OKLAHOMA BUDGET OVERVIEW

Trends and Outlook
REVISED May 12, 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 many 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
(Includes Supplementals thru FY ‗08 and Rainy Day spillover Funds for Recurring Agency Expenditures) - in $millions $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 $5,389 $4,981 $5,491 $5,191 $5,145 $5,459 $6,217 $6,760 $7,043

Annual Appropriations Totals,FY ‗00—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;  80 percent of new dollars went to six core agencies. 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) $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
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% 15.0%
10.6%
14.8%

10.0% 5.0% 0.0% -5.0% -10.0%
-6.6% -5.3%

7.6%

4.0%
0.9%

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 for FY ‗09  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 reach $600 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 Feb. 2010 certification)
7,000 6,000 5,000 4,000 3,000 2,000 1,000 -

1990

2007

1982

1983

1984

1985

1986

1987

1988

1989

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2008

2009

2010

2011

Budget Trends: FY „10
The Recession Hit Oklahoma Late 2008
Oklahoma Monthly Unemployment Rate (Seasonally-Adjusted), 1980-2010
10.0 9.0 8.0 % Unemployed 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 May-82 Jul-83 May-89 Jul-90 May-96 Jul-97 May-03

Mar 2010: 6.6%

Mar-95

Sep-98

Mar-81

Sep-84

Mar-88

Sep-91

Mar-02

Jul-04

Sep-05

Nov-85

Nov-92

Nov-99

Nov-06

See OK Policy, “Numbers You Need”, at: http://okpolicy.org/numbers-you-need-key-oklahomaeconomic-and-budget-trends

Mar-09

Jan-80

Jan-87

Jan-94

Jan-01

Jan-08

Budget Trends: FY „10
The Recession Hit Oklahoma Late 2008
% Change from Prior Quarter

Quarterly Change in Personal Income, Oklahoma and National, 4th Quarter 2007 to 4th Quarter 2009

5.0% 3.0% 1.0% -1.0% -3.0% -5.0%
2007.4 2008.1 2008.2 2008.3 2008.4 U.S. 2009.1 2009.2 2009.3 2009.4

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% 10.0% 5.0% 0.0%
1.3% 11.1% 10.8% 10.4% 12.8% 7.1%

-5.0%
-10.0% -15.0% -20.0% -25.0% -30.0% -35.0% July Aug Sept Oct Nov Dec Jan Feb Mar Apr May
-21.5% -19.1% -21.1% -27.7% -30.1% -8.5%

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

6,000

5,946.4

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 December FY '09 February FY '10 Feburary

Budget Trends: FY „10
FY ‘10 Initial 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 7,000 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 State Appropriations ARRA FY'07 FY'08 FY'09 FY'10
$4,981 $5,389 $5,491 $5,191 $5,459 $6,217 $7,043 $6,760

$7,125 $30
ARRA

$7,231

$641
$7,095
State
ARRA

$5,145

$6,590
State

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

Budget Trends: FY „10
FY ’10 Initial State Appropriations
$550.7 , 8% Corrections Total Initial 10 Largest Agencies: $6.3 billion (88%)Transportation, $503.0 $208.7 , 3% Appropriations: Agencies (75 agencies): $829 million (12%) Mental Health, 7% DHS,

$7,231.2 million Includes American Recovery and Reinvestment Act (ARRA)

OHCA (Medicaid), $979.8 , 13%

$203.3 , 3% Career Tech, $157.8 , 2%

Higher Ed., $1,070.7 , 15% All Other Agencies, $779.4 , 11%

Juv. Affairs, $112.4 , 1%

Public Safety, $93.3 , 1%

Total Ten Largest: $6,451.8, 89.2 %

Common Ed., $2,572.0 , 36%

Budget Trends: FY „10
FY ‘10 Initial 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  Finally seeing clear signs that the downturn has hit bottom and revenues are starting to climb back
Change in Monthly General Revenue Collections, Compared to Same Month Prior Year, July '08 - Apr '10
20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% -25.0% -30.0% -35.0%
11.1% 10.8% 1.3% 10.4% 12.8% 7.1% 1.6% -0.2% -8.5% -16.7% -19.1% -21.1% -21.5% -23.7% -26.3% -27.7% -29.1% -30.1% -30.1% -30.5% -31.6% -7.3%

July

Sept

Nov

Jan

Mar

May

July

Sept.

Nov

Jan

Mar

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 (Q3)
9.9% -8.3% -12.1% -29.5% 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

40.0% 20.0% 0.0% -20.0% -40.0%

Budget Trends: FY „10
FY ‘10 : Off to a Very Rough Start
 Collections through April are $808.5 million – 17.8 percent below the estimate  After seven months of significant shortfalls, collections starting in February have come close to or exceeded the estimate
General Revenue Collections compared to Estimate, by Tax, FY '10 thru Jan (in $millions)
$0 -$100 -$200 -$300 -$400 -$500 -$600 -$700 -$800 -$900 -$1,000 -$11 -$180 -$401 -$600 -$800 -$864 Sales Tax Other Sources -$809 -$1,000 Net Income Tax Sales Tax Other Sources -$200 -$400 -$398

General Revenue Collections compared to Estimate, by Tax, FY '10 thru April (in $millions)
$0 -$70 -$236 -$1 -$104

-$72

-$200

Net Income Tax

Budget Trends: FY „10
FY ‘10 : Off to a Very Rough Start
 While collections are recovering, they remain substantially below their pre-downturn levels  April revenues just 83 percent of average for the same month over the prior 5 years
Monthly Total General Revenue Collections as % of Prior Five-Year Same-Month Average, July 2008 - April 2010
130%
120% 110% 100% 90% 80% 70% 60% Dec '08 Dec '09 Sep '08 Feb '09 Sep '09 Mar '09 Feb '10 82.8% 83.0%

Oct '09

Oct '08

Jan '09

Jan '10

Mar '10

Aug '08

Jun '09

Aug '09

Apr '09

May '09

Nov '08

Nov '09

Apr '10

Jul '08

Jul '09

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 that must be repaid  $314.6 million since start of year  $44 million remained to be repaid after April collections

Budget Trends: FY „10
Impact of Cuts
 Even at 5-10 percent monthly cut levels, the toll on services and programs has been significant:
 DHS cut senior nutrition services by $7.2 million;  OJA cancelled youth detention and gang prevention programs, cut providers 5 percent, authorized 22 furlough days;  OHCA cut some Medicaid benefits and reduced provider rates by 3.5 percent;  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;  Department of Corrections cut contracts, eliminated programs, reduced staffing to under 75 percent of authorized levels;  School districts eliminating programs, some going to 4-day weeks;

 Most agencies leaving positions unfilled, offering buy-outs; many imposing furloughs.

Budget Trends: What Response?
FY ‘10 : How Large a Shortfall?
 February certification projected 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 $5,000 $4,500 $5,415 $5,145

$669 million
$4,476

$4,000
100% Estimate - June Appropriation (95%) February Projection

Budget Outlook: What Response?
Shortfall Options
 Rainy Day Fund was 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) $596.6 $571.6 $461.3 $340.9 $217.5 $157.5 $72.3 $0.1
2001 2002 2003 2004 2005 2006 2007 2008 2009

$700 $600 $500 $400 $300 $200 $100

$496.7

$0

Budget Outlook: What Response?
Shortfall Options
 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 Mid-Year Budget Agreement
 Agreements announced by Governor, Speaker and President Pro Tem in January and February
 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 $157 million to offset part of GR and 1017 shortfalls; $25.6 M to Higher Ed; $33M to OHCA; $15M to Governor‘s Emergency Fund; $7.2M to Corrections; $3 million to Public Safety, smaller amounts to Rehab Services , Central Services, other agencies  No additional funds for Human Services, Mental Health  Use of $223.7 million of Rainy Day Fund (3/8th), $151 million more stimulus money, plus additional gross production tax revenues and other sources

Budget Outlook: What Response?
FY ‘10 Mid-Year Budget Agreement
 Total revised budget is $251 million (3.5%) less than initial; $143 million (2.0%) less than FY ‘09;  Almost $1.5billion (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 $6,793

Total= $7.124 billion
$301 $30

Total= $7.231 billion
$641 $371

Total= $6.981 billion
$224

$838
$435

$6,220

$4,500 $4,000
FY '09 State Recurring Cash FY '10 - Initial Stimulus (ARRA)

$5,484

FY '10 - Revised Rainy Day Fund

Budget Outlook: What Response?
FY ‘10 Mid-Year Budget Agreement
 Agencies funded in whole or in part with non-GR funds and those receiving supplementals absorbed less than full 7.5 percent cut
8.0% 3.0% -2.0% -7.0%
-7.3% -7.6% 11.1% Funding Changes for Largest State Agencies, FY '09 - FY '10 (Final) & FY '10 (Initial) - FY '10 (Final)

0.1% -0.2% -2.8% -7.4% -8.2% -3.1% -5.7% -7.2% -7.1% -7.3% -4.3% -7.2% -8.1% -7.4% -7.5%

-2.0% -3.5%

-1.7% -3.2%
-5.3% -5.3%

-12.0%

-9.6%

-10.0%

FY '09 (Final) - FY '10 (Final)

FY '10 (Initial) - FY '10 (Final)

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)
$6,000 $5,928 $5,714 $5,519 $5,415 $5,981

$5,500

$5,000 $ 4,475 $4,579

$4,500

$4,000
FY '06 Actual FY '07 Actual FY '08 Actual FY '09 Actual FY '10 (June estimated) FY '10 (Feb projected) FY '11 (Feb estimated)

Budget Outlook: FY „11
FY ‘11: The Challenge Escalates
 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
$8,000 $7,000 $6,000 $5,294 $5,000 $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 $7,043

(includes all revenues; includes FY '08-FY '09 supplementals; in $ millions) $7,231
$7,124 $6,959 $6,452 $5,415 $6,797

Budget Outlook: FY „11
FY ‘11: The Challenge Escalates
 Assuming maintenance of this year‘s budget cuts and the use of remaining stimulus funds and 3/8ths of Rainy Day Fund, next year‘s budget gap exceeds $800 million.  Equivalent to an additional 12 percent cuts to all agencies of state government beyond the cuts already enacted.  Federal extension of enhanced FMAP would reduce this gap by some $300 million and use of remaining ―emergency‖ Rainy Day Funds by an additional $149 million.

Budget Outlook: FY „11
FY ‘11: The Challenge Escalates
 Agency scenarios of how to absorb cuts of an additional 7.5 percent to 15 percent in FY ‗11 leave no doubt of the real threats that will be posed to the healthy, security and well-being of Oklahomans  Medicaid program could eliminate optional benefits for adults such as prescription drugs, diabetes supplies and kidney dialysis treatment, and cut provider rates by 10 to 20 percent;  Major cuts to community-based services for the elderly, mentally ill, juvenile offenders, people with disabilities, and others.  Widespread teacher layoffs and loss of school programs;  Possible loss of hundreds of correctional officers

 Corrosion of all the structures that deliver public services

Budget Outlook: FY „11
FY ‘11: The Challenge Escalates
 To budget the balance, Gov. Henry proposed:  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: The Challenge Escalates
 Some of the revenue enhancements and savings in the Governor‘s budget proposal are receiving serious consideration, as are other revenue ideas.  Even under the Governor‘s proposals, the cuts to agency programs and services would be deep and widespread  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.

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

$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 Feb 2010 certification

$5,275
$4,735 $4,439

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
Budget Outlook: No Quick Recovery
 Substantial reliance in FY‘10 –‘11 on non-recurring revenue creates significant problems for FY ‗12  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

Budget Outlook : Beyond FY „10
Short-Term Recommendations
1. Defer additional tax cuts until revenues fully recover 2. Suspend and cap some tax deductions, credits and incentives 3. Consider new revenue streams for the Medicaid program 4. 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
1,000 500
M i l l i o n $2005

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

0 (500) (1,000) (1,500) (2,000) (2,500) Before Tax Cuts After Tax Cuts

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. 2. 3. Modernize the Tax System Preserve a Balanced Tax Structure Scrutinize our programs and spending commitments

4.

Make the tax system fairer

For More Information
• Updated Budget Information: okpolicy.org/fy-10-fy11budget-information • Oklahoma Policy Institute’s Online Budget Guide www.okpolicy.org/onlinebudget-guide

Contact Information
Oklahoma Policy Institute
P.O. Box 14347 Tulsa, OK 74159-1437 (918) 794-3944 info@okpolicy.org
Oklahoma Policy Institute provides timely and credible analysis of state policy issues

Better Information, Better Policy www.okpolicy.org

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