OKLAHOMA BUDGET OVERVIEW

Trends and Outlook

REVISED February 15, 2010

David Blatt
Oklahoma Policy Institute
dblatt@okpolicy.org - (918) 794-3944
Oklahoma‟s Path to Prosperity

OUR STARTING POINT

We invest our tax dollars in
our public structures to support
our common goals as a state
Oklahoma‟s Path to Prosperity
We Already Lag Behind
 Oklahoma already underfunds most of our public
structures and falls short of our common goals as a state
 We rank 50th among the states in per capita
expenditures on state and local government
 We need renewed investment in our public structures
to meet our common goals as a state.
 Budget Trends: FY „02 – FY „09

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 „09

Where did the growth revenue go?

Covering rising costs of basic services and
supporting targeted investments for shared goals

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*

 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 ‗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
sour c e : Ok l a homa Ta x C ommi ssi on
Budget Trends: FY ‟02 - FY ‟09
FY‘07 – FY’08: Revenue Slowdown
 As tax cuts kicked in, General Revenue collections were
almost flat in FY ‘08 compared to FY ‘07 (+%0.9, $54
million)
Annual % Change in General Revenue Collections, FY '03 - FY '08
20.0%
14.8%
15.0%
10.6%
10.0% 7.6%

5.0% 4.0%
0.9%
0.0%

-5.0%
-5.3%
-6.6%
-10.0%
FY '02 FY '03 FY '04 FY '05 FY '06 FY '07 FY '08
Budget Trends: FY ‟02 - FY ‟09
FY ’09 Budget: Tightening the Screws
 Most agencies appropriations frozen from FY ‘08
 No funding for benefit cost increases teacher salary increases, state
employee raises

FY „09 excludes supplementals and mid-year budget cut

Budget Trends: FY „10
 Budget Trends: FY „10

Things Are Tough All Over

 All but two states are experiencing the state fiscal crisis
 Combined state budget gaps for FY ‘09 – FY ‗12 estimated to
total more than $465 billion

Source: Center on Budget and Policy Priorities

 Budget Trends: FY „10

This is As Bad as It’s Ever Been

Annual General Revenue Collections, in $ millions,
FY '82 - FY '11 (FY '10 & FY'11 based on Dec. 2009
certification)
7,000

6,000

5,000

4,000

3,000

2,000

1,000

-
1995
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994

1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
 Budget Trends: FY „10

The Recession Hit Oklahoma Late

Monthly Unemployment Rate,
National and Oklahoma, Oct. 2007 to Oct. 2009

11.5 10.2%
Unemployment Rate (%)

10.5
9.5
8.5
7.1%
7.5
6.5
5.5
4.5
3.5
2.5
Oct-07 Apr-08 Oct-08 Apr-09 Oct-09

Oklahoma National

See OK Policy, “Numbers You Need”, at:

http://okpolicy.org/numbers-you-need-key-oklahoma-
economic-and-budget-trends
 Budget Trends: FY „10

The Recession Hit Oklahoma Late

Quarterly Change in Personal Income,
% Change from Prior
Quarter
Oklahoma and National,
3rd Quarter 2007 to 3rd Quarter 2009
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0%
-4.0%
-5.0%
2007.3 2007.4 2008.1 2008.2 2008.3 2008.4 2009.1 2009.2 2009.3

U.S. Oklahoma
 Budget Trends: FY „10
FY ’09: A Tale of Two Half-Years
 FY ‗09 revenue collections went from $224.8 million above
estimate (July-Dec) to $672.0 million below estimate (Jan-Jun)

Change in Monthly General Revenue Collections,

FY '09 Compared to Same Month, FY '08
15.0% 12.8%
11.1% 10.8% 10.4%
10.0% 7.1%
5.0% 1.3%
0.0%
-5.0%
-10.0%
-8.5%
-15.0%
-20.0%
-19.1%
-25.0% -21.5% -21.1%

-30.0% -27.7%
-30.1%
-35.0%
July Aug Sept Oct Nov Dec Jan Feb Mar Apr May June
 Budget Trends: FY „10
FY ’10 Budget: Revenues on the Skids
 In February, FY ‗10 revenues estimated to come in >$600
million below FY ‘09 ;

6,500
General Revenue Collections,
FY '06 Actual - FY '10 Estimated (in $million)

5,981.1 5,946.4
6,000 5,902.7

5,710.0
5,649.2

5,500 5,407.2
5,356.6

5,000
FY '06 Actual Fy '07 Actual FY '08 Actual FY '09 June FY '09 FY '09 FY '10
December February Feburary
 Budget Trends: FY „10
FY ‘10 Budget
 $7,231.2 million total, including $641 million ARRA (stimulus)
 Increase in total appropriations of $106 million (1.5 percent)
compared to FY ‗09
 State dollars only: $500 million less than in 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 $6,217
ARRA
$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

 Budget Trends: FY „10
FY ’10 State Appropriations
DHS,
Total 10 Largest Agencies: $6.3
$550.7 , 8%billion (88%)Transportation,
Corrections
$503.0 $208.7 , 3%
Appropriations:
Agencies (75 agencies): $829 million
7% (12%) Mental Health,
$7,231.2 million
OHCA (Medicaid), $203.3 , 3%
Includes $979.8 , 13%
American Career Tech,
Recovery and $157.8 , 2%
Reinvestment
Act (ARRA) Higher Ed., Juv. Affairs,
$1,070.7 , 15% $112.4 , 1%
Public Safety,
$93.3 , 1%
All Other
Agencies,
Common Ed., $779.4 ,
Total Ten $2,572.0 , 36% 11%
Largest: $6,451.8,
89.2 %
 Budget Trends: 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
 Most smaller agencies took cuts of 5 to 7 percent
 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

See: OK Policy FY ‟10 Budget Review at:

http://okpolicy.org/fy-10-budget-information
 Budget Trends: FY „10
FY ‘10 : Off to a Very Rough Start
 July-Jan revenue collections down 27.0 percent from FY
‘09
 Not clear when we‘ll hit bottom or how long it will take
to recover

Change in Monthly General Revenue Collections, Compared to Same Month Prior Year,
July '08 - Jan '10
20.0%
12.8%
15.0% 11.1% 10.8% 10.4%
10.0% 7.1%
5.0% 1.3%
0.0%
-5.0%
-10.0%
-8.5%
-15.0%
-20.0% -19.1% -16.7%
-25.0% -21.5% -21.1% -23.7%
-30.0% -27.7% -26.3%
-30.1% -29.1%
-35.0% -30.1% -30.5%
-31.6%
July Aug Sept Oct Nov Dec Jan Feb Mar Apr May June July Aug Sept. Oct Nov Dec Jan
 Budget Trends: FY „10
FY ’10 : Off to a Very Rough Start
 Four consecutive quarters of worsening collections
 Revenue drops more than twice as steep as during the
last downturn

Quarterly Year-over-Year Change in GR Collections,

Oklahoma, FY '02 - FY'10
40.0%

20.0% 9.9%

0.0%

-20.0% -12.1%

-29.5%
-40.0%
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1
FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY
'02 '02 '03 '03 '04 '04 '05 '05 '06 '06 '07 '07 '08 '08 '09 '09 '10
 Budget Trends: FY „10
FY ‘10 : Off to a Very Rough Start
 Collections through January are $863.6 million – 24.9 percent
- below the estimate

General Revenue Collections compared to Estimate, by Tax, FY '10 thru

December (in $millions)
$0
-$100 -$11
-$72
-$200
-$180 -$200
-$300
-$400
-$500 -$401
-$600
-$700
-$800
-$900
-$864
-$1,000
Net Income Tax Gross Production Sales Tax Motor Vehicle Other Sources Total Gen.
Revenue
 Budget Trends: FY „10
FY ‘10 : Off to a Very Rough Start
 January collections were just 77 percent of the average
monthly collections of the previous 5 years – the 2nd worse
month of the downturn

Monthly Total General Revenue Collections as % of Prior Five-

Year Same-Month Average, July 2008 - Jan. 2010
130%

120%

110%

100%

90%

80%

70%

60%
Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan
'08 '08 '08 '08 '08 '08 '09 '09 '09 '09 '09 '09 '09 '09 '09 '09 '09 '09 '10
 Budget Trends: FY „10
FY ‘10 : Off to a Very Rough Start
 OSF cut agencies GR allocations by 5 percent through
November and by 10 percent since December.
 Cuts are across-the-board based on GR allocations
 Since some agencies are partly or fully appropriated from
other funds (i.e. 1017 Fund, State Transportation Fund,
Lottery, ARRA), agencies are not all affected equally
 Cuts limited to less than shortfall through transfers of cash
reserves ($233.8 million since start of year) that must be repaid
 Budget Trends: FY „10
Budget Outlook
 Gov. Henry: ―Unfortunately, the cuts we have been forced
to implement to date are already taking their toll on state
programs and services‖ (Nov. 10, 2009)
 Even at 5-10 percent monthly cut level, the toll is growing:

 DHS has cut senior nutrition services by $7.2 million;

 OJA has cancelled youth detention and gang prevention programs,
cut providers 5 percent, authorized 22 furlough days;
 OHCA has cut some Medicaid benefits and reduced provider rates by
an initial 3.5 percent, set to increase to 6.75 percent April 1st.
 Department of Mental Health and Substance Abuse Services has
announced closure of children‘s behavioral health center in Norman,
lay-offs cuts in contracts to providers;
 School districts eliminating programs, some going to 4-day weeks
 Budget Trends: FY „10
FY ‘10 : How Large a Shortfall?
 February certification projects a $669 million (13.0
percent) shortfall in FY ‘10 GR collections.
 $109 million projected shortfall in HB 1017 Fund as well
 Total mid-year shortfall of $778 million

FY '10 General Revenues - Original vs.

Revised Projections
$5,500 $5,415
$5,145
$669
$5,000 million

$4,476
$4,500

$4,000
100% Estimate - June Appropriation (95%) February Projection
Budget Outlook: What Response?
Shortfall Options
 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)
$700
$596.6
$600 $571.6
$496.7
$500 $461.3
$400 $340.9
$300
$217.5
$200 $157.5
$100 $72.3
$0.1
$0
2001 2002 2003 2004 2005 2006 2007 2008 2009
Budget Outlook: What Response?
Shortfall Options
 Full RDF potentially available for shortfalls in FY ‗10
 Rainy Day Fund can be accessed as follows:
 3/8th for a mid-year shortfall in GR collections; ($224M)
 3/8th for a projected decline in GR collections for the
coming year compared to the current year ($224M);
 1/4th upon declaration of an emergency and legislative
approval ($149M)

Uses of Constitutional
Reserve Fund

Emergency,
25.0% - $149M Current Year
Revenue
Failure, 37.5% -
$224M

Forthcoming
Year Shortfall,
37.5% - $224M
Budget Outlook: What Response?
FY ‘10 Shortfall Agreement
 Agreement announced by Governor, Speaker and President
Pro Tem in late January
 Main components:
 Continued 10 percent monthly cuts to GR for rest of year
 Averages out to 7.5 percent of GR for full year
 Supplemental funding to Common Ed of $104 million to offset
part of GR and 1017 shortfalls
 $25.6 M to Higher Ed; $33M to OHCA; $7.2M to Corrections;
$1.2M to Rehab Services and $10M unspecified
 Agreement requires $515 million in additional revenue to
balance.
 No formal agreement on revenues
Budget Outlook: What Response?
FY ‘10 Shortfall Agreement
 Agencies funded in whole or in part with non-GR funds
actually absorb less than full 7.5 percent cut
FY '10 Mid-Year Budget Cuts, Top Largest State
Agencies
8.0% 7.5% 7.3% 7.3% 7.2%
5.7%
6.0% 5.3%

3.7%
4.0% 3.1%
2.7%
2.0% 1.1%
0.0%
0.0%
 Budget Outlook: FY „11
FY ‘11: More of the Same
 FY ‗11 revenue collections projected to grow only
slightly from FY ‘10 and to remain almost 25 percent
below pre-downturn (FY ‗08) levels

General Revenue Collections,

FY '06 Actual - FY '11 Estimated (in $ millions)
$5,928 $5,981
$6,000
$5,714
$5,519
$5,500 $5,415

$5,000

$4,579
$ 4,475
$4,500

$4,000
FY '06 Actual FY '07 Actual FY '08 Actual FY '09 Actual FY '10 (June FY '10 (Feb FY '11 (Feb
estimated) projected) estimated)
 Budget Outlook: FY „11
FY ‘11: More of the Same
 Final FY ‗11 certification provides $1.8 billion less
revenue for next year than this year‘s initial budget

State Appropriations, FY'08-FY '11

(includes all revenues; includes FY '08-FY '09 supplementals; in $ millions)
$8,000
$7,231 $515M
$7,043 $7,124
$6,967
$7,000 $6,797
$6,452 $1.36B

$6,000
$5,294 $5,415

$5,000

$4,000
FY'08 FY'09 FY'10 - FY '10 - FY '10 - FY '11 - FY '11 - FY '11 -
initial projected Leadership Certified Certified Gov Budget
budget revenues agreement State $ State $
(Feb) (Dec) (Feb)
 Budget Outlook: FY „11
FY ‘11: More of the Same
 To budget the balance, Gov. Henry proposes:
 Annualizing and increasing FY„10 cuts by an additional 0.5
percent to 3 percent for all agencies.
 Using remaining stimulus funds and a portion of remaining
Rainy Day Funds.
 Savings from consolidating agencies and IT services.
 New bond issues.
 Enhanced tax collection proposals, particularly increased sales
tax collections on Internet sales and automated enforcement of
vehicle insurance;
 Eliminating and suspending various tax credits;
 Increases in fees and permits.
 Budget Outlook: FY „11
FY ‘11: More of the Same
 Many of the revenue enhancements and savings in the
Governor‘s budget proposal are unlikely to gain legislative
approval or have the full estimated fiscal impact .
 Even under the Governor‘s proposals, the cuts to agency
programs and services would be deep and widespread
 Most agencies face FY ’11 funding 10 to 17 percent below their
budgets for FY ’09.
 Even those core agencies in education, health, human services,
and public safety that are partially protected will take cuts in FY
’10 and FY ’11 and are not funded in FY ’11 to deal with rising
operating costs and caseloads.
 However, the combined FY ‗10 – FY ‗11 shortfall is $170
million in the February certification than in December.
Budget Outlook: Looking Ahead
Budget Outlook: No Quick Recovery
 Time-released tax cuts still kicking in
 Top rate will fall from 5.5% to 5.25% as soon as
revenues are projected to grow 4%... Even if revenues
remain below pre-downturn levels
 Additional revenues automatically allocated for ROADS
and OHLAP
 Use of one-time funds in FY ‗10 and FY ‗11 creates
significant problems for FY ‗12
Budget Outlook: Looking Ahead
Budget Outlook: No Quick Recovery
 Revenues unlikely to recover to pre-downturn nominal
levels prior to FY ‗13

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

General Revenue Fund
$6,500
Revenue in $millions

$5,928 $5,981
$6,000
$5,945
$5,500 $5,544
Estimates by OK $5,275
$5,000 Policy - not based on
Feb 2010
$4,500 certification $4,735
$4,439
$4,000
FY 07 (act.)FY 08 (act.)FY 09 (act.)FY 10 (est.)FY 11 (est.)FY 12 (est.)FY 13 (est.)

Fiscal Year
Budget Outlook : Beyond FY „10
Short-Term Recommendations
1. Develop and share greater information about impact of
actual and potential cuts, possible solutions

2. Use the RDF to minimize the magnitude of budget cuts

3. Defer additional tax cuts until revenues fully recover

4. Suspend and cap some tax breaks and incentives

5. Change the RDF rules to allow reserve funds to be used any

time revenues remain below their pre-downturn peak and to
allow for larger reserves

6. Consider new revenue streams for the Medicaid program

7. Expand and improve forecasting capacities

 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
Projected Annual Budget Surpluses and Deficits
Before and After 2004-2006 Tax Cuts (2007 to 2035)
1,000

500

0
M i l l i o n $2005

(500) Before Tax Cuts

(1,000)
After Tax Cuts
(1,500)

(2,000)

(2,500)
2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035
Year
Source: Projections conducted in 2007 by Dr. Kent Olson, Professor of
Economics, Oklahoma State University
 Long-Term Fiscal Outlook
Long-Term Recommendations

1. Modernize the Tax System

2. Preserve a Balanced Tax Structure

3. Scrutinize our programs and spending

commitments

4. Make the tax system fairer

 For More Information

• Updated Budget Information:

okpolicy.org/fy-10-fy-
11budget-information
• Oklahoma Policy Institute’s Online
Budget Guide
www.okpolicy.org/online-
budget-guide
 Contact Information
Oklahoma Policy Institute
P.O. Box 14347
Tulsa, OK 74159-1437
(918) 794-3944
info@okpolicy.org
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