The Next Cut is the Deepest

Today, I want to share two news releases with you. First, district superintendents received this email today from State Superintendent Joy Hofmeister:

Regarding a midyear notice of allocation

OK State Dept of Ed sent this bulletin at 12/15/2015 07:33 PM CST

Dear Superintendents,

We hope to have a midyear notice of allocation to you by early next week as planned. In addition, based on today’s news of a possible state revenue failure, any decrease in funding will cause an allocation adjustment. We will keep you informed of details affecting your midyear funding and when any adjustment has been posted to single sign-on.

In case you are interested, I submitted the following statement today upon news of the potential revenue failure:

“The state revenue failure will have a significant and painful impact on our schools during a time in which every dollar is precious. It is difficult to foresee a scenario in which Oklahoma’s schoolchildren will not feel the negative impact of this crisis. The Oklahoma State Department of Education and schools across the state of Oklahoma are bracing to take action given the new fiscal reality. Our hardworking and committed educators are already doing heroic work under difficult circumstances. We owe it to them and most importantly to the children who depend on them to move forward responsibly and with the importance of every single student’s education in mind.”

Sincerely,

Joy Hofmeister

Every July, school districts receive an initial notice of state aid. It used to come in the form of little envelopes at the end of the state superintendent’s Leadership conference. You’d see superintendents huddled around looking at numbers and either exhaling in relief, or sweating bullets, trying to figure out where they can make immediate reductions for the coming school year.

Now, we get those notices online. It’s 2015, after all.

Our state aid is calculated based on all kinds of statistics thrown into a formula. If you’re a quickly growing district, your initial state aid notice does not account for the added enrollment. That’s where the mid-term adjustment comes in. On the other hand, some districts fear the mid-term adjustment because they are either declining in enrollment or flat.

On yet a third hand (the one you use for a face-palm), when state revenue collections fail to meet projections, we all fear the mid-term notices. The link in Hofmeister’s message to us takes us to a separate news release from the Office of Management and Enterprise Services (OMES).

I’ll tackle it in three parts. Here’s the beginning of the release:

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.

We’ve heard various officials tossing around ballpark numbers for several months, but now it appears the state is willing to roll with an official projection. No, the Legislature will not have to make a budget for Fiscal Year 2017 with a billion dollar shortfall. It’s only $900 million. Well, $900.8 million.

This doesn’t impact our soon-to-be-released mid-term adjustment notices. Still, to quote Chevy Chase in Christmas Vacation, Where’s the Tylenol?

Here’s the second part of the release:

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.

I think a quote from a different Christmas movie is in order here:

Each school district receives monthly state aid checks. What this means is that revenue collections to this point of the current fiscal year have been so low that we will be receiving cuts to our monthly checks, possibly beginning in January. This will be on top of our mid-term adjustment.

Now, the third act of the OMES notice:

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.”

Uhhhmmmm…this:

Doerflinger is right. This is not the time to forget history.

Raise your hand if you’ve been in the Legislature for 10 years or more. You back there…we see you.

Raise. Your. Hand.

If you voted for every income tax cut, if you fed into this problem by supporting a seemingly endless supply of tax credits for corporations, if you campaigned for changes to the state constitution such as SQ 766 that further starved education and other public entities, you’re part of the reason we are here today. It’s fun to blame OPEC. Heck, it’s even kind of true. It’s just not the whole truth.

If you still have your hand raised, and you oppose the one-cent sales tax proposed by OU President David Boren, I’d love to hear what other big ideas you have.

Ok, I said the OMES release had three parts, but here’s the coda:

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.

Yes, they give us bullet points (at least it wasn’t a PowerPoint) to illustrate how the shortfall breaks down.  My personal favorite is this line:

Corporate income tax collections were entirely consumed by refunds and contributed nothing to the GRF.

So you’re telling me we have a $900.8 million shortfall, and that we’re receiving nothing in the way of corporate income tax collections, but that OPEC is to blame? Yeah, history isn’t important at all.

With these projections, if the Legislature refuses to take action to reverse tax credits, then one New Year’s prediction is certain. Oklahoma will continue leading the nation in cuts to education.

I know what my district will be asking Santa to bring us for Christmas: