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Managing the pain - State Budget Woes

Managing the pain - State Budget Woes

This article originally appeared in the Tulsa World

by: JULIE DELCOUR Associate Editor
Sunday, March 15, 2009
3/15/2009 4:37:19 AM

David Blatt isn't a doctor but he plays one in the Oklahoma Policy Institute latest report on budget shortfalls. Standing by the bedside of state government, he sees vital signs flagging.

"You're getting weaker," he warns. You might make it to the end of the fiscal year or beyond but there are no guarantees. To survive, you'll have to make some hard choices that might include going under the knife."

No second opinion is needed to know Oklahoma faces the economic equivalent of a catastrophic illness. In just two months most of the surplus built up over the first six months of FY '09 has vanished.

"With four months remaining in the fiscal year, the hope now becomes that revenue collections do not plummet below the amount appropriated in the current year budget," said Blatt, OPI's director of policy.

General revenues came in $104 million, or 30.2 percent, below the certified estimate for February. In January, collections missed the estimates by $50.8 million. Collections for each major tax — individual income, corporate income, sales, gross production and motor vehicle — are below the monthly estimate and below collections for February 2008.

"Budget shortfalls of this magnitude will lead to difficult and painful choices between cutting deeply into public services, raising new revenues, and tapping into budget reserves. If the downturn is of a similar magnitude to the one following the last recession of 2001," Oklahoma could face shortfalls in the future of $2.4 billion," warns Blatt, an economist and analyst who monitors the budget and state revenues with the precision of a surgeon.

To keep expenditures aligned with falling revenues, to spare the state and its people from devastating cuts in services when they need them the most, to prevent Oklahoma from losing hard-fought gains, will require careful and strategic decisions by policymakers.

Blatt has explored this tough situation in the sobering white paper, "What Do We Do Now? Options for Addressing State Budget Shortfalls," Here are some of his insights:

Federal stimulus package: Oklahoma will get substantial — in the neighborhood of $2.6 billion — but temporary help from the recently passed $787 billion economic federal stimulus package.

Most money will be directed toward an enhanced federal Medicaid matching rate, a state fiscal stabilization fund, highway and bridge construction and specified education programs. In other words, Washington isn't writing Oklahoma a check for $2.6 billion to spend entirely as it sees fit.

Clearly stimulus money will ease the budget crunch, Blatt said. But lawmakers must decide how much of the relief money to spend in 2010 and how much to set aside for 2011.

"They will also have to weigh the risk of using a large amount of one-time federal dollars to plug budget holes for ongoing expenditures, which brings about the potential to create funding shortfalls even when revenue collections begin to recover."

Tapping into the "Rainy Day" Fund: During the downturn of FY '02-FY '04, which created shortfalls of well over a billion dollars, policymakers used RDF money to help plug budget holes. Use of the RDF causes the least pain to the economy and population, Blatt said. But that $610 million in the fund only will go so far. The trick is to determine how much to use and when.

"While depleting the RDF to the full permissible extent in a single year may seem ill-advised," Blatt said, "a strong case can be made that the state's current budget situation is precisely the kind for which the Rainy Day Fund was recreated."

Use of RDF, while limited, can have positive effects by taking money out of savings and injecting it into the state economy, of giving the state time to respond sensibly to budget problems, and use of funds does not hurt the state's bond rating.

But there isn't enough RDF money to solve the mounting crisis. If a $2.4 billion shortfall comes to pass, the RDF would cover one-quarter of the shortfall, leaving a $1.8 billion gap.

Raising revenues: The political and constitutional barriers to raising taxes in Oklahoma are enormous.

The Legislature basically spent the last several years cutting taxes, meaning there's been about $500 million or so less to spend. Actual tax increases were kept off the table during the last recession but lawmakers approved several revenue-enhancing mechanisms to help bring the budget into balance.

Facing a $145 million shortfall last session, the Legislature approved several measures to bring the FY '09 budget into balance and avoid cuts in appropriations. Unfortunately, last year's action "picked clean most of the low-hanging fruit," meaning that most other sources of new revenue now would involve downsides and difficult trade-offs.

Cutting budgets: This is a virtual certainty but "it should be recognized," Blatt said, "that when downturns are extended and severe, cutting budgets is difficult to accomplish and involves painful and harmful consequences to citizens and to the economy."

To the extent that states will still be left with shortfalls that exceed available reserves it is now recognized that budget cuts will do more economic harm than raising taxes as an approach to bring the budget into line. But that doesn't mean it won't happen to state agencies already living "close to the bone."

Those are the options. None is for the faint of heart.

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