Fiscal Year 2011 Legislative Appropriations

Oklahoma House of Representatives Speaker Chris Benge

Appropriations and Budget Committee Representative Ken Miller, Chairman Representative Scott Martin, Vice Chair

October, 2010

Prepared by: House Fiscal Staff

APPROPIATIONS AND BUDGET COMMITTEE

Ken Miller, Chair Scott Martin, Vice Chair

John Auffet Joe Dorman Guy Liebmann John Carey Larry Glenn Danny Morgan Doug Cox Jeff Hickman Ron Peters Lee Denney Chuck Hoskin Randy Terrill Dale DeWitt Mike Jackson Weldon Watson

Subcommittees

Education Public Health & Social Services Lee Denney, Chair Doug Cox, Chair Earl Sears, Vice-Chair Paul Wesselhoft, Vice Chair Ed Cannaday Lisa Billy Ann Coody Gus Blackwell David Derby Samson Buck Eddie Fields John Enns Wes Hilliard George Faught Corey Holland Rebecca Hamilton Sally Kern Charlie Joyner Jeannie McDaniel Lucky Lamons Bill Nations Jabar Shumate Todd Thomsen Harold Wright

General Government & Transportation Public Safety & Judiciary Guy Liebmann, Chair Randy Terrill, Chair Colby Schwartz, Vice-Chair Mark McCullough, Vice Chair Gary Banz Mike Christian Mike Brown Rex Duncan Mike Jackson Scott Inman Shane Jett Fred Jordan Steve Kouplen Ryan Kiesel Ken Luttrell Richard Morrissette Steve Martin Jason Nelson Ryan McMullen Paul Roan Eric Proctor Mike Sanders Mike Reynolds Glen Bud Smithson T.W. Shannon Daniel Sullivan Mike Thompson

Human Services Revenue & Taxation Ron Peters, Chair Jeff Hickman, Chair Marian Cooksey, Vice Chair Neil Brannon, Vice Chair Dennis Bailey Tad Jones Wallace Collins Dan Kirby David Dank Randy McDaniel Dennis Johnson Jerry McPeak Al McAffrey Pat Ownbey Charles Ortega R.C. Pruett Pam Peterson Ben Sherrer Wade Rousselot John Trebilcock Sue Tibbs Weldon Watson Cory Williams John Wright

Natural Resources & Regulatory Dale Dewitt, Chair Skye McNiel, Vice Chair Don Armes Terry Harrison Charles Key Lewis Moore Jason Murphey Leslie Osborn Brian Renegar Phil Richardson Seneca Scott Jerry Shoemake Purcy Walker

Note: The same Members appointed to the Appropriations and Budget Committee were appointed to the General Conference Committee on Appropriations (GCCA). Since the Chairmanship rotates between the House and Senate each year, Representative Ken Miller served as Vice Chairman of GCCA.

Oklahoma House of Representatives

Fiscal Staff

Janice Buchanan, Director Mark Tygret, Deputy Director

Marilyn Anderson David Ligon Terry McKenna John McPhetridge Mark Newman Mark Nichols Nicole Taylor Diane Thomas

Appropriations and Budget Committee Assistant

Barbara Porter

Fiscal Staff Assistant

Amanda McCarrell

Preface and Acknowledgements

This document serves as a reference to House members, staff and other interested parties in summarizing the Fiscal Year 2011 Legislative Appropriations Process. As the final report on appropriations of the 2010 Legislative Session, the document contains specific information relating to the issues addressed by the Legislature in constructing the FY‐11 budget for the State of Oklahoma.

This final report contains a host of detailed information pertaining to past and present decisions affecting FY‐11 appropriations. It is hoped that the content and format are presented in a manner that is useful to members of the House, their constituents and the overall appropriations process. A ten‐year appropriation history of each state appropriated agency is included as a final summary for the readers’ review.

Each staff member of the Fiscal Division is to be commended for making contributions in preparing information for this report, as well as for their professional and dedicated work throughout the 2010 legislative session. Significant contributions to the appropriations process were made by Mark Harter of the Legal Division. Special thanks are also deserving of Barbara Porter, Assistant to the Appropriations and Budget Committee and Angie LaPlante, Legislative Assistant.

Important to the final work product were Amanda McCarrell (coordination/formatting), David Ligon (writing), and Mark Tygret (editing).

Janice Buchanan Fiscal Director House of Representatives

FY‐11 Appropriations Overview

Ten Year Appropriation History Total Appropriation Level

8.0

7.0

6.0

5.0

4.0

Billions 3.0

2.0

1.0

0.0 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

FY‐02 $5,611,514,760 FY‐07 $6,554,329,152 FY‐03 $5,532,095,223 FY‐08 $6,932,106,070 FY‐04 $5,106,597,024 FY‐09 $7,089,333,227 FY‐05 $5,358,101,676 FY‐10 $6,574,296,466 FY‐06 $6,038,003,816 FY‐11 $6,152,776,766

*FY‐11 Total Appropriations with Federal Stimulus $6,691,837,225

Notes:

1. These figures include appropriations, pension systems, capital and special projects. Figures exclude Rainy Day Fund spillover transfers and supplemental appropriations.

2. Totals also include the Tobacco Settlement Fund, the Common Education Technology Revolving Fund, the Education Reform Revolving Fund, the Higher Education Scholarship Revolving Fund and the Higher Education Capital Revolving Fund. Distribution of FY‐11 Appropriations By Subcommittee

General Natural Resources Government 2% 4% Federal Stimulus 8%

Human Services 9%

Education 49%

Judicairy & Public Safety 10%

Public Health 18%

Total Appropriations = $6,691,837,225

* Federal Stimulus $539,060,459

Excludes supplemental appropriations, reappropriations and Rainy Day spillover transfers. Includes capital and one‐time expenditures. Fiscal Overview

Economic Status

The current national economic recession is the longest and most challenging since the Great Depression. Oklahoma’s economy is certainly not immune to the affects of a national recession of this magnitude. In a recent article published in The Federal Reserve Bank of Kansas City Economic Review, researchers found that financial stress, measured in terms of credit and liquidity, plays a role in Unemployment Rates eventually tipping even a strong U.S. and Oklahoma economy into a distressed state. 2006 –2010 YTD

A key economic indicator that Percent 11 provides evidence of the 10 9 recession’s impact is 9.6% unemployment rates From peak 8 7 employment levels in FY‐08, 6 4.7% 6.9% Oklahoma has lost over 52,000 jobs, 5 3.2% according to Bureau of Labor 4 4.0% 3

Statistics data, but remains low J A J O J A J O J A J O J A J O J A J O relative to national unemployment U.S. Oklahoma rates. 2006 2007 2008 2009 2010

Crippling budget deficits have forced many states to enact drastic cuts as nearly half of all states reported an estimated cumulative FY‐11 budget gap of $174 billion with half the states raising taxes in 2009 netting more than $28 billion. (National Conference of State Legislatures). General Revenue Fund Collections ‐ Active Rig Count and GRF Gross Production Revenue FY(Six ‐Month02 –FYMoving Average)‐11 (Est.) 2006 –2010 YTD

6,500 Revenue Assessment 18% Drop from FY‐08 5,934.8 5,953.2 6,000 250 5,704.5 120 5,518.5 5,500 200 95 The severity of Oklahoma’s current 4,959.5 5,000 4,888.6 budget crisis is more clearly realized 4,615.8 4,599.6 1504,500 4,413.3 70 4,185.3 4,703.9 4,636.8

Collections ($ Millions) ($ Collections 4,413.3 4,305.3 when compared to revenue 4,000 4,404.0 100 4,259.9 45 4,018.0 4,098.3 collections in the not too distant 3,500 3,545.3 50 3,355.6 20 past. General Revenue Fund (GRF) 3,000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 J S J S J S J S J S collections, which constitute about Real CollectionsM 2002 = 100 M MFiscal Year M M 2006 2007GRF Collections 2008Real GRF Collections 2009 2010 GDP Implicit PriceActive Deflator Rigsfor State andGP Local Revenue Government used as index 70 % of total appropriations, have decreased 18 % since the “high‐ water mark” in FY‐08. When adjusted for inflationary effects the GRF has also lost substantial purchasing power.

Active Rig Count and GRF Gross Production Revenue (Six Month Moving Average) Because much of the growth in 2006 – 2010 YTD revenue collections since 2004 has been realized in gross production 250 120 tax collections on oil and gas, the 200 95 turning point for Oklahoma’s 150 70 budget occurred in the later half of FY‐09 with a dramatic fall in oil and 100 45 gas prices to five year lows. 50 20

J J J J J M S M S M S M S M S 2006 2007 2008 2009 2010 Active Rigs GP Revenue Although revenue collections continued to weaken from all sources in 2009, the FY‐10 state budget was based on the FY‐10 appropriations authority established by the Board of Certification in February, 2009. Most state agency budgets were reduced by approximately 7 % to reflect overall decreases in available state revenues even though approximately $223.7 million in Rainy Day Funds were employed to offset the revenue shortfall.

FY‐10 began with a poor revenue FY‐10 performance and although there was General Revenue Fund Collections modest improvement in the final few months as natural gas prices General Revenue Fund Comparisons With Estimate increased, total collections for the 12 Month Year to Date SUMMARY Jul‐June, 2010 year were less than 85 % of the FY‐10 Estimated FY‐10 Actual Variance from Estimate estimate. (in $ millions) Jul‐Jun, 2009 Jul‐Jun, 2010 $ % Net Income Tax 2,351.4 1, 875.8 (475.5) (20.2) Gross Production 427.5 444.4 16.9 3.9 Sales Tax 1,754.1 1,515.7 (238.3) (13.6) Motor Vehicle 141.4 147.3 5.8 4.1 Further complicating the FY‐10 Subtotal: Major Taxes 4,674.4 3,983.2 (691.2) (14.8) budget were the first time Other Sources 741.0 616.4 (124.6) (16.8) appropriation and subsequent TOTAL: GRF $5,415.4 $4,599.6 ($815.7) (15.1) formulation of rules and regulations governing the American Recovery and Reinvestment Act (ARRA) federal stimulus funds, designed primarily to offset imminent FY‐10 state budget decreases in the areas of education and Medicaid related programs.

During 2010, the State experienced a 15.1 % revenue shortfall. Most state agency budgets were subsequently cut by another 7.5% from the original FY‐10 appropriation level as the Legislature essentially rewrote the state budget to balance FY‐10 expenditures with actual revenue collections.

FY‐11 Budget

As the FY‐11 appropriation process General Revenue Fund – Estimate to began, most state government base‐ Actual FY‐08 –FY‐11 YTD line appropriations had been $Millions 6,500 reduced on average 14 % since the 102.3% of 93.2% of Estimate Estimate Projected 6,000 FY‐09 high appropriation mark, 84.9% of 102.3% of Estimate Estimate essentially setting a lower bar for 5,500 state government standard 5,000 5,544.7 5,946.4 5,981.1 operating costs. Cumulative 4,500 5,845.4 5,084.1 4,888.6 4,599.6

decreases in revenue collections can 5,415.4 4,000 be illustrated by the observation FY‐08 FY‐09 FY‐10 FY‐11 YTD* that FY‐11 General Revenue Fund Estimate Actual * Based on Year to Date Estimate to Actual collections through the first four months are at their lowest point since FY‐05.

In the midst of the of the most severe recession in seventy years, the Legislature again undertook the challenge of constructing a balanced state budget that met increased demand in critical core services: education, public safety, health care and transportation, while preserving previously enacted tax cuts.

While most of state government sustained additional cuts of between FY‐11 Appropriations by Subcommittee 3.0 % and 7.0 % on an already reduced $267.3 $1,293.0 appropriation base, common education 4.0% 19.4% Total: $6,691.8 and higher education budgets also were marginally decreased for the first time Education in recent fiscal history to accommodate $676.0 General Govt. FY‐11 budget constraints but still 10.1% Health retained a combined 55.5 % share of $132.4 Human Svcs. $3,575.4 2.0% Nat Resources 53.6% total state appropriations. Public Safety 730.3 10.9% In Millions of Dollars

In an effort to meet an all time high in the number of Oklahomans receiving Supplemental Nutrition Assistance Program (SNAP) and Medicaid benefits, the Department of Human Services received a 4.0 % increase in appropriations and the Health Care Authority was directed to employ expanded Federal Medical Assistance Percentage (FMAP) program funds.

To honor the legislative commitment to public safety, those related state agencies inclusive of the court system received marginal cuts averaging only 2.0 %. The transportation Rebuilding Oklahoma Access and Driver Safety (ROADS) program providing in excess of $650 million to address critical state highway construction, major repair and maintenance needs was preserved through legislative approval of increased bond authorization of $65.0 million.

The Legislature used several innovative techniques to close the gap between projected expenditures and certified revenue including a series of moratoria on selected tax credits, tax compliance initiatives, gross production tax rebate payment deferral and a state sponsored Voluntary Buyout Plan (VOBO).

All remaining federal stimulus of approximately $540 million and Rainy Day Funds in the amount $272.8 also were employed to close the gap resulting in an overall decrease in total FY‐11 state appropriations of $244.5 million or 3.5 % from the FY‐10 final appropriation. The remainder of Rainy Day Funds in the amount of $100 million was restricted for use in the upcoming FY‐12 state budget.

FY‐12 Outlook

With the first FY‐12 revenue FY‐11 Appropriations and certification just over one month FY‐12 Preliminary Appropriations Authority* away, a loss of appropriations $Millions authority in excess of $565 is $6,692.0 $6,126.7 •Reduction from FY‐11 of $565.3 Million 7,000 projected for the 2011 Legislative •Stimulus and Rainy Day unavailable 6,500 272.9 for FY‐12. $100 million in carryover cash Session. Using an assumption of 539.1 is available. 6,000 350.0 236.5 •Four percent growth will activate the 4.0 % representing moderate 5,500 trigger to lower the top marginal income 911.1 943.0 tax rate to 5.25%, reducing FY‐12 revenue recovery and growth, the 5,000 by $48.0 million. Legislature will have 4,500 •Funding for the ROADS program and 4,732.4 4,833.7 the Oklahoma Higher Learning Access approximately 8.5 % less to 4,000 Program (OHLAP) have been removed from the FY‐12 certified total 3,500 FY‐11 FY‐12 Certified Authorized Cash Stimulus Rainy Day *Assumes a 4.0% increase in cash, certified and authorized funds FY‐12 appropriate in the FY‐12 budget than was appropriated for FY‐11.

The model illustrated takes into account the absence of available Rainy Day funds and federal stimulus for the FY‐12 budget cycle, activation of the trigger to lower the top marginal income tax rate to 5.25 % at a cost of $48.0 million in FY‐12, and funding for the ROADS program and the Oklahoma Higher Learning Access Program (OHLAP) removed from the FY‐12 certified total.

The estimated 8.5 % decrease speaks only to available funds and neither accounts for cost increases in any key service areas including Medicaid, mental health, corrections or public safety nor factors in the significant loss in purchasing power due to inflationary effects.

This chart illustrates the current FY‐11 fiscal year financial performance General Revenue Fund Collections by exhibiting data for four General Revenue Fund Comparisons With Prior Year months of GRF collections. FY‐ 11 collections surpass FY‐10 by 4 Month Year to Date SUMMARY Jul‐Oct, 2010 5.7 %; however it’s important to FY‐10 Actual FY‐11 Actual Variance from Prior Year (in $ millions) Jul‐Oct., 2009 Jul‐Oct., 2010 $ % keep in mind that FY‐10 Net Income Tax 647.5 651..1 3.6 0.5 collections fell over 15 % from Gross Production 83.4 95.7 12.3 14.8 Sales Tax 496.2 548.1 51.9 10.5 that of FY‐09. From a relative Motor Vehicle 45.8 66.7 20.9 45.5 standpoint, it appears that Subtotal: Major Taxes 1,272.9 1.361.6 88.6 7.0 Other Sources 207.3 202.9 (4.4) (2.1) collections are showing marginal improvement under the auspices TOTAL: GRF $1,480.2 $1,564.4 $84.2 5.7 of a lower revenue benchmark.

Legislators most certainly will face one of the most challenging budget environments in Oklahoma’s history as the 2011 Session convenes. However, the combination of limited resources, a lower revenue standard, higher inflation and increased service demand also will provide ample opportunities from both a political and policy perspective to enact meaningful fiscal reform.

Top Ten Agencies by Appropriation (In Millions of Dollars)

Agency Amount Percentage

Board of Education $2,375.6 35.5

Higher Education 1,003.5 15.0

Health Care Authority 963.0 14.4

Human Services 543.1 8.1

Dept. of Corrections 462.1 6.9

Mental Health 187.7 2.8

Career Tech 142.0 2.1

Dept. of Transportation 114.8 1.7

Juvenile Affairs 99.2 1.5

Public Safety 88.4 1.4

Subtotal $5,979.4 89.4

All other Agencies 712.4 10.6

Total Appropriations $6,691.8