Balancing Oklahoma’s checkbook

OkCashCowOpinion:  Oklahoma will collect more than $8 billion in taxes in 2015. Since 2009, our state’s revenue has increased by almost 2 percent per year. With that sum of money, and five years of consistent growth, it is hard to believe our state has a $611 million shortfall this year.

However, the budget committee’s failure to consider obvious trends and instead grossly overestimate the state’s income guaranteed financial problems. In fact, it rejected the warnings of budget committee members trained in finance who predicted a shortfall.

I suppose the budget committee didn’t want sound reasoning to disrupt its political discussions, or perhaps it is because the majority of the budget committee had no formal training in finance. Whatever the reason, understanding last year’s budget planning failure is crucial to getting the planning process right this year (this year’s budget was developed last year, and next year’s budget is being planned this year).

GovRegulationsEither we learn from our mistakes or we are doomed to repeat them. As voters, we have an obligation to learn about and select leaders who can steward the process. The alternative is the annual squandering of more than $8 billion.

At the core of the predicted shortfall was the correlation between Oklahoma tax revenues and national economic growth. More specifically, over the last five years, the national economy grew by approximately 2.3 percent per year. During the same time period, state tax revenues grew by almost 2 percent per year. Following the same correlation, national economic growth was estimated to be approximately 2.5 percent or less this year. Therefore, Oklahoma tax revenue growth should have been estimated closer to 2 percent or less. Yet, a growth rate of at least 4 percent was required for the state’s budget to balance this year. A tax revenue growth rate of 4 percent sounds reasonable until one considers that it is more than a 100 percent increase in the tax revenue growth rate over the previous years. More than 100 percent growth rate is fantastically optimistic, unreasonable and anything but conservative.

OKcapitolLgMost of us would like to see our income growth rates increase by 100 percent annually, but no reasonable person (or group of people) I know would expect that to balance their personal budget. Yet, this is exactly what the budget committee did last year (remember this year’s budget was developed last year, and next year’s budget is being planned this year).

As I trust that most of our leaders are well intentioned, I only can assume it is because the majority of last year’s Senate budget committee had no formal finance training and that members weren’t able to make the connection between national growth and Oklahoma tax revenue growth rates, nor were they able to compute the unrealistic growth rate required to balance this year’s budget.

This is a problem and adds significant risk to the governance of our state.

With our budget leaders depending on more than 100 percent tax revenue growth rates in revenue to justify financial decisions, it should be no surprise that our budget is not balanced this year. If that happens again, we should expect a shortfall next year. Furthermore, they are blaming the shortfall on two things. “Top dollar funding” (dollars appropriated based on previously agreed upon percentages, before budget discussions begin) and the unexpected drop in oil and natural gas revenue. Since top dollar funding was a planned event, it can’t really be presented as cause for our budget woes.

OilThat leaves the drastic drop in oil prices as their last scapegoat. However, the estimated loss in tax revenue from Oklahoma’s devalued oil and gas patch is from $100 million to $150 million (the number is hard to quantify due to secondary effects of taxes related to economic activity from oil and gas). In any case, since even the higher revenue-loss estimate is well below the $611 million shortfall, it does not explain the magnitude of the mistake, nor does that explanation provide any hope that this year’s budget discussion will be better informed.

We are supposed to be a conservative state run by conservative leaders.

Dan Mazzei

Dan Mazzei

This type of fiscally blind decision-making does not sound conservative. If we hope to have a balanced budget next year we need to make sure our leaders consider economic trends and base projections on reasonable growth rates. Please, call your Senate and House members and request that they follow sound economic forecasting. The economic health of our state depends on it.

About the author: Dan Mazzei is a professional engineer in Tulsa.