Budget & Tax
Ray Carter | January 18, 2024
Stress test: State can weather another ‘Great Recession’
If Oklahoma faces another economic recession comparable to the housing-crash-induced “Great Recession” of 2008 to 2010, state government will require $6.14 billion in savings to cover all associated downfalls over a five-year period, according to the state’s first “budget stress” test, conducted by the Legislative Office of Fiscal Transparency (LOFT).
Fortunately, that same report shows Oklahoma has more than $8.9 billion in total savings that could be tapped, after accounting for all funds.
The report is the latest evidence of the dramatic financial turnaround that has occurred in state government since the election of Gov. Kevin Stitt.
Under Stitt’s predecessor, former Gov. Mary Fallin, state savings were never built up to any significant degree and they were quickly depleted when an oil bust devastated the state economy from 2015 to 2018.
Under Fallin, taxes were raised repeatedly.
Since then, Stitt and legislative leaders have worked to build up state savings to unprecedented levels even as they have cut taxes and boosted spending in areas such as education.
LOFT completed the Oklahoma state government’s first comprehensive budget stress test in partnership with The Pew Charitable Trusts and Moody’s Analytics Team.
Assuming an annual growth rate of 4.7 percent, LOFT compared the baseline projected tax revenue to the projected tax revenue declines during a mild, moderate, and severe downturn. The analysis considered the impact of a downturn over a five-year period.
LOFT noted that the state’s Rainy Day Fund currently holds $1.274 billion while the Revenue Stabilization Fund has $401 million, providing a combined $1.675 billion. Those are the state’s two funds primarily designated as state savings.
If policymakers had to rely on those two funds alone, LOFT concluded the state “could completely cover the first full year of a mild downturn (FY25) but not the total estimated five-year impact of $3.3 billion,” and that for “anything more than a mild downturn, the State would not be positioned to offset much of the impact with its current reserves.”
However, LOFT noted that the Oklahoma state government currently has more than $6 billion in savings in accounts other than the Rainy Day Fund and the Revenue Stabilization Fund, including more than $2 billion in unspent funds from the 2021, 2022, and 2023 state budget years, $3.5 billion in agency revolving funds, and $372.5 million in the Federal Medical Assistance Percentage (FMAP) Preservation Fund that prevents Medicaid cuts.
When all sources of state savings are combined, they total more than $8.9 billion.
The report defined a mild downturn as one in which the unemployment rate ranges between 4 percent and 5 percent, gross state product (GSP) increases by at least 2 percent, and deposits to the state’s General Revenue Fund are between 90 percent and 100 percent of estimates.
A moderate downturn was defined as involving an unemployment rate that is greater than 5 percent but less than 7.5 percent, an increase of GSP by less than 2 percent, and deposits to the General Revenue Fund falling between 85 percent and 100 percent of estimates.
The report cited the 2008-2010 Great Recession as an example of a moderate downturn for Oklahoma’s economy.
If the state faced a “severe” downturn, LOFT predicted the Oklahoma state government would need $9.75 billion in savings to avoid spending cuts or tax increases over a five-year period. The report defined a severe downturn as an economic event in which the unemployment rate is greater than 7.5 percent and prolonged for more than two years, gross state product experiences a negative growth rate, there is a shortfall in state General Revenue Fund of actual collections being less than 85 percent of the estimated collections, and the downturn lasts more than two years with minimal upward effort.
However, the report noted that such a scenario remains unlikely and has not occurred since the 1930s.
“The only recession in U.S. history significant enough to meet the conditions of a severe downturn is the Great Depression, which occurred almost 100 years ago,” the LOFT report stated.
Since 2000, the LOFT report noted that Oklahoma has experienced revenue failures in the 2002, 2003, 2009, 2010, 2016, 2017, 2018, and 2020 budget years. In 2020, which was COVID-related and the only budget shortfall that occurred on Stitt’s watch, policymakers tapped state savings to fill the $416 million budget gap and have since replenished those savings.
For the current 2024 state budget year, lawmakers appropriated $10.7 billion in state funding, a 50.4 percent increase over ten years. (Education spending surged from $3.6 billion to $5.7 billion during that time.)
LOFT officials forecast that baseline tax collections will bring in $13.4 billion in tax revenue by FY28, based on recent trends.
The report’s findings, which indicate an unprecedented level of fiscal stability in Oklahoma, come as policymakers are expected to consider reducing Oklahoma’s personal income tax from its current rate of 4.75 percent and putting the tax on the path to full repeal over time.
Gov. Kevin Stitt has called a special session, which will convene at the end of January, to consider tax cuts.
In a recent video posted to social media, Stitt noted that Oklahoma has cut its top income-tax rate from 7 percent in the 1990s to 4.75 percent today.
“We can’t get to zero income tax overnight, but it’s about continuing our trajectory to zero,” Stitt said. “And in the process, every Oklahoman will see a pay raise. That’s what I’m fighting for.”
During LOFT’s presentation of the state’s stress test, state Sen. Julia Kirt, a critic of tax cuts, raised the issue.
“What if we cut taxes now?” asked Kirt, D-Oklahoma City. “How would that impact your scenarios?”
“You would have to be able to quantify the exact amount of revenue reduction collected by the state and then factor that in,” said Regina Birchum, deputy director of LOFT. “But you would also need to quantify any intended positive economic impacts.”
During an October meeting of the Senate Appropriation Committee, State Treasurer Todd Russ noted that for many years in the economic cycle following every tax cut in Oklahoma “the revenues actually increased.”
Responding to LOFT’s presentation, House Appropriations and Budget Chairman Kevin Wallace, R-Wellston, noted that Oklahoma policymakers have worked to better manage state finances so downturns do not turn into fiscal nightmares.
Under Oklahoma law, legislators may spend up to 95 percent of the amount of revenue certified available each year, leaving a 5-percent cushion to prevent missed projections from causing shortfalls.
But in recent years, Wallace noted lawmakers have chosen to spend even less than the 95-percent maximum, building up additional savings, and suggested that practice will continue moving forward.
He also noted that the 2024 state budget included a significant amount of spending on “one-time” items, meaning lawmakers do not have to spend the same amount of money again next year to maintain current levels of ongoing spending.
“There’s a lot of one-time appropriations in the ‘24 budget,” Wallace said. “Those don’t have to be appropriated next year as well. Well over a billion dollars I can just rattle off real quick that wouldn’t have to be appropriated next year, today, going forward.”
Director, Center for Independent Journalism
Ray Carter is the director of OCPA’s Center for Independent Journalism. He has two decades of experience in journalism and communications. He previously served as senior Capitol reporter for The Journal Record, media director for the Oklahoma House of Representatives, and chief editorial writer at The Oklahoman. As a reporter for The Journal Record, Carter received 12 Carl Rogan Awards in four years—including awards for investigative reporting, general news reporting, feature writing, spot news reporting, business reporting, and sports reporting. While at The Oklahoman, he was the recipient of several awards, including first place in the editorial writing category of the Associated Press/Oklahoma News Executives Carl Rogan Memorial News Excellence Competition for an editorial on the history of racism in the Oklahoma legislature.