The State Budget Outlook:

A New Fiscal Reality

Updated February 23, 2011

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, hospitals, 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)
$7,500
$7,043 $7,089
$7,000 $6,760
$6,500 $6,217
$6,000
$5,389 $5,491 $5,459
$5,500 $5,191 $5,145
$4,981
$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
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 ‟13.

Lost Revenues from Select Tax Cuts Enacted 2004 - 2006

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

$776.9
$800.0 $651.1
$561.8
$600.0
$400.0 $333.3

$200.0 $144.8
$18.7
$0.0
FY'05 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 ‘10 – FY ‘11
Budget Trends: FY ‘10 – FY ‘11
Things Are Tough All Over
 All but four states are facing shortfalls in FY „11.
 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

The Recession Hit in Late 2008

Monthly Unemployment Rate,
National and Oklahoma, Dec. 2007 to Dec. 2010
10.5
9.4%
9.5

8.5

7.5 6.8%
6.5

5.5

4.5

3.5

2.5
Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10

National Oklahoma
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 '11

30.0%
20.0%
10.0%
0.0%
-10.0%
-12.1%
-20.0%
-30.0%
-29.5%
-40.0%
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1
FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY
'02 '02 '03 '03 '04 '04 '05 '05 '06 '06 '07 '07 '08 '08 '09 '09 '10 '10 '11
 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)
$5,935 $5,953
$6,000
$5,701
$5,545
$5,500

$4,966
$5,000
$4,717
$4,616 $4,600
$4,500 $4,408
$4,174

$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);
 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 $7,043 $7,125 $7,231

$6,760
7,000 $30
ARRA
6,500 $6,217
$641
ARRA
6,000 $7,095
$5,389 $5,491 $5,459 State
5,500 $5,191 $5,145 $6,590
$4,981 State
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

State Appropriations ARRA

 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 General Revenue Collections compared to

Estimate, by Tax, FY '10 thru Jan (in $millions) Estimate, by Tax, FY '10 thru June (in $millions)

$0 $200
-$11 $17 $6
-$200 -$72 $0
-$180 -$200
-$200 -$125
-$400
-$401 -$238
-$400
-$600
-$600 -$476
-$800 -$800
-$864 -$816
-$1,000 -$1,000
Net Income Gross Sales Tax Motor Other Total Gen. Net Gross Sales Tax Motor Other Total Gen.
Tax Production Vehicle Sources Revenue Income Tax Production Vehicle Sources Revenue
 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 Total= $7,231 million
Total= $6,959 million
$7,000 $30
$301 $641 $224
$6,500
$371 $838
$6,000
$435
$5,500
$6,793
$5,000 $6,220
$5,462
$4,500

$4,000
FY '09 FY '10 - Initial FY '10 - Revised

State Recurring Cash Stimulus (ARRA) Rainy Day Fund

 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
 Appropriated almost $1.4 billion in additional revenues on top
of those certified in February. These included:
 Remaining $539 million from the 2009 stimulus bill;
 Additional $273 from the Rainy Day Fund;
 $580 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
 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
(in $millions; FY '00-FY'10 includes supplementals, excludes one-times from Rainy Day Spillover Funds )
$7,500

$30
$7,000 $641 $224
$273
$6,500
$838
$539
$6,000
$7,095
$5,500 $79 $7,043
$219 $6,760
$6,590
$269 $72 $6,217
$5,000 $75 $5,897
$5,902
$5,412
$5,389
$5,240
$4,500 $5,073
$4,906 $4,922

$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
Budget Trends: FY ‘10 – FY ‘11
FY ’11 Budget Agreement
Agency Appropriations – 10 Largest, Others, Total
Total Corrections, $462.1 ,
Appropriations: 7%
$6,713.7 million DHS, $543.1 , 8% Transportation,
Includes stimulus, $114.8 , 2%
OHCA (Medicaid),
Rainy Day Fund
$993.0 , 15% Mental Health,
$187.7 , 3%

Career Tech, $142.0 ,

Total Ten Higher Ed., $1,003.5 2%
Largest: , 15% Juv. Affairs, $99.2 ,
$6,009.4, 89.5% 1%
All Other Agencies, Public Safety, $88.4 ,
$704.3 , 11% 1%

Common Ed.,
Notes: Transportation also $2,375.6 , 35%
received $65 from bond issue;
OHCA includes $30m transfer
from Insure Oklahoma Fund;
excludes Health Carrier Access
Payment revenue
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;
 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;
 Most state agencies and school districts will continue to be hard-
pressed to accomplish their core missions with reduced staffing
and resources.

See OK Policy’s FY ‘11 Budget Highlights at:

http://okpolicy.org/fy-10-fy-11budget-
information
 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;
 Department of Corrections cut contracts, eliminated programs,
reduced staffing to under 75 percent of authorized levels,
implemented monthly furlough days;
 OJA cancelled youth detention and gang prevention programs, cut
providers 5 percent, authorized 22 furlough days;
 DHS cut funding for senior nutrition services;
 OHCA reduced all provider rates by 3.5 percent;
 Health Department eliminated 17 child guidance centers serving pre-
school children with developmental delays;
 School districts laid off teachers and staff, eliminated programs;
 Most agencies leaving positions unfilled, offering buy-outs; some
imposing furloughs.
Looking Ahead
 Looking Ahead
Budget Outlook: This Ain’t Over
 Center on Budget and Policy Priorities: “2012 Could Be
Worst Year Yet For States”
 Slow economic growth and loss of federal assistance
equates to ongoing and worsening problems
 Looking Ahead
We’ve Gotta Admit, It’s Gettin’ Better
 Revenues are showing steady improvements

Change in Monthly General Revenue Collections,

Compared to Same Month Prior Year, Jan '09 - Jan '11
30.0%

19.5%
20.0%
13.0%
9.9% 9.3%
10.0% 6.0% 4.6% 6.0%
2.1% 2.6%
1.6%
0.0%
-0.2%

-10.0%
-8.5% -7.3%

-20.0% -16.7%
-19.1%
-21.5% -21.1%
-23.7%
-30.0% -27.7% -26.3%
-30.10% -30.5%
-29.1%
-30.1%
-31.6%
-40.0%
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
 Looking Ahead
We’ve Gotta Admit, It’s Gettin’ Better
 All major taxes are showing a healthy recovery – except the
income tax

% Variance by Tax in General Revenue Collections from Prior Year, FY

'11 vs. FY '10, YTD thru January (7 months)

60%
53.0%
50%

40%
29.2% 30.7%
30%

20%
10.2% 9.9% 9.4%
10%
2.1%
0%
Personal Corporate Gross Sales Tax Motor Other Total
Income Tax Income Tax Production Vehicle Tax Sources
Tax
 Looking Ahead
Budget Outlook: This Ain’t Over
 FY „11 GR collections through January up 9.4 percent from FY „10
– but 23.2 percent below FY ‟09;
 Collections through January 3.3 percent above the estimate;
 Official projection for full-year collections to be 1.7 percent above
the estimate.

July- Jan. General Revenue Collections,

FY '01 - FY '11 (in $ Millions)
4,000 $3,574
$3,410 $3,382
3,500 $3,225
$2,902 $2,855
3,000 $2,708 $2,628 $2,742 $2,610
$2,431
2,500
2,000
1,500
1,000
500
0
FY '01 FY '02 FY '03 FY '04 FY '05 FY '06 FY '07 FY '08 FY '09 FY '10 FY '11
 Looking Ahead
Budget Outlook: Hard Times Continue
 FY „12 General Revenue projected to be:
 5.0 percent higher than FY „11
 12.8 percent higher than FY „10
 12.5 percent lower than FY „08
 Lower than six years ago
General Revenue Collections,
FY '01 - FY '12 (in $millions)
$5,935 $5,953
$6,000 $5,701
$5,545
$5,500 $5,209
$4,966 $4,960
$5,000 $4,717 $4,616 $4,600
$4,408
$4,500 $4,174
$4,000
FY '01 FY '02 FY '03 FY '04 FY '05 FY '06 FY '07 FY '08 FY '09 FY '10 FY '11 FY '12
Source: FY'01 - FY '10 - Office of State Finance Monthly Revenue Collections; (proj.) (est.)
FY '11 - FY '12: Board of Equalization Revenue Certification, Feb 2011
 Looking Ahead
Budget Outlook: Hard Times Continue
 Modest revenue growth in FY „12 a result of:
 Forecasts of an uncertain economic recovery, and
 Policy decisions made in prior years, including:
 Time-released tax cuts that will lower the top income
tax rate from 5.5 to 5.25 percent in 2012;
 Revenue impact of $38M FY „12, ~$120M FY „13
 Allocation of additional $37.5M to ROADS Fund for
transportation and $6.2 million additional to OHLAP
scholarship program;
 Federal tax cut decisions will also impact state
revenue collections.
 Looking Ahead
Budget Outlook: Hard Times Continue
 BUDGET PROJECTIONS
 Revised, binding appropriations authority for FY „12 is for $6.211
billion
 About $500 million less than the FY „11 budget;
 Increase of $106 million from initial December certification.
 Several state agencies will require significant funding increases
just to maintain basic operations.
 Many agencies need additional funding to restore cuts to core
services and to address the cumulative impact of several years
of rising costs.
 Looking Ahead
Budget Outlook: Hard Times Continue
 Governor Fallin‟s Budget
 $225 Million in Additional Revenue:
 $100M in remaining stimulus money;
 $105M from 2-year Car Tags.
 $273 Million in savings from government modernization
initiatives
 $192 million from Information technology savings and IT
bonding;
 $70 million from hiring freezes and unfilled vacancies;
 Shared services, electronic payments, other measures.
 Looking Ahead
Budget Outlook: Hard Times Continue
 Governor Fallin‟s Budget (cont.)
 $201M in agency cuts:
 3 percent or less to education, health, human service, public
safety agencies;
 5 percent to most administrative, regulatory and economic
development agencies;
 Larger cuts for agencies slated for consolidation or for those
able to assess regulatory fees;
 For many agencies, even cuts limited to 3-5 percent will
mean cuts to core services and programs, loss of matching
federal funds.
 Her budget left $100 million unspent; revised certification has
made an additional $106 million available for appropriation.
 Looking Ahead
Budget Outlook: Hard Times Continue
 FY „12 budget would be 11.2 percent smaller than
FY „09
State Appropriations, FY '06 - FY '12 (in $Millions)

$7,200 $7,125
$7,043
$6,959
$7,000
$6,760
$6,800 $6,714

$6,600

$6,400 $6,325
$6,217
$6,200

$6,000

$5,800

$5,600
FY'06 FY'07 FY'08 FY'09 FY '10 - FY '11 FY '12 -
Final proposed
 Looking Ahead
Budget Outlook: No End in Sight
 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 (in $ millions)
$6,500
$6,044
$5,938 $5,953 Actual
$6,000
Low
$5,518 $5,643
$5,500 Forecast
$5,121 $5,380 Middle
$4,969 Forecast
$5,000 High
$4,912 Forecast
$4,500
$4,600
See: "A New
Fiscal Reality for
$4,000 Oklahoma: The
State Budget
FY '07 FY '08 FY '09 FY '10 FY '11 FY '12 FY '13 FY '14 Outlook, 2011-
(act.) (act.) (act.) (act.) (est.) (est.) (est.) (est.) 2014; at:
Fiscal Year
 Looking Ahead
Budget Outlook: No End in Sight
 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:
 Defer or repeal additional tax cuts;
 Review and reduce tax exemptions, credits and rebates;
 New revenue streams for Medicaid and treatment of
substance abuse;
 Broaden the tax base.
 Make smarter expenditure decisions:
 Consolidate duplicative agencies and streamline services;
 Prioritize prevention and surveillance;
 Ensure adequate funding of public pensions.
 For More Information

• Updated Budget Information:

okpolicy.org/current-budget-
information
• Oklahoma Policy Institute‟s Online
Budget Guide
www.okpolicy.org/online-
budget-guide
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