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The State Budget Outlook: An Incomplete Recovery

Updated September, 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

Were In This Together


State and local governments help us meet our goals:
Educate our children and train our workforce; Protect our streets and investigate crimes; Maintain and upgrade our roads and bridges;

Pay for medical care provided by private doctors, nurses, therapists, home health aides, hospitals, etc.
Ensure our water is clean and safe; Promote our small towns, rural areas, artists, and investors;

Support those at risk of harm and abuse.

Our families, communities and businesses cannot thrive without effective public structures & systems.

Oklahomas Path to Prosperity


Oklahoma Is A Low Tax State
Oklahomans pay among the lowest state and local

taxes in the nation, either as a share of state personal income (40th) or per capita (41st);
Oklahomans goes to pay for state and local services.

Just under a dime of every dollar earned by

Source: Source: Center on Budget and Policy Priorities tabulations based on data from the Bureau of the Census.

Oklahomas Path to Prosperity


We Already Lag Behind
Oklahoma invests less than most states in our public
structures:
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.

$9,000 $7,000 $5,000 $3,000 $1,000 -$1,000

State and Local Spending per Person by Function, 2007-08

Spending per Person

Oklahoma

US Average

Source: U.S. Bureau of the Census

Oklahomas Path to Prosperity


We Already Lag Behind
We already fall short in many of our common goals as a state:
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 longterm 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
Tax cuts were large, permanent, and back-loaded;

Tax cuts were stretched out over several years; full impact will not be felt until FY 13;
Major cuts were almost all to the personal income tax.
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

so u r c e : Ok l a h o m a T a x C o m m i ssi o n

Budget Trends: FY 10 FY 12

Budget Trends: FY 10 FY 12
The Recession Hit in Late 2008
Oklahomas unemployment rate rose quickly from under 4 percent to around 7 percent between Sept 2008 and June 2009; Unemployment less severe, recovered more quickly than the nation.
Monthly Unemployment Rate, National and Oklahoma, January 2008 to August 2011 (seasonally adjusted)
10.5 9.5 8.5 7.5 6.5 5.5 4.5 3.5 2.5 Jan-08 Jul-08 Jan-09 Jul-09 United States Jan-10 Jul-10 Jan-11 Oklahoma Jul-11
7.0%
5.6% 10.1% 9.8% 9.1%

Budget Trends: FY 10 FY 12
The Recession Hit in Late 2008
Oklahoma experienced three straight quarters of negative growth (declining state personal income) in late 2008 early 2009; Economy growing faster than the nations since start of 2010.

% Change from Prior Quarter

5.0%
3.0% 1.0% -1.0% -3.0% -5.0%

Quarterly Change in Personal Income, Oklahoma and National, 3rd Quarter 2007 to 1st Quarter 2011

2007.4 2008.1 2008.2 2008.3 2008.4 2009.1 2009.2 2009.3 2009.4 2010.1 2010.2 2010.3 2010.4 2011.1 U.S. Oklahoma

Budget Trends: FY 10 FY 12 State Budgets Hammered


States facing cumulative budget shortfalls close to $600 billion.

Budget Trends: FY 10 FY 12
State Budgets Hammered
All but four states faced budget shortfalls in FY 11.

Budget Trends: FY 10 FY 12
State Budgets Hammered
All but four states faced budget shortfalls in FY 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;
Revenues recovering over past five quarters.
Quarterly Year-over-Year Change in Oklahoma General Revenue Collections, FY '02 - FY '11
12.9%

30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% -40.0%

-12.1% -29.5%
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

Budget Trends: FY 10 FY 12
Its a Revenue Problem
FY 10 General Revenue 23 percent below pre-downturn (FY 08) levels; Between 2001 2010, state population grew 6 percent, inflation increased costs of good and services by about 30 percent yet state collected less revenue in FY 10; Revenues increased by 10.5 percent in FY 11 but remained 16.5 percent below FY 08.
Annual General Revenue Collections, FY '01 - FY '11 (in Millions)
7,000 6,000 5,000 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 4,717 4,408 4,174 4,616 5,701 5,935 5,953 5,544 4,621

4,966

5,138

Budget Trends: FY 10 FY 12
Its a Revenue Problem
All major taxes fell sharply in FY 09 and FY 10 personal income tax and gross production tax most steeply; Only sales tax has fully recovered to pre-downturn levels.
Oklahoma General Revenue Collections, FY '06 - FY '11 (in $ millions)
$7,000 $6,000 $5,000

Total = $5,701
$638 $234 $1,455 $730 $265

Total= $5,935
$732 $259 $1,531 $640 $435

Total= $5,953
$746 $252 $1,612

Total= $5,541
$716 $176
$1,647 $724 $266 $2,014

Total= $4,621
$637 $147 $1,516 $445 $168 $1,708

Total= $5,138
$676 $199 $1,668

$4,000
$3,000 $2,000 $1,000 $-

$825 $279

$489 $275 $1,832

$2,380

$2,338

$2,239

FY'06
Personal Income Tax

FY'07
Corporate Income Tax

FY'08
Gross Production

FY'09
Sales Tax

FY'10
Motor Vehicle Other Sources

FY'11

Budget Trends: FY 10 FY 12
Its a Revenue Problem
Monthly collections down by over 15 percent for 12 straight months (Feb 2009 Jan 2010); Collections now showing solid recovery; FY 12 year-to-date up 19 percent from FY 10 but still 16 percent below FY 09.
Change in Monthly General Revenue Collections, Compared to Same Month Prior Year, Jan '09 - Aug '11
30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% -40.0%
-22% -8% -19% -7% 1.6% 0% 6% 2% 20% 22% 12% 9% 13% 10% 4% 19% 13%

10%

5% 6%

9% 3%

-17%
-21% -28% -30% -26% -32% -30% -24% -31% -29%

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 Jul-11

Budget Trends: FY 10 FY 12
Budgeting Through the Crisis
Budgets for each of the past three years (FY 10, FY 11 & FY 12) have been repeated variations of a similar theme:
Large shortfalls in projected revenues;
Fear of deep and devastating budget cuts; Use of non-recurring revenues to partly bridge the budget gap; Budget cuts across state government but less severe for core education, health, human service, public safety agencies.

Budget Trends: FY 10 FY 12
Budgeting Through the Crisis
FY 12 appropriations of $6.511 billion:
Three consecutive years 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
Budgeting Through the Crisis
Governors Henry and Fallin and the Legislature used various revenue enhancements to help bridge budget shortfalls and reduce the severity of cuts; Most new revenues have been one-time/non-recurring Totaled close to $3 billion over 3 years, including:
Federal funds from the stimulus bill (~$1.5 billion); State Rainy Day Fund ($597 million);
Revenue Enhancements, FY '10 - FY 12 (in $millions)
Total: $2,988
Suspension and deferral of tax credits, $129 Tax compliance efforts, $154 Fee increases, $34 Other measures, $59

Rainy Day Funds, $597

Cash transfers from various funds ($525 million);


Enhanced tax compliance ($154 million); Suspending and deferral of tax credits ($129 million).

Transfers from State Funds, $525

Federal stimulus funds, $1,491

Budget Trends: FY 10 FY 12
Budgeting Through the Crisis
Federal Stimulus bills (American Recovery and Reinvestment Act) provided single largest source of assistance for state budget); Funds divided between support for education and health care.
American Recovery and Reinvestment Funds Authorized in FY '10, FY '11 & FY '12 Budgets by Agency Total FY '10 FY' 11 FY '12 Total 1. State Fiscal Stabilization Fund* $ 219,711,616 $ 139,521,635 $ 359,233,251 Education, State Department of $ 68,792,477 $ 59,794,986 $ 128,587,463 Higher Education, Regents for $ 288,504,093 $ 199,316,621 $ - $ 487,820,714 sub-total State Fiscal Stabilization Fund 2. Enhanced FMAP Health Care Authority (OHCA)** Human Services, Department of University Hospital Authority Other agencies sub-total enhanced FMAP

$ $ $ $ $

431,111,338 $ 101,355,640 $ 10,316,683 $ 2,816,784 $ 545,600,445 $

278,139,950 43,000,000 24,407,120 9,196,768 354,743,838

$ $ $ $

70,866,174 $ 22,618,363 $ $ 5,297,146 $ 98,781,683 $

780,117,462 166,974,003 34,723,803 17,310,698 999,125,966

$ 837,850,680 $ 554,060,459 $ 98,781,683 $ 1,490,692,822 Total of All Agencies *Common Education received $114 million in extra stimulus money for FY '11 that was not appropriated *OHCA includes $10 million from State Fiscal Stabilization Fund (General Purpose) in initial FY '10 budget. Excludes $30 million enhanced FMAP for FY '09

Budget Trends: FY 10 FY 12
Budgeting Through the Crisis
90 percent of appropriations consistently goes to 10 agencies that provide core services; Over 65 agencies share remaining 11 percent of funding
FY '12 Appropriations: Total and 10 Largest Agencies
DHS; $537 ; 8.3%

Total Appropriations: $6,510.5 million

OHCA (Medicaid); $983 ; 15.1%

Corrections; $460 ; 7.1% Transportation; $107 ; 1.6% Mental Health; $187 ; 2.9% Career Tech; $134 ; 2.1%

Total Ten Largest: $5,811.9; 89.2%

Higher Ed.; $945 ; 14.5% All Other Agencies; $699 ; 10.7%

Juv. Affairs; $96 ; 1.5% Public Safety; $85 ; 1.3%

Notes: Transportation also received $70 from bond issue; OHCA excludes revenue from hospital provider assessmber (SHOPP)

Common Ed.; $2,278 ; 35.0%

Budget Trends: FY 10 FY 12
Budgeting Through the Crisis
Almost every agency has absorbed successive and significant cuts over past three years; Some 40 agencies more than half of all appropriated agencies have absorbed cuts of greater than 20 percent since FY 09; Cuts to some key health, human service, and public safety agencies have been minimized: Mental Health -12.7%; DPS 12.6%; Common Education 10.0%; Higher Ed 9.1 percent; Corrections -8.6%; DHS 3.9%; OHCA +12.7% No agencies have been funded to cover rising operating and employee benefit costs over the past three years;

Budget cuts and funding shortfalls will continue to impact Oklahoma students, teachers, families, public employees, non-profit 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: An Incomplete Recovery
TAX COLLECTIONS AT HISTORIC LOWS

Tax collections in FY 10 equal to just 5.2 percent of state personal income ; Declined from 6.7 percent in FY 06 due to tax cuts and economic downturn.
State Tax Collections, FY '82 - FY '10 Total and as % of State Personal Income

$10,000

7.5%

$8,000
$6,000 $4,000 $2,000 $0

7.0%
6.5% 6.0% 5.5% 5.0%

State Tax Collections (in $millions) Tax Collections as % of State Personal Income

Sources: State personal income from Bureau of Economic Analysis; Tax collections from Annual Executive Budget

Looking Ahead
Budget Outlook: An Incomplete Recovery
State appropriated spending has reached its lowest level in at least 30 years and will fall even further in FY 12 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: An Incomplete Recovery
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: An Incomplete Recovery
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 credit programs; Limit itemized income tax deductions;

Modernize the sales tax;


Allow higher taxes on commercial property; Target any tax relief towards those in greatest need: Increase the personal exemption; Stretch and index tax brackets Expand the grocery tax credit or earned income tax credit

Looking Ahead
Budget Outlook: An Incomplete Recovery
Make smarter expenditure decisions: Consolidate duplicative agencies and streamline services; Prioritize prevention and surveillance; Ensure adequate funding of public pensions. Improve our forecasting capacities and budget reserves; Give control for making decisions about revenues and spending back to our elected representatives.

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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