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Financial dry spell: Frightening times ahead for state as revenue continues to fall

Financial dry spell: Frightening times ahead for state as revenue continues to fall

Tulsa World Editorial
by: WAYNE GREENE World Editorial Writer
Sunday, August 02, 2009
8/2/2009 4:14:08 AM

Look for state budget officials to declare a general revenue failure as soon as next week. If not then, shortly thereafter.

The fact that the state's checkbook is going to be so badly out of balance one month into its fiscal year is a measure of how gobsmackingly hard the recession is hitting Oklahoma.

A revenue failure is bad news — potentially very bad news — especially if you're a state employee, a teacher or anyone who depends on state services. So, it might be worthwhile to take a few minutes to consider how the state's fiscal system works and how this process is likely to play out from here — a sort of state finance primer for concerned citizens.

Every winter the state's economic forecasters tell the top statewide elected officials — the board of equalization — how much money they expect the state will earn with certain taxes in the next fiscal year. In state budget jargon, that is what is known as "the estimate."

After the equalization board signs off on the estimate, the Legislature is allowed to budget up to 95 percent of it. The next 5 percent — if it materializes — goes into the state's cash flow reserve fund. Any over that, which is certainly not an issue at the moment, goes to the state's "rainy day" fund, which is sort of an emergency savings account.

Here's the key point: At the end of the fiscal year, June 30, the state can't have spent more general revenue money than it has received. And right now, general revenue taxes (like the state income tax, oilfield tax and part of the state sales tax) aren't coming in fast enough to keep up with the state budget. The money in the reserve fund is running out too, meaning the state is just about strapped.

State Treasurer Scott Meacham said it's too soon to say how much of a revenue failure the state might be facing, but he's relatively certain there's one coming quickly.

In June, general revenue tax collections were $441.2 million. That's nearly $190.3 million below the tax collections for the same month in 2008. The estimate went down on July 1, the first day of the current fiscal year, because officials anticipated the recession's effects, but state revenue is still not likely to cover the nut.

There's very little nuance to a revenue failure.

Once state Budget Director Mike Clingman determines the state isn't going to be able to meet expenses, he simply cuts every state agency's general revenue appropriations by the same percentage until things balance.

It doesn't matter if a state agency is 100 percent dependent on general revenue appropriations or 1 percent dependent, or whether the agency had planned to spend all of its money in the first part of the year or had a plan to spend it later on. Everyone gets the same percentage cut off their appropriations immediately.

In other words, after the Legislature spent months determining the state's budgetary priorities with surgical precision, a revenue failure cuts through those plans like a meat cleaver.

Some state agencies are completely immune from the problems of a general revenue failure because they get all of their money from other sources. Don't look for any state highway projects to stop work. The Oklahoma Employment Security Commission won't notice at all.

Many state agencies will feel the general revenue bite, but will be able to ease the impact with money from other sources of income — tuition, for example, in the case of colleges and universities, or property taxes for public schools. Other agencies will have budgetary reserves of their own that they can depend on to ease the impact.

But a few state agencies are almost completely exposed. They are completely dependent on general revenue appropriations and have little or no reserves. Meacham said the state Departments of Corrections and Human Services are probably in the most danger.

If you live close to a state prison that should send a chill up your spine.

In the past, budget officials have put off declaring revenue failures in hopes taxes would pick up again. That delays but intensifies the financial hit when it is comes, Meacham said.

He had to declare a 13.65 percent general revenue failure almost as soon as he became newly elected Gov. Brad Henry's budget director in 2003. At one point in that crisis the state troopers and prison guards were set to take 23 days of unpaid furlough leave and tens of thousands of poor children were about to be kicked off the Medicaid rolls.

Meacham has vowed to be on top of this year's problem to avoid that sort of built-up crisis. He's watching state revenue numbers as soon as they come in and is in constant contact with the other top state budget officials.

They also have some resources at hand to deal with problem.

During the 2003 shortfall, only the Legislature could dip into the state's rainy day fund to deal with a crisis, but in 2004 state voters OK'd a constitutional change designed by Meacham to grant easier access to the state's emergency fund. This time the equalization board has the option of spending a little more than $223.7 million from the $596 million rainy day fund without legislative approval.

If the equalization board does reach into the rainy day fund, the process again lacks nuance. It can't direct money to specific priorities. It goes into the general revenue stream and is divided in the same fashion that the cuts were levied.

Any more targeted spending from the rainy day fund would require action of the Legislature, which won't be in session until February unless the governor calls a special session.

In 2003, the Legislature added a temporary $2 fee to license tags to take care of the state troopers and at the last minute came up with enough money from other sources to avoid denying children health care.

Whether a similar solution is possible this year will depend on legislative will, and, most importantly, the depth of the budget hole.

That leads to the key unanswered questions about a revenue failure: How much and how long? Meacham said he would like to know the answer to that one, too.

He's watching state tax collections as fast as they come in. There hasn't been any good news to report since the petrifying June report.

Recent reports that the state's unemployment rate and the number of people applying for food stamps continue to climb suggest there's no reason for optimism at this point.

We're falling fast and we can't see the bottom from here.

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