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
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
$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
 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)

$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 ‟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%
14.8%
15.0%
10.6%
10.0% 7.6%

5.0% 4.0%
0.9%
0.0%

-5.0%
-5.3%
-6.6%
-10.0%
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 Mar 2010:
8.0 6.6%
% 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

Mar-95
May-96
Jul-97
Sep-98

May-03
Jul-04
Mar-81

Sep-84

Mar-88

Sep-91

Mar-02

Sep-05

Mar-09
Nov-85

Nov-92

Nov-99

Nov-06
Jan-80

Jan-87

Jan-94

Jan-01

Jan-08
See OK Policy, “Numbers You Need”, at:
http://okpolicy.org/numbers-you-need-key-oklahoma-
economic-and-budget-trends
 Budget Trends: FY „10

The Recession Hit Oklahoma Late 2008

Quarterly Change in Personal Income,
% Change from Prior
Oklahoma and National,
Quarter
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 2009.1 2009.2 2009.3 2009.4

U.S. 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% 12.8%
11.1% 10.8% 10.4%
10.0% 7.1%
5.0% 1.3%
0.0%
-5.0%
-10.0%
-8.5%
-15.0%
-20.0%
-19.1%
-25.0% -21.5% -21.1%

-30.0% -27.7%
-30.1%
-35.0%
July Aug Sept Oct Nov Dec Jan Feb Mar Apr May 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 5,946.4
6,000 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 FY '09 FY '10
December February 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
$7,043 $7,125 $7,231
7,000 $6,760
$30
6,500 $6,217
ARRA
$641
6,000 ARRA
$7,095
$5,389 $5,491 $5,459 State
5,500 $5,191 $6,590
$5,145
$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

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

 Budget Trends: FY „10
FY ’10 Initial State Appropriations
DHS,
Total Initial 10 Largest Agencies: $6.3
$550.7 , 8%billion (88%)Transportation,
Corrections
$503.0 $208.7 , 3%
Appropriations:
Agencies (75 agencies): $829 million 7% (12%) Mental Health,
$7,231.2 million
OHCA (Medicaid), $203.3 , 3%
Includes $979.8 , 13%
American Career Tech,
Recovery and $157.8 , 2%
Reinvestment
Act (ARRA) Higher Ed., Juv. Affairs,
$1,070.7 , 15% $112.4 , 1%
Public Safety,
$93.3 , 1%
All Other
Agencies,
Common Ed., $779.4 ,
Total Ten $2,572.0 , 36% 11%
Largest: $6,451.8,
89.2 %
 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%
12.8%
15.0% 11.1% 10.8% 10.4%
10.0% 7.1%
5.0% 1.3% 1.6%
0.0%
-5.0% -0.2%
-10.0% -7.3%
-8.5%
-15.0%
-20.0% -19.1% -16.7%
-25.0% -21.5% -21.1% -23.7%
-30.0% -27.7% -26.3%
-29.1%
-30.1% -30.1%
-35.0% -31.6%
-30.5%

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)
40.0%

20.0% 9.9%

0.0% -8.3%

-20.0% -12.1%

-29.5%
-40.0%
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
'02 '02 '03 '03 '04 '04 '05 '05 '06 '06 '07 '07 '08 '08 '09 '09 '10 '10
 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) General Revenue Collections compared to
Estimate, by Tax, FY '10 thru April (in $millions)
$0 $0
-$100 -$11 -$1
-$72 -$70 -$104
-$200 -$200
-$300 -$180 -$200 -$236
-$400 -$400
-$500 -$401 -$398
-$600 -$600
-$700
-$800 -$800
-$900 -$809
-$864
-$1,000 -$1,000
Net Income Tax Sales Tax Other Sources Net Income Tax Sales Tax Other Sources
 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% 82.8% 83.0%
70%
60%
Dec '08

Dec '09
Sep '08

Feb '09

Sep '09

Feb '10
Oct '09
Oct '08

Jan '09

Mar '09

Jan '10
Jun '09

Mar '10
Aug '08

Apr '09

May '09

Aug '09

Apr '10
Jul '08

Nov '08

Nov '09
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 $5,415
$5,145
$669
$5,000 million

$4,476
$4,500

$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)
$700
$596.6
$600 $571.6
$496.7
$500 $461.3
$400 $340.9
$300
$217.5
$200 $157.5
$100 $72.3
$0.1
$0
2001 2002 2003 2004 2005 2006 2007 2008 2009
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 Total= $7.124 billion Total= $7.231 billion
Total= $6.981 billion
$7,000 $30
$301 $641 $224
$6,500 $371 $838
$6,000
$435
$5,500 $6,793
$5,000 $6,220
$5,484
$4,500
$4,000
FY '09 FY '10 - Initial FY '10 - Revised
State Recurring Cash Stimulus (ARRA) 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
11.1%
Funding Changes for Largest State Agencies, FY '09 - FY '10 (Final)
& FY '10 (Initial) - FY '10 (Final)
8.0%

3.0%
0.1%

-2.0% -0.2%
-2.0% -1.7%
-3.2% -2.8% -3.1%
-3.5% -4.3%
-7.0% -5.3%
-5.3% -5.7%
-7.3% -7.4% -7.1% -7.2%
-7.3% -7.2%
-7.6% -7.4%-7.5%
-8.2% -8.1%
-9.6% -10.0%
-12.0%

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)
$5,928 $5,981
$6,000
$5,714
$5,519
$5,500 $5,415

$5,000

$4,579
$ 4,475
$4,500

$4,000
FY '06 Actual FY '07 Actual FY '08 Actual FY '09 Actual FY '10 (June FY '10 (Feb FY '11 (Feb
estimated) projected) 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 (includes all revenues; includes FY '08-FY '09 supplementals;
$7,231 in $ millions)
$7,043 $7,124
$6,959
$7,000 $6,797
$6,452

$6,000
$5,294 $5,415

$5,000

$4,000
FY'08 FY'09 FY'10 - FY '10 - FY '10 - FY '11 - FY '11 - FY '11 -
initial projected Revised Certified Certified Gov
budget revenues State $ State $ Budget
(Feb) (Dec) (Feb)
 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

$5,928 $5,981
$6,000
$5,945
$5,500 $5,544
Estimates by OK $5,275
$5,000 Policy - not based on
Feb 2010
$4,500 certification $4,735
$4,439
$4,000
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
Projected Annual Budget Surpluses and Deficits
Before and After 2004-2006 Tax Cuts (2007 to 2035)
1,000

500

0
M i l l i o n $2005

(500) Before Tax Cuts

(1,000)
After Tax Cuts
(1,500)

(2,000)

(2,500)
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. 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

• Updated Budget Information:

okpolicy.org/fy-10-fy-
11budget-information
• Oklahoma Policy Institute’s Online
Budget Guide
www.okpolicy.org/online-
budget-guide
 Contact Information
Oklahoma Policy Institute
P.O. Box 14347
Tulsa, OK 74159-1437
(918) 794-3944
info@okpolicy.org
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