OKLAHOMA BUDGET OVERVIEW

Trends and Outlook

REVISED December 21, 2009

(includes December certification)

David Blatt
Oklahoma Policy Institute
dblatt@okpolicy.org - (918) 859-8747
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

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

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
 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 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
 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
total more than $465 billion

Source: Center on Budget and Policy Priorities

 Budget Trends: FY „10

The Recession Hit Oklahoma Late

Monthly Unemployment Rate,
National and Oklahoma, Oct. 2007 to Oct. 2009

11.5 10.2%
Unemployment Rate (%)

10.5
9.5
8.5
7.1%
7.5
6.5
5.5
4.5
3.5
2.5
Oct-07 Apr-08 Oct-08 Apr-09 Oct-09

Oklahoma National

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

Quarterly Change in Personal Income,
% Change from
Prior Quarter
Oklahoma and National,
2nd Quarter 2007 to 2nd Quarter 2009
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

U.S. Oklahoma
 Budget Trends: FY „10

The Recession Hit Oklahoma Late

Monthly Oil and Gas Prices, 1986 - 2009
$12.00 $160.00

$140.00
$10.00
$120.00
$8.00
$100.00

$6.00 $80.00

$60.00
$4.00
$40.00
$2.00
$20.00

$- $-
Apr-1994

Apr-2005
Oct-1999
Dec-1986
Nov-1987
Oct-1988

Aug-1990

Mar-1995

Dec-1997
Nov-1998

Aug-2001

Mar-2006

Dec-2008
Jan-1986

Jul-1991
Jun-1992

Feb-1996
Jan-1997

Jul-2002
Jun-2003

Feb-2007
Jan-2008
Sep-1989

May-1993

Sep-2000

May-2004
U.S. Natural Gas Wellhead Price (Dollars per Thousand Cubic Feet)

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

 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 ‘08 ;

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 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 „09 – FY „10
FY ’10 State Appropriations
DHS,
Total 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 „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
 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 „09 – FY „10
FY ‘10 : Off to a Very Rough Start
 July-Nov revenue collections down 28.5 percent from
FY ‘09
 October better than previous months but November
back down
 Not clear when we‘ll hit bottom or how long it will take
to recover
Change in Monthly General Revenue Collections, Compared to Same Month Prior Year,
July '08 - Nov. '09
20.0% 12.8%
11.1% 10.8% 10.4%
10.0% 7.1%
1.3%
0.0%

-10.0%
-8.5%
-20.0% -19.1%
-21.5% -21.1% -23.7%
-30.0% -27.7% -26.3%
-30.1% -30.1% -30.5%
-40.0% -31.6%

July Aug Sept Oct Nov Dec Jan Feb Mar Apr May June July Aug Sept. Oct Nov
Budget Trends: FY „09 – FY „10
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
Quarterly Year-over-Year Change in GR Collections,
Oklahoma, FY '02 - FY '10
30.0%
20.0%
9.9%
10.0%
0.0%
-10.0%
-15.3%
-20.0% -12.1%
-26.3%
-30.0%
-29.5%
-40.0%
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
'02 '02 '03 '03 '04 '04 '05 '05 '06 '06 '07 '07 '08 '08 '09 '09 '10
Budget Trends: FY „09 – 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

1st Quarter General Revenue Collections,

FY '01 - FY'10 (in millions)
$1,700
$1,600 $1,567.8
$1,500
$1,400
$1,300
$1,200 $1,136.3
$1,100 $1,105.9
$1,000
$995.3
$900
FY'01 FY'02 FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09 FY'10
Budget Trends: FY „09 – FY „10
FY ‘10 : Off to a Very Rough Start
 Collections through November are $577.5 million – 24.3
percent - below the estimate
 OSF cut agencies GR allocations by 5 percent through
November and by 10 percent in December
 Cuts limited to less than shortfall through transfers of cash
reserves ($233.8 million since start of year) that must be repaid

General Revenue Collections compared to Estimate, by Tax, FY '10 thru

$0
November (in $millions)
-$100 -$11
-$49
-$200 -$150
-$181 -$187
-$300
-$400
-$500
-$600
-$577
-$700
Net Income Tax Gross Production Sales Tax Motor Vehicle Other Sources Total Gen.
Revenue
Budget Trends: FY „09 – FY „10
FY ‘10 : Off to a Very Rough Start
 HB 1017 collections also failing – 14.9 percent shortfall
($41 million) through November.
 Dept. of Education cut November disbursements by 7.1
percent
 Agreement in December to use cash reserves to fund 1017
shortfall
FY '10 Dept. of Education Funding by Revenue Source
Lottery *Other
1% 3%

Total
HB 1017 Appropriations=
25% $2,572.1 million
General
*Other includes Prior
Stimulus (ARRA) Revenue Year GR, Gross
6% 65% Production Tax, Mineral
Leasing Fund
Budget Trends: FY „09 – FY „10
FY ‘10 : How Large a Shortfall?
 December certification projects a $729 million (14.2
percent) shortfall in FY ‘10 GR collections.
 $80 million shortfall in HB 1017 Fund as well
 Total mid-year shortfall of $809 million
FY '10 General Revenues - Original vs.
Revised Projections
$5,600 $5,415
$5,400
$5,145
$5,200
$5,000
$4,800
$4,600 $4,415
$4,400 $729
million
$4,200
$4,000
100% Estimate - June Appropriation (95%) December Projection
Budget Outlook: What Response?
Shortfall Options
 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)
$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
 Full RDF potentially 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)

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?
Shortfall Options
 Projected shortfall of $809 million shortfall could be filled
by:
 RDF shortfall funds (3/8ths) - $224 million +
 RDF emergency funds (1/4) - $149 million +
 Full year across-the-board cuts of 7.5 percent
FY ‘10 Forecast Shortfalls and Rainy Day Fund Impacts ($ in millions)
Forecast Appropriated FY ‘10 General % Shortfall % Shortfall % Shortfall % Shortfall % Shortfall
Amount Projected Revenue + with no with 3/8ths with 5/8ths with 3/4 of with all of
(GR+1017) Revenue 1017Shortfall Rainy Day of RDF of RDF RDF RDF
Fund ($224M) ($373M) ($448M) ($597M)
December $ 5,777 $4,968 $ 809 14.0% 10.1% 7.5% 6.2% 3.7%
projections
Budget Outlook: What Response?
FY ‘11: More of the Same?
 FY ‗11 revenue collections projected to remain
almost unchanged from FY ‘10 and over 25 percent
below pre-downturn (FY ‗08) levels

General Revenue Collections,

FY '06 Actual - FY '11 Estimated (in $ millions)
$5,981
$6,000
$5,649
$5,519
$5,500 $5,407 $5,415

$5,000

4,415 4,449
$4,500

$4,000
FY '06 Actual FY '07 Actual FY '08 Actual FY '09 Actual FY '10 June FY '10 Dec FY '11 Dec
(estimated) (projected) (estimated)
Budget Outlook: What Response?
Budget Outlook
 What‘s the plan?
 Seems to involve:
 Keep cutting agency budgets every month
 Keep borrowing from any and all available reserves to make
up the difference
 Tap the Rainy Day Fund to fill part of the gap
 Special Session in January?
Budget Outlook: What Response?
Budget Outlook
 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)
 Even at 5 percent monthly cut level, the toll is growing:

 DHS has cut senior nutrition services by $7.2 million;

 OJA has cancelled youth detention program, cut providers 5 percent,
authorized 22 furlough days;
 Corrections has cut private contractors; 10-12 furloughs days
between March - June (staffing already at historic low of 77 percent
of authorized FTEs);
 Department of Mental Health and Substance Abuse Services has
announced closure of children‘s behavioral health center in Norman,
cuts in contracts to providers;
 School districts going to 4-day weeks, eliminating programs
Budget Outlook: What Response?
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
 Time-released tax cuts still kicking in
 Additional revenues automatically allocated for ROADS
and OHLAP
 Use of one-time funds in FY ‗10 and FY ‗11 create
significant problems for FY ‗12
Budget Outlook: Beyond FY „10
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 [OK Policy estimates]
$7,000
Revenue in $millions

$5,938 $5,953
$6,000
$5,518 $5,945
$5,000 $5,275
$4,000 $4,439 $4,735

$3,000
$2,000 Estimates by OK Policy
(pre-December
$1,000 certification)
$-
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 : 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

 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

• Oklahoma Policy Institute’s Online

Budget Guide
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
info@okpolicy.org

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