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Oklahoma Budget Overview: Trends and Outlook, October 2010

Oklahoma Budget Overview: Trends and Outlook, October 2010

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Oklahoma Policy Institute's budget presentation has been updated with most recent revenue collection data and our recommendations for how to manage the ongoing state budget crisis
Oklahoma Policy Institute's budget presentation has been updated with most recent revenue collection data and our recommendations for how to manage the ongoing state budget crisis

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OKLAHOMA BUDGET OVERVIEW

Trends and Outlook
Updated October 15, 2010

David Blatt Oklahoma Policy Institute
dblatt@okpolicy.org - (918) 794-3944

Oklahoma’s 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.

Oklahoma’s 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, 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 state without effective public structures and systems.

Oklahoma’s 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. 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 years without 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 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 ’11.
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 ‘02 – FY ‘09
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)
Estimated Revenue Impact of New Revenue Measures Compared to Major Tax Cuts, FY '05 - FY '10 (in $ millions)
$1,000.0 $800.0

$651 $562

$777

$ millions

$600.0

$333
$400.0

$195
$200.0

$41
$-

$145 $19
FY '06

$239
FY '07

$287

$323

$335

FY '05

FY '08

FY '09

FY '10

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

Budget Trends: FY ‘10 – FY ‘11

Budget Trends: FY ‘10 – FY ‘11
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 exceed $600 billion.

Source: Center on Budget and Policy Priorities

Budget Trends: FY ‘10 – FY ‘11
It‟s 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 '10
30.0% 20.0% 10.0% 2.3%

0.0%
-10.0% -20.0% -30.0% -40.0% Q1 Q3 FY FY '02 '02 Q1 FY '03 Q3 Q1 Q3 FY FY FY '03 '04 '04 Q1 Q3 FY FY '05 '05 Q1 FY '06 Q3 FY '06 Q1 Q3 FY FY '07 '07 Q1 FY '08 Q3 Q1 FY FY '08 '09 Q3 FY '09 Q1 Q3 FY FY '10 '10 -12.1% -29.5%

Budget Trends: FY ‘10 – FY ‘11
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 for inflation or population growth.
General Revenue Collections, FY '01 - FY '10 (in $millions)
$6,000 $5,500 $5,000 $4,500 $5,701

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

$4,966
$4,717 $4,408 $4,174 $4,616 $4,600

$4,000
FY '01 FY '02 FY '03 FY '04 FY '05 FY '06 FY '07 FY '08 FY '09 FY '10

Budget Trends: FY ‘10 – FY ‘11
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 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 $4,981 $5,145 $5,459 $6,217 $6,760 $7,043

$7,125 $30
ARRA

$7,231

$641
ARRA

$7,095
State

5,500 5,000 4,500 4,000 FY'00 FY'01 FY'02

$6,590
State

FY'03

FY'04

FY'05

FY'06 ARRA

FY'07

FY'08

FY'09

FY'10

State Appropriations

Budget Trends: FY ‘10 – FY ‘11
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.
General Revenue Collections compared to Estimate, by Tax, FY '10 thru Jan (in $millions)
$0 -$11 -$200 -$400 -$401 -$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

$6
-$125 -$238

-$72

$0 -$200 -$400 -$600 -$800 -$864
Total Gen. Revenue

-$180

-$200

-$476 -$816
Net Gross Sales Tax Income Production Tax Motor Vehicle Other Total Gen. Sources Revenue

-$1,000

Budget Trends: FY ‘10 – FY ‘11
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.

Budget Trends: FY ‘10 – FY ‘11
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

Total= $7,124 million $301 $30

Total= $7,231 million $641 $371

$7,000
$6,500 $6,000 $5,500 $5,000 $4,500 $4,000

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

$6,793

$6,220

$5,462

FY '09 State Recurring Cash

FY '10 - Initial Stimulus (ARRA)

FY '10 - Revised Rainy Day Fund

Budget Trends: FY ‘10 – FY ‘11
FY ‟11 Budget: The Challenge Escalates
 Final FY ‘11 certification provided $1.8 billion less revenue for next year than FY ‘10 initial budget , $1.5 billion less than final FY ‘10 budget
State Appropriations, FY'08-FY '11
$8,000 $7,043

(includes all revenues and supplementals; in $ millions)
$7,124
$7,231 $6,452 $6,959 $6,797

$7,000

$6,000

$5,294
$5,000

$5,415

$4,000 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

Budget Trends: FY ‘10 – FY ‘11
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 ‘11
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
$7,500 $7,000 $6,500 $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 FY'10 - FY '10 FY '11 Initial - Final State Revenues Federal Relief Rainy Day Fund
$75 $5,389 $4,906 $79 $269 $5,412 $4,922 $5,073 $72 $5,240 $6,760 $6,217 $7,043 $7,095 $6,590 $5,897

(in $millions; FY '00-FY'10 includes supplementals, excludes one-times from Rainy Day Spillover Funds )
$30 $641 $224 $373 $838

$539

$219

$5,802

Budget Trends: FY ‘10 – FY ‘11
FY ‟11 Budget Agreement
 Appropriated over $1.35 billion in additional revenues on top of 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.

Budget Trends: FY ‘10 – FY ‘11
FY ‟11 Budget Agreement
Agency Appropriations – 10 Largest, Others, Total
Total Appropriations: $6,713.7 million Includes stimulus, Rainy Day Fund
Corrections, $462.1 , 7% DHS, $543.1 , 8% OHCA (Medicaid), $993.0 , 15% Transportation, $114.8 , 2% Mental Health, $187.7 , 3% Career Tech, $142.0 , 2% Juv. Affairs, $99.2 , 1% Public Safety, $88.4 , 1%

Total Ten Largest: $6,009.4, 89.5%

Higher Ed., $1,003.5 , 15% All Other Agencies, $704.3 , 11%

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

Common Ed., $2,375.6 , 35%

Budget Trends: FY ‘10 – FY ‘11
FY ‟11 Budget Agreement
 Funding cuts limited to under 10 percent for most of the largest state agencies;  However, over half of all appropriated agencies will absorb cuts of at least 15 percent for FY „11 compared to FY ‟09.  In some cases, appropriations cuts have been partly offset by fee increases. In addition, the Legislature has approved measures to promote savings and efficiencies and give agencies and school districts greater spending flexibility;  For most agencies and school districts, no additional funding to cover 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-11budgetinformation

Budget Trends: FY ‘10 – FY ‘11
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 reduced beds and closed centers for children’s mental health and adult substance abuse, cut contracts to all providers;  OJA cancelled youth detention and gang prevention programs, cut providers 5 percent, authorized 22 furlough days;  OHCA cut some Medicaid benefits and reduced all provider rates by 3.5 percent;

 Health Department eliminated 17 child guidance centers serving preschool 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; some imposing furloughs.

Budget Outlook: Looking Ahead

Budget Outlook: Looking Ahead
Budget Outlook: This Ain‟t Over Yet
 FY ‘11 GR collections through September up 6.8 percent from FY ‘10 – but 24 percent below FY ’09;  Collections through September 4.0 percent above the estimate.
July- Sept. General Revenue Collections, FY '01 - FY '11 (in Millions)
$1,650.0 $1,450.0 $1,250.0 1,136.3 1,127.4 1,148.2 1215.6 1319.1 1435.9 1466.3 1567.8 1,105.9 1,180.6

$1,050.0
$850.0 $650.0 $450.0 $250.0 FY '01 FY '02

995.3

FY '03

FY '04

FY '05

FY '06

FY '07

FY '08

FY '09

FY '10

FY '11

Budget Outlook: Looking Ahead
Budget Outlook: This Ain‟t Over Yet
 Substantial reliance in FY’10 –’11 on non-recurring revenue creates 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.
Non-Recurring Revenue in FY '11 Budget
Total Budget = $6,714 million; Total Non -Recurring Revenues= $1,145 million)

Federal stimulus funds, $539 Other one-time revenue, $36 Moratorium of tax credits, $44

Deferral of tax rebate payments, $81

Rainy Day Funds, $373

Revolving fund transfers, $73

Budget Outlook: Looking Ahead
Budget Outlook: This Ain‟t Over Yet
 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;

 Revenue impact of $120 - $170 million in FY ‘12 & FY ’13;
 Effective January 1, 2012 – unless Legislature acts.  Additional revenues automatically allocated for ROADS and OHLAP.

Budget Outlook: Looking Ahead
Budget Outlook: This Ain‟t Over Yet
 Possible passage of SQ 744 (mandatory K-12 education funding increases) could throw everything into chaos.
Annual Mandatory Increase in K-12 Funding vs. Increased Revenues, FY '12 - FY '14 (in $ millions) under SQ 744 Formula
$2,200 $1,800 $1,400 $1,000 $600
$392 $889 $1,696

$1,901

$572
$179

$415

$632
$217

$698
$(191)
$206

$200
$(200)

Yr 1 (FY '12)

Yr 2 (FY '13)

Yr 3 (FY '14) Rest of Government

Total Increased Revenue

Increased K-12 Spending

Assumes 10.5% annual revenue growth; 5% increase in Regional Per Pupil Expenditure in 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

Budget Outlook: Looking Ahead
Budget Outlook: This Ain‟t Over Yet
 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

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

$5,928

$5,981 $5,544 $5,945

Estimates by OK Policy - not based on certification
$4,439

$5,275
$4,735

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: Looking Ahead
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 determine which are needed and effective; 3. Consider new revenue streams for the Medicaid program; 4. Consolidation of functions and agencies where duplicative or unnecessary; 5. Prioritize prevention, diversion and surveillance over detention; 6. Prepare for next downturn by strengthening our reserve funds and improving our forecasting capacities.

Long-Term Fiscal Outlook
Long-Term Recommendations
1. 2. Serious review of our tax system; Scrutinize our programs and spending commitments; Give control for making decisions about revenues and spending back to our elected representatives.

3.

For More Information
• Updated Budget Information: okpolicy.org/current-budgetinformation • Oklahoma Policy Institute‟s Online Budget Guide www.okpolicy.org/onlinebudget-guide

Stay Connected
• E-mail dblatt@okpolicy.org • Visit our website www.okpolicy.org and blog www.okpolicy.org/blog • Subscribe to our e-mail alerts • Follow @okpolicy on Twitter • “Like” Oklahoma Policy Institute on Facebook

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Please consider a tax-deductible contribution to support our work. We are a 501(c)(3) funded by grants and contributions from individuals, organizations and businesses. You can donate from our website or send a check to Oklahoma Policy Institute, P.O. Box 14347, Tulsa, OK 74159-1347

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