OKLAHOMA BUDGET OVERVIEW

Recent Trends and Outlook

---updated June 2009--

David Blatt
Oklahoma Policy Institute
dblatt@okpolicy.org - (918) 382-3228
Oklahoma’s Path to Prosperity
 Budget Trends: FY ‘02 – FY ‘08

FY ‘02 – FY ‘08: 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
Annual Appropriations Totals, FY ‘00—FY ‘08
(Includes Supplementals thru FY ‘08 and Rainy Day spillover Funds for
Recurring Agency Expenditures) - in $millions
$7,500
$7,043
$7,000 $6,760

$6,500 $6,217

$6,000
$5,389 $5,491 $5,459
$5,500 $5,191 $5,145
$4,981
$5,000

$4,500

$4,000
FY'00 FY'01 FY'02 FY'03 FY'04 FY'05 FY'06 FY'07 FY'08
Budget Trends: FY ‘02 – FY ‘08

Where did the money go?

Revenue growth was dedicated to covering rising
costs of basic services and supporting targeted
investments for our common goals


Funding increased by $1.3 billion to 6 agencies


Common Ed, Higher Ed, Health Care Authority, Human
Services, Corrections, Transportation


Mostly for increased mandatory costs, enrollment increases
and declining federal support


Teacher and support staff pay increases, health care
provider reimbursement rate increases, student
scholarships


Only new programs were full-day kindergarten and
beginning of road and bridge repair initiative (ROADS)
 Budget Trends: FY ‘02 – FY ‘08

Continuing Impact of Tax Cuts

Deep and permanent tax enacted between 2004 and 2006


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 ‘11
Lost Revenues from Select Tax Cuts Enacted 2004 - 2006
FY'05 through FY'10 (in $ millions)
$776.9
$800.0
$651.1
$561.8
$600.0

$400.0 $333.3

$200.0 $144.8
$18.7
$0.0
FY'05 FY'06 FY'07 FY'08 FY'09 FY'10
source: Oklahoma Tax Commission
Budget Trends: FY ’02 - FY ’08
FY‘07 – FY’08: Revenue Slowdown


General Revenue collections began to slow in FY ‘07 and were
almost flat in FY ’08 (+%0.9, $54 million)


Increased gross production tax (+$205.7 million) and sales tax
(+$80.6 million) revenues helped make up for falling personal
and corporate income tax collections (-$254.6 million)

Annual % Change in General Revenue Collections, FY '03 - FY '08

20.0%
14.8%
15.0%
10.6%
10.0% 7.6%
4.0%
5.0%
0.9%
0.0%

-5.0%
-5.3%
-10.0% -6.6%

FY '02 FY '03 FY '04 FY '05 FY '06 FY '07 FY '08

Budget Trends: FY ‘09 – FY ‘10
Budget Trends: FY ‘09 – FY ‘10
Things Are Tough All Over
Combined state budget gaps for FY ‘09, FY ‘10 and
FY ‘11 estimated to total more than $350 billion

Source: CBPP, “State Budget Troubles Worsen”,

updated May 18, 2009 at: http://www.cbpp.org/
9-8-08sfp.htm
Budget Trends: FY ‘09 – FY ‘10
FY ’09 Budget: Tightening the Screws


FY ’09 initial appropriations of $7.089 billion – increase of $47 million
(0.7%)


Most agencies appropriations frozen from FY ’08


No funding for teacher salary increases, state employee raises

FY ‘09 excludes supplementals and mid-year budget cut

Budget Trends: FY ‘09 – FY ‘10
Revenues on the Skids


FY ‘09 revenue: from $224.8 million above estimate (Dec.) to
$271 million below estimate (May)


Every major tax below estimate and prior year in recent months


When revenues dipped below 95 percent of estimates in May, a
revenue shortfall was declared, leading to cuts in June
allocations ($6.8 million)
  


 










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Budget Trends: FY ‘09 – FY ‘10
Revenues on the Skids


By mid-year, FY ‘09 projections dropped $236 million
compared to the June certified estimate (red bars, below)


FY ‘10 revenues estimated to come in >$600 million below
FY ’08
General Revenue Collections,
6,500
FY '06 Actual - FY '10 Estimated (in $million)

5,981.1 5,946.4
6,000 5,933.9

5,710.0
5,664.4

5,500
5,356.6

5,000
FY '06 Actual Fy '07 Actual FY '08 Actual FY '09 June FY '09 FY '10
February Feburary
Budget Trends: FY ‘09 – FY ‘10
Revenues on the Skids


The FY ‘10 forecast is bad - - but far from a worst-case scenario


Still assumes growth of sales tax and corporate income tax
collections
Change in General Revenue Collections by
Major Tax, FY '08 Actual to FY '10
(February Certified Estimate)
20.0%
10.2% 8.8%
10.0%

0.0%

-10.0%
-10.4% -10.5%
-20.0%

-30.0%

-40.0%
-37.6%
-50.0%
-50.3%
-60.0%
Gross Income Tax- Income Tax- Motor Vehicle Sales Tax Total General
Production Personal Corporate Tax Revenue
Tax-Gas
Budget Trends: FY ‘09 – FY ‘10
Building the FY ‘10 Budget
$612.5 million (8.7 percent) less available
in FY ‘10 than FY ‘09
Appropriations Authority,
FY '09 vs. FY '10 (in $millions)

7,250
7,068.8
-$309.6
7,000
6,759.2 - $612.5
6,750

6,500 6,456.3

6,250
•

6,000
FY '09 FY '10 December FY '10 February
 Budget Trends: FY ‘09 – FY ‘10
Stimulus Dollars to the Rescue


Budget agreement reached on using $641 million from
the American Recovery and Reinvestment Act (ARRA, or the
stimulus) in FY ‘10


$236.3 million from the State Fiscal Stabilization Fund
for common education and higher education;


$10 million from the State Fiscal Stabilization Fund for
Oklahoma Health Care Authority


$394 of enhanced federal Medicaid matching funds for 8
agencies


$306.5 million to OHCA


$71.4 million to DHS


Stimulus dollars allocated for FY ‘10 represent roughly
half of total available stimulus amount
See: OK Policy FY ’10 Budget Review at:
http://okpolicy.org/fy-10-budget-information
Budget Trends: FY ‘09 – FY ‘10
FY ‘10 Budget


$7,231.2 million total, including $641 million ARRA


Increase in total appropriations of $106 million (1.5
percent) compared to FY ‘09


State dollars only: 7.1 percent less than FY ’09
State Appropriations History, FY '00 - FY '10 in $millions)
(includes supplementals, excludes one-times from Rainy Day Spillover funds)
7,500
$7,043 $7,125 $7,231
7,000 $6,760
$30
6,500 ARRA
$6,217
$641
6,000 ARRA
$7,095
$5,389 $5,491 $5,459 State
5,500 $5,191 $6,590
$5,145
$4,981 State
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 FY'10
State Appropriations ARRA

NOTE: FY ‘09 totals do not include June budget cuts

 Funding Public Services
FY ’10 Appropriations by Subcommittee
Total Appropriations: $7,231.2 million (includes ARRA)
 Funding Public Services
FY ’10 State Appropriations
DHS, Transportation
10 Largest Agencies: $6.3 Corrections
billion (88%)
Total $550.7 , 8% $208.7
$503.0
Appropriations:
Agencies (75 agencies): $829 million7%
(12%) 3%
Mental Health
$7,231.2 million OHCA (Medicaid) $203.3
Includes $979.8 3%
American 13% Career Tech
Recovery and $157.8
2%
Reinvestment Higher Ed. Juv. Affairs
Act (ARRA) $1,070.7 $112.4
15%
Public1%
Safety
$93.3
All Other 1%
Common Ed. Agencies
$2,572.0 $779.4
Total Ten Largest: 36% 11%
$6,451.8,
89.2 %
 Budget Trends: FY ‘09 – FY ‘10
FY ‘10 Budget


Stimulus funds made it possible to minimize cuts or
provide small increases to ten largest state agencies and
some smaller ones


Funding for 10 largest agencies up $161 million, 2.6
percent


OHCA, +$107.7 million (+12.3%)


Common Education, +$40.3 million (+1.6%)


Higher Education, +$30.9 million (+3.0%)


DHS, -$8.4 million (-1.5%)


Most smaller agencies took cuts of 5 to 7 percent


Funding for 68 smaller agencies down $54 million, 6.5
percent

See: OK Policy FY ’10 Budget Review at:

http://okpolicy.org/fy-10-budget-information
 Budget Trends: FY ‘09 – FY ‘10
FY ‘10 Budget: The Impact


For most agencies, FY ‘10 appropriations will lead to funding
gaps and possible cuts in staffing, programs and services


No funding to address rising employee benefit costs or
inflation (e.g. utilities, transportation, food)


Demands for some state services increase due to the
downturn State Employee Health Benefit Allowance,
in $ millions, FY '01 - FY '09 (projected)
Contributions to Oklahoma Public Employee $450 418.9
393.6
Retirement System by State Agencies, FY '04 - FY '10 $400
357.1
Fiscal Year Covered Payroll Contribution Contributions
$350
Rate
(in $millions) (in $millions) 293.1
$300
FY '04 $1,055.74 10.0% $105.60 244.5
$250 217.6
FY ‘05 $1,142.80 10.0% $114.30 186.0
$200 163.7
FY ‘06 $1,227.90 11.5% $141.20 $150 129.6
FY ‘07 $1,299.00 12.5% $162.40 $100
FY ‘08 $1,337.78 13.5% $180.60 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Employee Benefits Council
(proj.)
FY ‘09 (est.) $1,361.50 14.5% $197.42

FY '10 (est.) $1,395.60 15.5% $216.31

Source: Oklahoma Public Employees Retirement System

 Budget Trends: FY ‘09 – FY ‘10
FY ‘10 Budget: The Impact


At this point, little is known about how agencies will respond to
budget cuts and funding gaps.


Most agencies will be forced to try to perform their core work with
fewer staff (unfilled vacancies). This could lead to:


Closing offices , reducing hours, and limiting staff serving the
public;


Reducing the frequency of inspections of facilities and
businesses;


Increasing staff caseloads;


Some agencies may be required to fill budget gaps by:


Cutting reimbursement rates to private providers;


Waiting lists and freezes on programs.


Fee increases;


Furloughs and involuntary lay-offs
Budget Outlook: Beyond FY ‘10
A Slow Rebound


Assuming the economy begins to recover in late 2009, we
project that revenues will rebound slightly in FY ‘11


Revenue growth could be hindered by automatic cut in top
income tax rate if GR is projected to increase >4 percent


It may take until FY ’13 for revenues to return to FY ‘08 levels
Totals Available for Appropriation (Recurring State Revenues),
FY '06 - FY '13
7,600
$7,286
$7,089
7,200 $7,043
$6,780 $6,848
$ millions

6,800 $6,518
$6,456
6,400 $6,217

6,000

5,600
2006 2007 2008 2009 2010 2011 2012 2013
Fiscal Year Ending June 30

Source: Oklahoma Board of Equalization for 2006-10,

Oklahoma Policy Institute projections for 2011-13
Budget Outlook : Beyond FY ‘10
Rainy Day Fund


Rainy Day Fund is filled to maximum amount of $597
million


Left untouched for initial FY ‘10 budget
Rainy Day Fund Balances, FY '01 - FY '09
(opening balance in $ millions)
 



 













 

 


 


 
















 Budget Outlook : Beyond FY ‘10
Rainy Day Fund: Off- Limits?


Rainy Day Fund can be accessed as follows:


3/8th for a mid-year shortfall in GR collections;


3/8th for a projected decline in GR collections for the coming
year compared to the current year;


1/4th upon declaration of an emergency and legislative approval

RDF designed for use at the onset of a downturn

If revenues do begin to recover, most of the RDF will be

unavailable for appropriations in FY ‘11 and FY ‘12.


However, if FY ’10 or FY ‘11 revenue collections fall short
of the estimate, RDF could be used

See: OK Policy, “Now’s the Time: Using Stimulus and Rainy

Day Funds Can reduce the Impact of State Budget Cuts”,
at:http://okpolicy.org/nows-time-use-rainy-day-funds
Budget Outlook : Beyond FY ‘10
Filling the Revenue Gap


Stimulus Round II


About half of the State Fiscal Stabilization Fund and enhanced
Medicaid funds will be available for use in FY ‘11


$236.5 million of SFSF education dollars;


Up to $95 million of SFSF general purpose dollars;


$365 to $500 million of enhanced Medicaid


Other Revenues?


SQ 640 requires a 3/4th vote of both legislative chambers or
vote of the people at time of next general election to raise
taxes;


Continuing search for one-time revenues;


Other proposals could include selling off public assets,
securitizing the tobacco settlement or state lottery
Budget Outlook : Beyond FY ‘10
The Post-Stimulus Budget Gap?


The FY ‘12 dilemma


State Fiscal Stabilization Fund and enhanced FMAP are intended
for states to avoid cuts, layoffs, and tax increases – but what
happens when the money runs out?


>$600 million of “one-time” federal stimulus dollars being used
to support the ongoing expenditures of state agencies and
schools in the FY ’10 budget (and FY ‘11?).


Other stimulus funding streams may also end up being used in
part to fund ongoing expenditures (e.g. Dept of Rehabilitation
Services clearing off its waiting list).


Hole will be especially huge for Medicaid agencies, which could
see their federal share plunge by over 15 percentage points.


Will Congress help out?
Budget Outlook : Beyond FY ‘10
The Sky is Slowly Descending!


Oklahoma already underfunds most of our public structures
and falls short of our common goals as a state


The relentless underfunding of public structures leads to :


threats to public safety and well-being;


decline in performance;


decline in public confidence and growing cynicism;


“your on your own” attitude
Budget Outlook : Beyond FY ‘10
Short-Term Recommendations
1.
Change the rules for the Rainy Day Fund

Introduce legislation next year for a 2010 ballot

proposal to allow RDF money to be used any time
revenues remain below their pre-downturn peak.

2.
Defer additional tax cuts until revenues recover

3.
Consider new revenue streams for the Medicaid program

4.
Develop meaningful multi-year forecasting

 Long-Term Fiscal Outlook
Oklahoma – like most states and the federal government
– faces a looming structural budget deficit

•
Structural deficit: A
situation that occurs
when a state’s “normal
growth of revenues is
insufficient to finance
the normal growth of
expenditures year after
year”
(CBPP, “Faulty Foundations: State
Structural Budget Problems”)
 Long-Term Fiscal Outlook
Oklahoma’s Structural Deficit


Demographic changes, rising health care and retirement
costs, an outdated tax system and tax cuts all lead to
revenues failing to keep pace with costs in the years ahead


































 






 












Source: Adapted by Oklahoma Policy Institute from Kent W. Olson,
State Policy and Economic Development in Oklahoma: 2007
 Long-Term Fiscal Outlook
Long-Term Recommendations

1.
Modernize the Tax System

3.
Preserve a Balanced Tax Structure

4.
Make the tax system fairer

People want just taxes more than they want lower

taxes. They want to know that every man is
paying his proportionate share according to his
wealth.
-Will Rogers
 Contact Information
David Blatt, Director of Policy
Oklahoma Policy Institute
4606 South Garnett, Suite 100 |
Tulsa, Oklahoma 74146
ph: (918) 859-8747
dblatt@okpolicy.org

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