Ok Budget Outlook Nov09

OKLAHOMA BUDGET OVERVIEW

Trends and Outlook

REVISED NOVEMBER, 2009

David Blatt

Oklahoma Policy [email protected] - (918) 859-8747

mailto:[email protected]

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

Annual Appropriations Totals,FY ‗00—FY ‗08(Includes Supplementals thru FY ‗08 and Rainy Day spillover Funds for

Recurring Agency Expenditures) - in $millions

FY ‘02 – FY ‘08: Bust and BoomState 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

$4,981

$5,389 $5,491

$5,191 $5,145

$5,459

$6,217

$6,760 $7,043

$4,000

$4,500

$5,000

$5,500

$6,000

$6,500

$7,000

$7,500

FY'00 FY'01 FY'02 FY'03 FY'04 FY'05 FY'06 FY'07 FY'08

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

Health Care Authority: $289M

Higher Education: $271M

Human Services: $129M

Corrections: $80M

Transportation: $72.5M*


Lost Revenues from Select Tax Cuts Enacted 2004 - 2006

FY'05 through FY'10 (in $ millions)

$18.7$144.8

$333.3

$561.8$651.1

$776.9

$0.0

$200.0

$400.0

$600.0

$800.0

FY'05 FY'06 FY'07 FY'08 FY'09 FY'10sour c e : Ok l a homa Ta x Commi ssi on

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


Budget Trends: FY ‟02 - FY ‟09

FY‘07 – FY’08: Revenue Slowdown

General Revenue collections were almost flat in FY ‘08 compared to FY ‘07 (+%0.9, $54 million)

-6.6%-5.3%

10.6%

7.6%

14.8%

4.0%

0.9%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

FY '02 FY '03 FY '04 FY '05 FY '06 FY '07 FY '08

Annual % Change in General Revenue Collections, FY '03 - 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

Source: Center on Budget and Policy Priorities


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


6.7%

9.8%

2.5

3.5

4.5

5.5

6.5

7.5

8.5

9.5

10.5

Sep-07 Mar-08 Sep-08 Mar-09 Sep-09

Un

em

plo

ym

en

t R

ate

(%

)Monthly Unemployment Rate,

National and Oklahoma, Sep. 2007 to Sep. 2009

Oklahoma National

The Recession Hit Oklahoma Late

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

http://okpolicy.org/numbers-you-need-key-oklahoma-

economic-and-budget-trends



-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

2007.2 2007.3 2007.4 2008.1 2008.2 2008.3 2008.4 2009.1 2009.2

% Change from

Prior Quarter

Quarterly Change in Personal Income,

Oklahoma and National,

2nd Quarter 2007 to 2nd Quarter 2009

U.S. Oklahoma



$-

$20.00

$40.00

$60.00

$80.00

$100.00

$120.00

$140.00

$160.00

$-

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

Jan-1986

Dec-1986

Nov-1987

Oct-1988

Sep-1989

Aug-1990

Jul-1991

Jun-1992

May-1993

Apr-1994

Mar-1995

Feb-1996

Jan-1997

Dec-1997

Nov-1998

Oct-1999

Sep-2000

Aug-2001

Jul-2002

Jun-2003

May-2004

Apr-2005

Mar-2006

Feb-2007

Jan-2008

Dec-2008

U.S. Natural Gas Wellhead Price (Dollars per Thousand Cubic Feet)

Cushing, OK WTI Spot Price FOB (Dollars per Barrel)

Monthly Oil and Gas Prices, 1986 - 2009


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)

11.1% 10.8%

1.3%

10.4%12.8%

7.1%

-8.5%

-21.5%-19.1%

-21.1%

-27.7%-30.1%

-35.0%

-30.0%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

July Aug Sept Oct Nov Dec Jan Feb Mar Apr May June

Change in Monthly General Revenue Collections, FY '09 Compared to Same Month, FY '08


FY ’10 Budget: Revenues on the Skids

5,407.2

5,649.2

5,981.15,946.4

5,902.7

5,710.0

5,356.6

5,000

5,500

6,000

6,500

FY '06 Actual Fy '07 Actual FY '08 Actual FY '09 June FY '09

December

FY '09

February

FY '10

Feburary

General Revenue Collections,

FY '06 Actual - FY '10 Estimated (in $million)

In February, FY ‗10 revenues estimated to come in >$600 million below FY ‘08 ;


FY ‘10 Budget

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

$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

$4,981

$5,389 $5,491

$5,191 $5,145

$5,459

$6,217

$6,760

$7,043

4,000

4,500

5,000

5,500

6,000

6,500

7,000

7,500

FY'00 FY'01 FY'02 FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09 FY'10State Appropriations ARRA

$30ARRA

$7,125 $7,231

$641 ARRA

$7,095 State

$6,590State

State Appropriations History, FY '00 - FY '10 in $millions)

(includes supplementals, excludes one-times from Rainy Day Spillover funds)

FY ’10 State Appropriations

10 Largest Agencies: $6.3 billion (88%)

Agencies (75 agencies): $829 million (12%)


Common Ed.,

$2,572.0 , 36%

Higher Ed.,

$1,070.7 , 15%

OHCA (Medicaid),

$979.8 , 13%

DHS,

$550.7 , 8% Corrections

$503.0

7%

Transportation,

$208.7 , 3%

Mental Health,

$203.3 , 3%

Career Tech,

$157.8 , 2%

Juv. Affairs,

$112.4 , 1%

Public Safety,

$93.3 , 1%All Other

Agencies,

$779.4 ,

11%

Total

Appropriations:

$7,231.2 million

Includes

American

Recovery and

Reinvestment

Act (ARRA)

Total Ten

Largest: $6,451.8,

89.2 %


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


FY ‘10 : Off to a Very Rough Start

July-Oct revenue collections down 28.1 percent from FY ‘09

October better than previous months

Not clear whether we‘ve hit bottom or how long it will take to recover

11.1% 10.8%

1.3%

10.4%12.8%

7.1%

-8.5%

-21.5%-19.1%

-21.1%-27.7%

-30.1%-26.3%

-31.6%-30.1%

-23.7%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

July Aug Sept Oct Nov Dec Jan Feb Mar Apr May June July Aug Sept. Oct

Change in Monthly General Revenue Collections, Compared to Same Month Prior Year, July '08 - Oct. '09


FY ’10 : Off to a Very Rough Start

Three consecutive quarters of worsening collections

Revenue drops more than twice as steep as during the last downturn

-12.1%

9.9%

-15.3%

-26.3%

-29.5%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

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

Quarterly Year-over-Year Change in GR Collections,

Oklahoma, FY '02 - FY '10


FY ’10 : Off to a Very Rough Start

1st quarter revenues lower than 9 years ago – without adjusting for inflation or economic growth

$1,136.3

$995.3

$1,567.8

$1,105.9

$900

$1,000

$1,100

$1,200

$1,300

$1,400

$1,500

$1,600

$1,700

FY'01 FY'02 FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09 FY'10

1st Quarter General Revenue Collections,

FY '01 - FY'10 (in millions)


FY ‘10 : Off to a Very Rough Start

Collections through October are $471.7 million – 24.2 percent - below the estimate

OSF has cut agencies GR allocations by 5 percent

Cuts limited to 5 percent ($21.9 million) of GRF each month through transfers of cash reserves

-$141-$172

-$113

-$14 -$31

-$472-$500

-$400

-$300

-$200

-$100

$0

Net Income Tax Gross Production

Sales Tax Motor Vehicle Other Sources Total Gen. Revenue

General Revenue Collections compared to Estimate, by Tax, FY '10 thru October (in $millions)


FY ‘10 : How Large a Shortfall?

Based on first quarter revenues, our best estimate of the full year GR shortfall is about $700 million, or 13.7%, below the appropriated amount

$5,518

$5,145

$3,933

$4,439

$5,293

$-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

100% Estimate Appropriated Low Middle High

Comparison of FY '10 Original Estimates and OK

Policy Forecasts (GR Fund Only)

See “State Budget Shortfalls, FY „10 & Beyond”

at http://okpolicy.org/fy-10-budget-information

Budget Outlook: What Response?

Shortfall Options Rainy Day Fund is filled to maximum amount of $597

million

Left untouched for initial FY ‗10 budget

$157.5

$340.9

$72.3$0.1

$217.5

$461.3$496.7

$571.6$596.6

$0

$100

$200

$300

$400

$500

$600

$700

2001 2002 2003 2004 2005 2006 2007 2008 2009

Rainy Day Fund Balances, FY '01 - FY '09

(opening balance in $ millions)


Shortfall Options

Up to $375 million 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)

Current

Year

Shortfall,

37.5%

Next Year

Shortfall,

37.5%

Emergency,

25.0%

Uses of Constitutional

Reserve Fund


Shortfall Options

Middle estimate of $706 million shortfall could be filled by:

RDF shortfall funds (3/8ths) - $224 million +

RDF emergency funds (1/4) - $149 million +

Full year across-the-board cuts of 6.4 percent


Budget Outlook

What‘s the plan???

Seems to involve:

Keep cutting agency budgets 5 percent every month

Keep borrowing from any and all available reserves to make up the difference

No Special Session

Tap the Rainy Day Fund to fill the gap

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)


Budget Outlook: Other Revenues

Stimulus Round II

About half of the State Fiscal Stabilization Fund and enhanced Medicaid funds remains available

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;

Budget Outlook: Beyond FY „10

Budget Outlook Revenues unlikely to recover to pre-downturn nominal levels prior to FY ‗12 or FY ‗13

$3,870

$4,439 $4,735

$5,275

$5,945

$5,938 $5,953

$5,518

$6,451

$-

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

FY 07 (act.) FY 08 (act.) FY 09 (act.) FY 10 (est.) FY 11 (est.) FY 12 (est.) FY 13 (est.)

Reve

nu

e in

$

millio

ns

Fiscal Year

Figure 4

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

General Revenue Fund

Low Middle High

Estimates by OK

Policy

Budget Outlook: Beyond FY „10

Budget Outlook

Time-released tax cuts still kicking in

Use of one-time funds in FY ‗10 and FY ‗11 create significant problems for FY ‗12

Budget Outlook : Beyond FY „10

Short-Term Recommendations

1. Develop and share greater information about projected shortfalls, impact of actual and potential cuts, possible solutions

• Revised forecasts, legislative hearings

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

3. Defer additional tax cuts until revenues fully recover

4. 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

5. Consider new revenue streams for the Medicaid program

6. Develop meaningful multi-year forecasting

• 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 – like most states and the federal government – faces a looming structural budget deficit


Projected Annual Budget Surpluses and Deficits

Before and After 2004-2006 Tax Cuts (2007 to 2035)

(2,500)

(2,000)

(1,500)

(1,000)

(500)

0

500

1,000

2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035Year

Millio

n $

20

05

Before Tax Cut s

Aft er Tax Cut s

Oklahoma’s Structural Deficit

Source: Projections conducted in 2007 by Dr. Kent Olson, Professor of

Economics, Oklahoma State University

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

• Oklahoma Policy Institute’s Online Budget Guide

www.okpolicy.org/online-budget-guide

http://www.okpolicy.org/online-budget-guide





Contact Information

Oklahoma Policy Institute

228 Robert S. Kerr, Suite 750

Oklahoma City, OK 73102

ph: (405) 601-7692

[email protected]

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

www.okpolicy.org

mailto:[email protected]

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Ok Budget Outlook Nov09