Budget & Tax
Debate over state savings continues
August 2, 2019
At Gov. Kevin Stitt’s urging, state lawmakers set aside roughly $200 million of this year’s surplus into state savings. That amount, combined with deposits to Oklahoma’s Constitutional Reserve Fund, leaves Oklahoma government with around $1 billion in savings for the first time ever.
But the decision to prioritize savings for future downturns continues to draw objections.
According to the Tahlequah Daily Press, Rep. Matt Meredith, a Democrat who represents that area, recently complained that lawmakers had put $200 million into “the governor's slush fund” rather than spend the money on growing government programs such as Medicaid.Rep. Matt Meredith (D-Tahlequah) complained that lawmakers put $200 million into “the governor's slush fund” rather than expand Medicaid.
When asked for comment on the House Democrats’ position on state savings, a spokesman for House Democratic Leader Emily Virgin of Norman pointed to a statement she released in May.
In that statement, Virgin said any claim that House Democrats “want to spend every dollar of the state’s money and not save any is a ‘mistruth’ at best and at worst an outright lie.” But she went on to note the state’s Rainy Day Fund was expected to hold about $850 million by the end of the state budget year in June, and decried putting an additional $200 million into savings.
She noted the tax increases approved in 2018 constituted “one of the largest revenue packages in the history of Oklahoma,” and said those tax increases were enacted “specifically to invest in core services.”
“Taking $200 million from taxpayers and putting it into a bank account isn’t fiscal responsibility, it is legislative malpractice,” Virgin said. “Our position is that this money should be invested back into our students, our healthcare, and our infrastructure, while we also save the $450 million in the Rainy Day Fund.”
But other officials say the decision to further augment state savings was prudent, and note Oklahoma’s lack of savings has been cited as a problem by bond-rating agencies.
“Absolutely, it’s an important initiative for us to have increased savings,” said Oklahoma State Treasurer Randy McDaniel. “This will be helpful in future economically difficult periods, and so this will be looked at as a favorable improvement for our state to have put back additional savings above and beyond the Rainy Day Fund.”
In September, state government leaders will meet with officials at national bond-rating agencies to defend Oklahoma’s current bond rating and seek an upgrade. Any improvement in the state’s bond rating will lower taxpayer costs when bond debt is issued, while downgrading of the state’s bond rating increases taxpayer costs.
Oklahoma government’s savings—or lack of savings—has been cited as a problem by bond-rating analysts in recent years.
In March 2017, Standard & Poor’s lowered its rating on Oklahoma’s general obligation bonds and appropriation debt backed by the state’s credit enhancement reserve fund. Among the reasons given was analysts’ belief that “the state’s financial position has deteriorated to a point that further precludes the state from building up reserves in subsequent fiscal years.”
Standard & Poor’s noted lawmakers had voted to augment the state’s “rainy day” fund with creation of a “revenue stabilization fund” that would receive energy tax collections that exceed a five-year rolling average, “which we view as a strength over the long term, but we do not expect that the state will build significant RSF reserves for several years.”
“For states such as Oklahoma that have concentrations in cyclical industries, such as the oil industry, we consider reserves of particular importance to the state’s credit quality,” the Standard & Poor’s analysis stated.
The $200 million in savings now criticized by Democrats was deposited into the revenue stabilization fund.
Had lawmakers chosen to increase spending by another $200 million, rather than put it into savings, sustaining that spending might have become a challenge in the near future. While lawmakers had a huge surplus this year, officials say expectations for next year’s revenue growth should be much more modest.
“I could see maybe a standstill,” said House Appropriations and Budget Committee Chair Kevin Wallace, R-Wellston. “I don’t expect a dip. But perhaps not the growth we’ve seen in the last couple cycles.”
He notes there are “a couple of factors I’m looking at that are not positive,” but says other indicators offset those negative trends.
One factor Wallace said he tracks closely is the rig count in Oklahoma, which has historically been tied to the state’s overall economic health. Oklahoma’s rig count is down significantly over the past year, although actual oil production has held steady thanks to improved technology. Oil prices have also stayed in mid-range, well below the highs that fueled past booms in state tax collections but still above the bottoms that triggered a state recession in the 2015-2016 period. The business uncertainty created by the 2020 elections, particularly at the federal level, could also lead some businesses to hold off on new investments, Wallace said.
In contrast, Wallace said positive trends that offset those reasons for concern include low unemployment, business optimism, and broader state economic growth.
McDaniel is a member of the State Board of Equalization, which will certify in December initial revenue figures that will be used by state budget writers. McDaniel also believes state revenue growth could be much lower next year than it was this year.
“We should ensure that we have realistic expectations for the future,” McDaniel said. “We have seen some key issues that are worth further exploration, one of which is the slowing growth in the sales tax receipts. That is a very important contributor to the overall funding of the state and therefore I think that we should be expecting not near the growth revenue that we had in the past.”