Budget & Tax

Stitt’s budget to ‘keep a lid’ on spending

December 6, 2019

Ray Carter

When officials at the Oklahoma State Department of Health recently requested a slight reduction in the agency’s state appropriation, some lawmakers were flummoxed. The request defied the status quo of politics, where success is typically measured only by spending totals, not results.

But Mike Mazzei, a former state senator who now serves as Gov. Kevin Stitt’s secretary of budget, says a shift is underway in Oklahoma government. He said the governor’s next budget plan will focus more on efficiency than increased spending.

“After last year’s successful first-year financial strategy, where the governor with the help of the Legislature was able to address core-service priorities, such as the teacher pay raise along with significantly adding to the state’s savings account, one of the important goals for this year is to keep a lid on recurring expenses,” Mazzei said in an interview. “It appears to us that when we get the revenue estimates later this month that we’re not going to be seeing significant additional revenue dollars like we did this time last year. And so Governor Stitt has communicated to the agencies that report directly to him to try to keep budget requests limited to 1-to-2 percent increases over the previous year.”

In Stitt’s first year in office, thanks in large part to the recovery of the state’s energy industry, lawmakers had an additional $574.5 million to appropriate. Stitt successfully advocated for setting aside $200 million of that growth revenue into state reserves, which helped state government achieve record reserves of more than $1 billion by summer.

Now the governor plans to build on that success with an eye toward implementing sound business practices throughout government, Mazzei said. In many cases, that means agencies will be expected to find efficiencies and redirect savings to other needs.

At the Department of Health, agency leaders say they have identified savings that will allow them to redirect money to personnel at county health departments across the state and also reduce the agency’s appropriation to $54 million. (The state appropriation represents only a small share of the agency’s total budget, which totaled around $428 million.) The proposed $4.5 million reduction will lower the agency’s total budget by about 1.5 percent.

“That is a big shift towards mission priorities that we hope will produce better health outcomes,” Mazzei said.

At the Department of Human Services, agency director Justin Brown has chosen to consolidate 850 vacant and fully funded positions and use the savings to provide significant pay increases to many of DHS’ frontline workers. That process included elimination of 400 vacant positions from the books, according to an agency release.

Mazzei said that approach reflects “the governor’s vision and message to get resources working towards better outcomes, better top 10 results.”

At the Oklahoma Health Care Authority, Stitt has requested a Medicaid eligibility performance audit, and the results of that review are expected in the first quarter of 2020.

Mazzei has also met with the leaders of the state’s 12 largest agencies, whose budgets account for roughly 90 percent of state appropriations. He said agencies are being encouraged to implement “simple business practices” similar to those Stitt used in his years as a private businessman. Among other things, that includes providing financial reporting on “at least” a 90-day basis that compares budgeted expenses with actual expenses and current-year expenses with prior-year expenses.

“The governor wants top 10 results, and he wants agencies to do it as effectively and efficiently as possible with the current funding that’s available—and from there we can be a little bit more confident on resources going to additional projects because we know we’re getting more bang for the buck,” Mazzei said.

Stitt’s approach to state finance may prove a culture shock, as was apparent at the Department of Health’s recent budget hearing. One lawmaker called the requested budget cut “counterintuitive” and several appeared skeptical that government can be more efficient or that spending should ever go any direction but up.

But Mazzei said the governor’s approach is not only the result of Stitt’s business background, but also financial reality.

“We would think after a 16-percent increase in expenditures the last two years, which is equivalent to over $1.2 billion, that our friends in the Legislature would appreciate an eye towards some spending restraint right now,” Mazzei said. “We may be lucky to just be working with the same revenue scenario that we had last year, let alone any growth.”

He noted rig counts are down 50 percent and gross revenue collections in November declined year-over-year for the first time in 32 months.

“We certainly can’t afford a significant spending increase that could open the door to the mistakes of the recent past and risk another round of big budget deficits,” Mazzei said.

Prior to Stitt’s election, the previous gubernatorial administration and the Legislature routinely used budget gimmicks that increased state spending above recurring revenue collections. That practice contributed significantly to the size and severity of budget shortfalls experienced during the energy bust.

The decision of Stitt and legislative leaders to build up state reserves this year, rather than increase spending at the fastest rate possible, has since gained approval from outside experts.

Moody’s Investors Service has given the state of Oklahoma a “positive” outlook that “reflects our expectation that strong fiscal management and a commitment to increasing reserves will continue, in line with the state’s goal of strengthening its preparedness for the next cyclical economic downturn.”

Noting that his time in state government “goes back to about 2005,” Mazzei said, “It’s been a while where we had a credit rating agency refer to us with ‘strong fiscal management and a commitment to increasing reserves.’”

The credit outlook from Moody’s, issued Oct. 25, noted that the “turnaround in the oil and gas sector provided broad uplift to the state's revenue,” but also warned that Oklahoma’s “economy and the budget remain dependent on the oil and gas sector, which may yield further difficulties during the next recession unless reserves are sufficiently high to enable the state to weather the cyclical economy.”

Due to an oil bust, Oklahoma’s economy contracted for five consecutive quarters at an average rate of -2.7 percent year-on-year. When, in the second quarter of 2017, Oklahoma’s economy generated positive growth of 0.2 percent, it marked the first such growth since the fourth quarter of 2015. The state economy has since accelerated to growth of 3.7 percent in the first quarter 2019, which was greater than the national rate of 3.2 percent.

But that may be near an end. In November, gross receipts to the state treasury were lower than the prior-year numbers for the first time in more than two and a half years, State Treasurer Randy McDaniel reports. The last time monthly gross receipts were less than the same month of the prior year was in March 2017.

In a release, McDaniel said the “primary reasons for the decrease are lower sales tax and oilfield tax payments.” Sales tax receipts were down for a fifth time in the past six months, while oil and gas gross production collections were “considerably lower” for a third consecutive month.

“Lower energy prices are having a significant influence on gross production tax receipts,” McDaniel said. “The recent large layoffs in the energy sector impact both families and the overall economy.”

McDaniel also noted that the Oklahoma Business Conditions Index for November fell below growth-neutral for a second consecutive month and the third time in the past four months. November’s rate of 47.8 is down from 48.7 in October, indicating slow to no economic growth in the next three to six months. Numbers below 50 are considered growth negative.

“The governor believes it’s critically important as we work on a spending plan for the next fiscal year to pursue an increase in the state’s credit rating, and they have told us—Moody’s, Standard and Poor’s, and Fitch—have told us we have to keep adding to reserves, keep a lid on recurring expenses so we don’t set ourselves up for another round of structural deficits, and continue to invest in economic diversification,” Mazzei said. “That’s going to be the governor’s criteria for a solid financial strategy for FY21.”

That may discomfort some politicians, but Mazzei noted Stitt did not seek election to preserve the status quo, but to put Oklahoma on a top-10 trajectory.

“Governor Stitt likes to tell everyone that he was elected to do things differently, because doing the ‘same old, same old’ wasn’t improving outcomes,” Mazzei said. “And just adding money to last year’s base of recurring expenses certainly wasn’t helping us move the needle.”