POSTED ON DECEMBER 22, 2010:
Tulsa-based think tank forecasts state financial woes
David Blatt, the director of the Oklahoma Policy Institute, isn't trying to convince anyone that the economic analyses his nonprofit, Tulsa-based think tank produces are always going to be spot on.
"Obviously, forecasts are simply that," he said. "You can never project everything, but at least we offer some kind of baseline. For years, we've been aware that a fiscal gap is emerging between our revenue and the services we provide, both at the federal and state level. The tax base is aging, and nothing is replacing that. This recession has just led us into that fiscal gap earlier and more dramatically than anyone anticipated."
The baseline the Oklahoma Policy Institute is offering is a new report on the state's budget outlook through 2014, a document that is ominously titled "A New Fiscal Reality for Oklahoma." It is a discouraging study of the growing divide between the amount of money the state can expect to have at its disposal over the next three years and the demands of continuing to fund essential state services, even at a reduced level.
But before Blatt expounds on that subject, he can't help but marvel at the fact that his organization seems to be the only one that has even tried to examine the issue.
"It's kind of absurd that the Oklahoma Policy Institute is the only entity trying to project what our revenues and expenditures are going to be beyond next year," he said. "Most households and businesses would not (operate that way)."
The analysis -- written by Paul Shinn, a consultant for the institute -- doesn't mince words when it comes to characterizing the state's reaction to the recession.
"As Oklahoma enters the third year of a deep and prolonged fiscal downturn, it has become increasingly clear that our budget system is not up to the challenge," the report states. "As revenue has fallen, the state has been unable to develop a long-term, coherent response that protects essential public services, uses our resources wisely, and sets the stage for capitalizing on the eventual economic recovery. Instead, we have failed to anticipate the severity and length of the revenue loss, made repeated budget cuts without fully considering impacts on services and staffing, and plugged holes with one-time fixes."
The most alarming aspect of the analysis is its forecast that Oklahoma can expect to experience at least seven years with revenue below pre-downturn levels. Even by Fiscal Year 2014, the report states, it is unlikely that revenue will return to the Fiscal Year 2008 peak under current policies.
To put that in perspective, the report forecasts the Fiscal Year 2012 state budget will be nearly $400 million less than in Fiscal Year 2011 and nearly $800 million, or 11 percent, less than in Fiscal Year 2009.
Blatt said he didn't expect good news when the institute initiated the study, but even he didn't expect the news to be quite so bad.
"We were somewhat surprised to see that even by 2014 our revenue was not going to be back to pre-downturn levels," he said. "It really is a reflection of the severity of the downturn."
Blatt acknowledged that the economy has started to recover and revenues are headed up again. But he said it's important to note how far revenues have fallen over the past few years.
"We're still over 20 percent down from pre-downturn levels," he said. "The other part of the problem is that a series of policy decisions that have already been made have impacted both our revenue and our spending, and those are hampering our ability to recover from this."
Blatt cited tax cuts that were adopted five years, along with decisions to defer payments on certain tax credits, as examples of those policy decisions.
"All those kind of made sense when times were good or when you're trying to figure out how you're going to make it from year to year, but not now," he said.
He believes Oklahoma is still years away from seeing a period of robust revenue growth and believes state officials have to start taking a more far-reaching approach to funding government operations.
"We've got to broaden our time horizons past the next 12 months," he said.
And while the figures cited earlier may attract the most attention, Blatt said that is the primary message he hopes state officials take from the institute's new report.
"Absolutely," he said. "We have done a very poor job of looking past the next budget cycle. The question always seems to be, 'How do we get past the next 12 months?' In a typical economic downturn, you tighten your belt for 12 months and then recover. That was certainly the case the last time we went through this in the early 2000s.
"But what we're saying is, we're in a very different situation now," he said. "We can't expect an economic recovery is just going to fix our problems."
The state's dim financial future is the product of a number of factors, he said.
"This was the worst downturn in at least a generation," he said. "We're seeing the congruence of a really bad economic situation with decisions that were put in place when the Legislature assumed Oklahoma was going to be largely immune to downturns."
The state was not well positioned for the new economic reality, he said.
"We did have a rainy day fund, and that was helpful," he said. "But we have to enhance our forecasting capacity and enlarge our scope to three, four or five years instead of 12 months. We can also do more to make our reserve funds more robust for the next time we're facing a downturn."
The study recommends that state officials create a revenue structure that supports public services even in times of modest revenue growth by deferring or repealing additional income tax cuts; eliminating inefficient tax breaks; considering new revenue streams for health care, prevention and treatment; and making the tax base both broader and fairer.
It also recommends that state officials make smarter expenditure decisions that reduce future costs by consolidating agencies and functions where savings can be expected, prioritizing prevention and surveillance over detention, and reforming the state pension system.
It also repeats Blatt's assertion that the state needs to take a longer view of its financial situation, recommending that state officials create new budget processes and structures that support responsible financial planning and management by developing long-range forecasting, adopting pay-go requirements, and continuing to improve reserve policies.
Blatt said he was struggling to find a silver lining in the midst of the report's gloomy assessment.
"I think what we're trying to do is let policy makers and the public know the situation is not going to fix itself," he said. "Hopefully, the information we put out will help open a discussion about how we're going to fund our services. We'll see what kind of discussion emerges from this. At this point, I think we have a long way to go before policy makers and the public grasp that this situation is different."
To read a copy of the study or a one-page summary, visit http://okpolicy.org/new-fiscal-reality.
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