Doerflinger: State Must Face $900M Shortfall ‘Head On with All Hands on Deck’

— NEWS RELEASE —

For Immediate Release:  Dec. 15, 2015

Weak GRF receipts to cause revenue failure this fiscal year
$900.8 million budget hole likely for next year

OKLAHOMA CITY — With sustained low oil prices further weakening General Revenue Fund (GRF) collections, the state will enact midyear budget reductions for appropriated state agencies this year and likely face a $900.8 million appropriated budget hole next year.

As state government’s main operating fund, the GRF is the key indicator of state government’s fiscal status and the predominant funding source for the annual appropriated state budget. GRF collections are revenues that remain for the appropriated state budget after rebates, refunds and mandatory apportionments. Gross collections, reported by the State Treasurer, are all revenues collected by the state before rebates, refunds and mandatory apportionments.

November GRF collections of $354.1 million were $50.1 million, or 12.4 percent, below the official estimate upon which the FY 2016 appropriated state budget was based, and $28.4 million, or 7.4 percent, below prior year collections.

Total GRF collections for the first five months of FY 2016 were $2.1 billion, which is $101.9 million, or 4.6 percent, below the official estimate and $97.3 million, or 4.4 percent, below prior year collections.

REVENUE FAILURE

Oklahoma state government builds a five percent cushion into every appropriated state budget to prevent mandatory budget reductions if revenues fall below the official estimate. If revenues are projected to fall more than five percent below the estimate for the remainder of the fiscal year, a revenue failure is declared and mandatory appropriation reductions must occur to maintain a balanced budget.

While the five percent threshold was not reached through November, the Board of Equalization next Monday, Dec. 21, will consider an updated FY 2016 revenue forecast that projects GRF collections falling 7.7 percent, or $444.3 million, below the initial estimate the board approved in June. If the board approves the updated forecast, a revenue failure declaration will be necessary.

Agencies on Tuesday were informed of the likely revenue failure by Secretary of Finance, Administration and Information Technology Preston L. Doerflinger, who is statutorily assigned the revenue failure declaration responsibility in his role as OMES director.

“A shortfall is all but certain after 18 months with the oil price as it is, so agencies have been formally advised to prepare for a midyear reduction if they have not already,” Doerflinger said. “It’s going to be the biggest fiscal challenge since the years following the 2008 recession, and we’ll need to meet it head on with all hands on deck.”

Following a revenue failure declaration, monthly general revenue allocations to agencies are reduced across the board by a percentage sufficient to cover the dollar amount of the shortfall projected for the remainder of the fiscal year. Most, but not all, appropriated state agencies receive monthly general revenue allocations.

The reductions each agency will receive will be determined following the Board of Equalization meeting. The state last declared revenue failure in 2009 during the most recent national recession.

FY 2017 BUDGET HOLE

The board on Monday will also make the first projection of revenues available for the next appropriated state budget.

Preliminary information shows the board will consider a revenue projection that would result in $900.8 million, or 12.9 percent, less revenue for the FY 2017 appropriated state budget than was appropriated for FY 2016.

The appropriated state budget comprises about one third of all state spending.

With the Organization of the Petroleum Exporting Countries refusing to adjust production levels to account for the global oil supply glut, West Texas Intermediate crude has dropped below $37 a barrel in recent days – the lowest prices seen since the last U.S. recession in 2008. The oil price has fallen 70 percent since June 2014.

As a result, Oklahoma during that time has lost 11,600 energy jobs and 59 percent of its active oil and gas rigs, which has caused significant tax revenue declines. Other major energy-producing states, such as Alaska, Wyoming, Louisiana, North Dakota and West Virginia, are experiencing similar tax revenue declines.

“Tax revenues in energy states are collateral damage in the market warfare OPEC is waging on U.S. energy producers,” Doerflinger said. “As tempting as it may be to send OPEC and Saudi princes a $900 million bill, we can’t do that and have to manage this hole realistically and responsibly with the tools at our disposal.”

The Board of Equalization will make a second revenue estimate in February that will be used by Gov. Mary Fallin and the Legislature to develop the FY 2017 appropriated state budget.

“The universal truth of Oklahoma state finance – as oil goes, so goes state revenue – is playing out once again,” said Doerflinger, who is Fallin’s lead budget negotiator with the Legislature. “To panic is not productive, and neither is forgetting history. Oklahoma is resilient and will emerge from this boom-bust cycle as we have many times before.”

Major tax categories in November contributed the following amounts to the GRF:

• Total income tax collections of $110.4 million were $16.9 million, or 13.3 percent, below the estimate and $10.5 million, or 8.7 percent, below the prior year.
• Individual income tax collections of $110.4 million were $16.6 million, or 13.1 percent, below the estimate and $10.5 million, or 8.7 percent, below the prior year.
• Corporate income tax collections were entirely consumed by refunds and contributed nothing to the GRF.
• Sales tax collections of $160.5 million were $19.9 million, or 11.1 percent, below the estimate and $13.6 million, or 7.8 percent, below the prior year.
• Gross production tax collections of $8.9 million were $16.9 million, or 65.6 percent, below the estimate and $14.7 million, or 62.4 percent, below the prior year.
• Natural gas collections of $8.6 million were $10.5 million, or 54.9 percent, below the estimate and $615,900, or 7.7 percent, above the prior year.
• Oil collections of $287,306 were $6.4 million, or 95.7 percent, below the estimate and $15.3 million, or 98.2 percent, below the prior year.
• Motor vehicle tax collections of $14.4 million were $83,473, or 0.6 percent, below the estimate and $10.7 million, or 290.5 percent, above the prior year.
• Other revenue collections of $59.9 million were $3.7 million, or 6.6 percent, above the estimate and $307,859, or 0.5 percent, below the prior year.

Monthly revenue tables are available on the OMES website.

About the Office of Management and Enterprise Services
The Office of Management and Enterprise Services provides financial, property, purchasing, human resources and information technology services to all state agencies, and assists the Governor’s Office on budgetary policy matters. Our mission: Supporting our partners through unified business services. For more information, visit OMES.OK.gov.