Budget & Tax

$2 billion in state savings prudent

May 28, 2021

Rick Farmer, Ph.D.

Governor Kevin Stitt first began talking about adding to Oklahoma’s savings account in 2018 as candidate Stitt. At the time he said Oklahoma needed a $2 billion savings in order to keep the government operating through difficult budget years.

In 2019 Governor Stitt pushed the Legislature to add $200 million to the state’s rainy day fund. In 2021 he pushed for $800 million more to go to savings.

$2 billion seems like a lot of money to have in savings. Is this amount justified in today’s economy?

Even though Oklahoma has worked hard to diversify its economy, oil and gas activity still has a powerful effect on state revenue. As a result, state revenue remains very volatile. In back-to-back years Oklahoma revenue can swing up or down by nearly $1 billion.

In 1985 Oklahoma voters created a Constitutional Reserve Fund. In good financial years surplus tax revenue flows directly into this “rainy day” fund. When the economy takes a downturn, the Legislature can dip into the rainy day fund to keep the government running. The chart below shows the balance available to the Legislature each year going back to 2001. Prior to Stitt taking office, the largest balance held in the fund was $597 million in 2009-2010.

In addition, in 2016 the Legislature established a Budget Stabilization Fund. In good financial years, this fund captures a percentage growth revenue and places it in a second savings account. Total deposits to this new fund so far were $399 million. Some of both funds were spent to fill the FY-20 budget hole created by COVID.

The real problem arises when Oklahoma has two or more years of economic decline back to back. The state’s savings accounts can help the state get through the first year. They can also cushion part of the blow in a second year. However, Oklahoma has never had enough savings to maintain government funding through a second year of financial difficulty.

An analysis of the Oklahoma Tax Commission’s annual reports over time reveals that Oklahoma needs about $2 billion in savings to prevent budget cuts during back-to-back declining revenue years.

Each year the Tax Commission publishes a report of all taxes collected. Plotting the annual totals on the chart below shows historically how much savings would have been needed to avoid significant budget cuts across a multi-year downturn.

In 2002 and 2003 with the dotcom bust, Oklahoma suffered two years of declining revenue in a row. However, the decline was relatively minor. The total amount of savings needed to bridge those two years was $487 million.

But when the housing bubble burst in 2008 state revenue declined precipitously in 2009 and 2010. In fact, FY10 revenue was more than $1 billion less than FY09. Although revenue began to bounce back in 2011, it did not actually return to 2008 levels until 2013. In order to bridge that five-year span, Oklahoma would have needed $2.1 billion in savings.

More recently, with the collapse of oil prices state revenue declined in 2016 and 2017. The total amount needed to fill the budget hole for those two years was $1.8 billion.

This means that in Oklahoma’s last two economic downturns roughly $2 billion was needed to keep state government running without significant budget cuts.

It seems like a lot of money. But any common sense budget planner would look back at the history of previous revenue downturns and ask how much do we need in savings to get through future hard times. That is what families do. That is what businesses do. That is what businessman Governor Kevin Stitt did. As he promised in his campaign, Governor Stitt is working to build a $2 billion savings. In FY-22 he and the Legislature are making an $800 million down payment on fulfilling that need.