Allocation of additional $37.5M to ROADS Fund for transportation and $6.2 million additional to OHLAP scholarship program;

Budget Trends: FY 10 FY 12
Building the FY 12 Budget
Revised, binding appropriations authority for FY 12 was $6.211 billion About $500 million less than the FY 11 budget; Many agencies need additional funding to maintain basic operations, restore cuts to core services, and address the cumulative impact of several years of rising costs.

Governor Fallins Budget balanced through:

$225 Million in additional revenue (stimulus, tax collection changes); $273 Million in savings from government modernization initiatives; $201M in agency cuts: 3 to 5 percent for most agencies. Legislative leaders warned of possible cuts of 5 10 percent.

Budget Trends: FY 10 FY 12
FY 12 Budget
FY 12 appropriations of $6.511 billion:
Third straight year of declining appropriations; $254.8 million, 3.8 percent, below FY 11; $613.5 million, 8.6 percent, below FY 09; $249 million, 3.7 percent below FY 07
State Appropriations, FY '06- FY '11 (in $ Millions, includes supplementals, excludes Rainy Day "spillover" funds)
$7,500 $7,000 $6,500 $6,000 $5,500 $5,000 $4,500 $4,000 FY'06 State Revenues FY'07 FY'08 FY'10 Initial Rainy Day Fund FY'09 FY '10 Final FY '11 FY '12
$6,217 $6,760 $7,043 $7,095 $6,590 $5,897
$30 $641

Total= $6,511
$224
$838

$273
$554

$100
$99

$5,938

$6,312

Federal Relief

See FY 12 Budget Highlights at: http://okpolicy.org/fy-2012-budget-highlights

Budget Trends: FY 10 FY 12
FY 12 Budget
Budget balanced through various revenue enhancements: Additional federal stimulus dollars; Cash balances from the Cash Flow Reserve Fund ($120 million) and Rainy Day Fund ($100 million); Transportation bond issue ($70 million); Use of assorted reserve funds and other measures. Cut to top income tax rate allowed to take effect and no actions to suspend or eliminate tax breaks.
Provision Transfer of Voluntary Buy Out (VOBO )Funds Transfer from Cancelled Warrant Fund Transfer from Secretary of State Revolving Fund Transfer from Unclaimed Property Fund Transfer from Insurance Commission Revolving Fund Transfer from Cash Flow Reserve Fund American Recovery and Reinvestment Act Delaying reapportionment of revenues to Highway Fund Oklahoma Tax Commission Compliance initiatives Amount $ 5,500,000 $ 4,925,888 $ 2,000,000 $ 15,000,000 $ 5,000,000 $ 120,000,000 $ 98,781,683 $ 15,500,000 $ 16,000,000 $ 282,707,571 Bill HB 2170, s. 52 HB 2170. s. 53 HB 2170, s. 61 HB 2170, s. 69 HB 2170, s. 105 SB 973 HB 2170, assorted SB729 SB123

Budget Trends: FY 10 FY 12
FY 12 Budget
On the appropriations side, cuts to key health, human service, and public safety agencies were minimized;
Common Education cut 4.5 percent; Career Tech and Higher Ed cut 6.7 percent; Almost all agencies will absorb deeper cuts in FY 12 and none have been funded to cover rising operating and employee benefit costs over the past three years; Some 40 agencies more than half of all appropriated agencies will have absorbed cuts of greater than 20 percent since FY 09;

Budget cuts and funding shortfalls will continue to harm Oklahoma students, teachers, families, public employees, nonprofit organizations and private sector businesses.

Budget Trends: FY 10 FY 12
Impact of Cuts
Agencies have reduced staffing, eliminated or cut back programs, closed offices and facilities, cut rates to private contractors, and raised user fees. Some examples:
School districts have laid off teachers and staff, eliminated services, raised class sizes. Department of Education eliminated bonuses for National Board Certified Teachers, research-based teacher training programs, evaluation contracts, and other programs Department of Mental Health and Substance Abuse Services reduced beds and closed centers for childrens mental health and adult substance abuse, cut contracts to all providers; Department of Corrections cut contracts, eliminated programs, reduced staffing to under 70 percent of authorized levels, implemented monthly furlough days; OJA cancelled youth detention and gang prevention programs; Health Department eliminated 17 child guidance centers serving pre-school children with developmental delays;

Looking Ahead

Looking Ahead
Budget Outlook: No End in Sight
Revenues unlikely to recover to pre-downturn nominal levels prior to FY 14 under current policies
General Revenue Fund Collections, FY '07 to FY '14, Actual and OK Policy Forecasts (Oct. 2010) (in $ millions)
$5,938

$6,500 $6,000 $5,500 $5,000 $4,500 $4,000

$5,953
$5,518 $5,121 $4,969

$6,044

Actual Low Forecast Middle Forecast High Forecast

$5,643
$5,380 $4,912

$4,600

FY '07 (act.)

FY '08 (act.)

FY '09 (act.)

FY '10 (act.)

FY '11 (est.)

FY '12 (est.)

FY '13 (est.)

FY '14 (est.)

See: "A New Fiscal Reality for Oklahoma: The State Budget Outlook, 20112014; at:

Fiscal Year

Looking Ahead
Budget Outlook: Hard Times Continue
State appropriated spending has reached its lowest level in at least 30 years and will fall even further next year Oklahoma State Appropriated Budget as Share of State Personal Income, FY '81 - FY '11 7.0%
6.5% 6.0%
5.7%

5.5%
5.2%

5.0%
4.8%

4.5% 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Sources U.S. Bureau of Economic Affairs, State Quarterly Personal Income (estimated 1.0% growth 2nd-4th Qtr SFY 2011); Appropriations history from annual Executive Budget, other sources

Looking Ahead
Budget Outlook: No End in Sight
The prospect of continued slow revenue growth and budget shortfalls creates a new fiscal reality that calls for new perspectives and strategies. Create a revenue structure that supports public services: Review and reduce tax exemptions, credits and rebates; Broaden the tax base;

Protect the income tax.

Make smarter expenditure decisions: Consolidate duplicative agencies and streamline services; Prioritize prevention and surveillance; Ensure adequate funding of public pensions.

For More Information

Updated Budget Information: okpolicy.org/current-budgetinformation Oklahoma Policy Institutes Online Budget Guide www.okpolicy.org/onlinebudget-guide

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