Thursday, September 10, 2009

Headlines of the Week

Organizers Preparing for Annual Oklahoma State Fair
The Oklahoman
http://tinyurl.com/nhucgl

State Chamber Leader Retiring After 23 Years
The Oklahoman
http://preview.tinyurl.com/qk5kgw

Climbing Our Way out of the Red
The Journal Record

OKLAHOMA CITY – Oklahoma budget leaders find themselves like emergency-management officials trying to assess damage while the tornado is still raging, asking not “What the heck WAS that?” but “What’s happening?” and, more importantly, “What do we do now?”

At the same time, they have the good fortune to be able to say, “At least we’re not (any one of many worse-off states).”

The state is facing a revenue shortfall this fiscal year that some say may exceed the $700 million fiscal gap of 2003. There’s no shortage of ideas for how to address the money lag and soften the effect of future downturns. The best guess for what officials will do? Come back to the Capitol before next year’s regular session, tap a state savings account and spend more federal stimulus money.

A legislative session that ended in May limiting FY 2010 budget cuts to an average of 7 percent, at least in part due to spending $655 million in stimulus funds, demonstrated that the state is not as recession-proof as some have said.
“They always say that, in every downturn, and I try to tell them that that’s not what the history has been,” said University of Oklahoma economist Bob Dauffenbach. “Typically, we’ve been pretty much in tandem with the nation.”
That was not true in the early 1980s, when the state’s economy, even more energy-dependent than now, threw it into a boom/bust cycle the opposite of its national counterpart.

Lesson learned, lawmakers who survived that fiscal catastrophe created a constitutional Rainy Day fund, which may just save their successors’ bacon this year. Legislators also launched a series of economic initiatives aimed at diversifying and stabilizing the economy in the late 1980s and early 1990s.

During energy-boom times, income from severance taxes made up one-quarter or more of annual state revenue, compared with about 16 percent last year and 10.5 percent to 13 percent over the previous five years.
After seven months of declining revenue, officials had to cut agency allocations 5 percent in August. Gov. Brad Henry and legislative leaders want another month of fiscal data under their belts before deciding whether to call a special session sometime in September.

If they do come back early, they will most likely dip into the $600 million Rainy Day fund, tap the state’s remaining $600 million in federal stimulus money, or some combination of the two, to minimize additional cuts.
In last session’s $7.2 billion budget agreement, some $655 million in stimulus funding was allocated to key state agencies, resulting in overall increases for public schools and health care. Key stimulus spending included about $167.5 million to common education, $68.9 million to higher education, $71.3 million to the Department of Human Services, and $331.5 million to the Oklahoma Health Care Authority, the state Medicaid agency.
Agencies cut employees, business hours

Some agencies have already worked out how much the most recent cutbacks will cost them, including $4 million from state schools and more than $3 million from higher education.

The Oklahoma Corporation Commission, which regulates utilities, is making up its budget gap through voluntary buyouts of 20 employees and a reduction-in-force of five, saving about $1.5 million. The Oklahoma Historical Society is closing the Oklahoma History Center on Sundays, opening an hour later on other days, eliminating state funding for some sites, and eliminating three full-time and several part-time positions.

State leaders may need to use every tool at their disposal.

Although some prognosticators expect the current recession to ease before year’s end, Dauffenbach, who has observed many Oklahoma fiscal seasons, is not so certain.

“My own view is not backed up by much more than a trained, gut feel that we’re in the eye of the storm right now,” he said. “I think there’s a whole lot more financial difficulties to appear in the near future.”

Dauffenbach said remaining bad mortgages and commercial property problems are only two of his concerns, coupled with, for Oklahoma at least, natural gas prices in the tank. According to information from Dauffenbach, natural gas was selling at $10.62 per thousand cubic feet in July 2008. It is currently selling at about $2.50 per mcf. Last year, Dauffenbach said, the state gained about $500 million in severance taxes that current natural gas prices will come nowhere near duplicating.

Oklahoma State University economist Russell Evans said that 2010 is likely to continue the lean-year scenario of 2009. He said the Rainy Day fund will not fill the gap entirely, but will give policymakers a good start.
“I think that we could weather the storm under our current setup, if we chose to do so,” he said. “Certainly, it would require some belt tightening.”

Evans said the next few months should convey a lot of information about whether the recession has hit bottom, whether the state starts seeing a slowdown in the bad news or actually starts receiving some good economic news.
“I think we’ll get a much better sense of what 2010 and 2011 look like by the time we get into the winter, towards the end of this year,” he said.

Extend budget forecasting, institute recommends
Some analysts think the downturn provides an opportunity for the state to look at how it budgets, and maybe tweak the tools at its disposal for addressing fiscal crises.

Matt Guillory, with the Oklahoma Policy Institute, is one such analyst.
Guillory said the state needs to extend its fiscal forecasting model, raise the Rainy Day fund cap and make it easier to tap the fund when revenue is growing during a slow economic recovery. He said the fund’s current structure does not allow gradual use through multiple years of shortfalls.

“We’d like to see three- or maybe five-year forecasting,” Guillory said. “That would allow a better estimate of what the future is going to hold.”

He said looking ahead one year does not provide enough information to address issues such as the volatility of the gross-production tax on oil and natural gas. He said that in six years out of eight, collections from that tax have come in more than 15 percent above or below official estimates, with an average annual variation of more than 26 percent.
Guillory said the state should not fund ongoing essential services with revenue from such a volatile source.
“There may be a better structure of how to do that,” he said.

Guillory also said Oklahoma’s largely goods-based tax structure does not tax services efficiently in a country that has an increasingly service-driven economy.

OPI recommended raising the cap on the Rainy Day fund from 10 percent of the prior year’s spending-authority level to 15 percent.

Any changes in the Rainy Day fund would require a public vote.

“We don’t want to come out of this recession barely surviving and say ‘that’s done’ and we don’t need to make improvements,” Guillory said.

Meacham: Focus on what state does best

State Treasurer Scott Meacham said that over the long term it would be good for the state to be less dependent on oil and natural gas taxes.

“But I think it’s going to take some diversification of our economy, not necessarily restructuring our tax structure,” he said.

That means more than taxing more services, he said.

“You don’t just sort of chase what everybody else is doing,” he said. “What happens is, you end up entering that late and you end up not being the best. I think what you do is concentrate on what you do very well or where you have competitive advantages.”

For Oklahoma, Meacham said, that means industry sectors such as agriculture, biosciences and aeronautics, while keeping energy in the mix.

“We focus on building those clusters and building out those clusters more, so they’re a greater proportion of the economy,” he said.

Oklahoma’s primary tool to accomplish that is the Economic Development Generating Excellence Fund, Meacham said.

“It is focused to sort of take innovations out of those fields and turn them into economic and job opportunities,” the treasurer said.
But Meacham recognizes that developing more of those will mean additional EDGE funding. With an original goal of $1 billion, the fund now stands at about $150 million, he said.

House Speaker Chris Benge, R-Tulsa, said state leaders conducted budget deliberations last session as if they needed to cover a two-year cycle, which was one reason they kept back half of the stimulus funds.
“I think that the Rainy Day (fund) is going to work to help us smooth out this collection cycle that we’re in, and I think should set us up for a soft landing,” he said.

With the current recession being global, Benge said a change in tax structure would not help the state position itself better for the future.

“On the structural side, there will most likely be some more cuts,” he said. “So, I think that there may be a need for government agencies to look at themselves, look inward and see if maybe there are some ways that they could be more efficient.”

That is true for all of state government, Benge said.

“All of us can be more efficient, because when things turn around, I don’t know that we’re going to get a robust turnaround,” he said.

Coffee: Oil bust taught painful lesson

Senate President Pro Tem Glenn Coffee, R-Oklahoma City, said that Oklahoma learned from the painful experience of the oil bust and has made efforts to diversify its economy away from the dependence on the energy sector that led to substantial budget problems in the early 1980s.

“I hope that we get by without significant changes, but it may precipitate a discussion about structural changes,” he said of today’s downturn.

If those who predict a rebound in winter natural gas prices come January are correct, Coffee said, “We’ll have one more tough budget year and hopefully enter into the recovery phase. But certainly, given the global nature of this recovery, it’s really impossible for anybody to project exactly what’s going to happen.”

Oklahoma City University economist Jonathan Willner said there are changes that need to be enacted regardless of the recession. He said that includes an increased focus on and investment in quality education, particularly in requiring students to learn the higher-level science and mathematics needed in growing fields such as biomedicine and computer science.

“There’s a heck of a lot of Oklahoma, in the way things function, that is extremely reminiscent of an OPEC country,” he said. “One of the big problems these countries run into is diversifying the economy.”

Willner said some of those countries, realizing their economies are built upon depleting resources, take part of their oil revenue and invest it in “the next group of industries.”

“That investment aspect is not something I see happening in Oklahoma,” he said.

Willner said such decisions in the state are often made by a group of powerful individuals.

“They have the resources to allocate and they allocate them as they see fit,” he said. “What they don’t see is any reason to invest in something that isn’t going to have a high rate of return for them.”

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