Oklahoma Budget Overview

OKLAHOMA BUDGET OVERVIEW Recent Trends and Outlook ---updated June 2009--

David Blatt Oklahoma Policy Institute [email protected] - (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 $6,760

$7,000 $6,217

$6,500 $6,000 $5,389

$5,500

$5,491

$5,459 $5,191

$5,145

FY'03

FY'04

$4,981 $5,000 $4,500 $4,000 FY'00

FY'01

FY'02

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)

$800.0 $561.8

$600.0

$0.0

$651.1

$333.3

$400.0 $200.0

$776.9

$144.8 $18.7 FY'05

source: Oklahoma Tax Commission

FY'06

FY'07

FY'08

FY'09

FY'10

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% -10.0%

-6.6%

FY '02

-5.3%

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 6,500

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

5,933.9

6,000

5,981.1

5,946.4

5,664.4

5,710.0

5,500

5,356.6

5,000 FY '06 Actual Fy '07 Actual FY '08 Actual FY '09 June

FY '09 February

FY '10 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%

10.0%

8.8%

0.0% -10.0%

-10.4%

-20.0%

-10.5%

-30.0% -40.0%

-37.6%

-50.0%

-50.3%

-60.0% Gross Production Tax-Gas

Income TaxPersonal

Income Tax- Motor Vehicle Corporate Tax

Sales Tax

Total General Revenue

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

7,000

-$309.6

6,759.2

6,750

- $612.5

6,456.3

6,500 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 7,500

State Appropriations History, FY '00 - FY '10 in $millions) (includes supplementals, excludes one-times from Rainy Day Spillover funds) $7,043

7,000

$6,760

6,500

ARRA

$641

6,000 $5,389

5,000

$5,491

$4,981

$7,095

$5,459 $5,191

$7,231

$30

$6,217

5,500

$7,125

ARRA

State

$6,590

$5,145

State

4,500 4,000 FY'00

FY'01

FY'02

FY'03 FY'04 FY'05 FY'06 State Appropriations ARRA

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

FY'07

FY'08

FY'09

FY'10

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 Corrections 10 Largest Agencies: $6.3 billion (88%) $550.7 , 8% $208.7

Total $503.0 Appropriations: Agencies (75 agencies): $829 million7% (12%) OHCA (Medicaid) $7,231.2 million $979.8 Includes 13% American Recovery and Reinvestment Higher Ed. Act (ARRA) $1,070.7 15%

Total Ten Largest: $6,451.8, 89.2 %

Common Ed. $2,572.0 36%

All Other Agencies $779.4 11%

3% Mental Health $203.3 3% Career Tech $157.8 2% Juv. Affairs $112.4 Public1% Safety $93.3 1%

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

Retirement System by State Agencies, FY '04 - FY '10

$400

Fiscal Year

Covered Payroll (in $millions)

Contribution Rate

Contributions (in $millions)

357.1

$350 293.1

$300

FY '04

$1,055.74

10.0%

$105.60

$250

FY ‘05

$1,142.80

10.0%

$114.30

$200

FY ‘06

$1,227.90

11.5%

$141.20

$150

FY ‘07

$1,299.00

12.5%

$162.40

$100

FY ‘08

$1,337.78

13.5%

$180.60

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

418.9 393.6

244.5 217.6 163.7

186.0

129.6

2001 2002 2003 2004 2005 2006 2007 2008 2009 (proj.) Source: Employee Benefits Council

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

$ millions

7,200

$6,780

$7,043

$6,848

6,800 6,400

$7,286

$7,089

$6,456

$6,518

$6,217

6,000 5,600 2006

2007

2008

2009

2010

2011

Fiscal Year Ending June 30 Source: Oklahoma Board of Equalization for 2006-10, Oklahoma Policy Institute projections for 2011-13

2012

2013

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 [email protected]

Better Information, Better Policy Oklahoma Policy Institute provides timely and credible analysis of state policy issues

www.okpolicy.org