Oklahoma State Capitol

Oklahoma lawmakers face tough choices at the Capitol as the legislative session begins. DYLAN GOFORTH/The Frontier

State lawmakers are running out of metaphors to describe the overwhelming size of Oklahoma’s budget shortfall.

Lacking at least $900 million in revenue for the upcoming fiscal year, Oklahoma’s leaders are facing tough choices as the legislative session begins this week.

Cuts in state services, teacher shortages and schools potentially forced to close are some of the most dire consequences of the revenue failure.

Oklahoma’s budget woes are too big to blame on a single factor, though most experts and lawmakers agree plummeting oil prices and tax cuts have contributed to the problem.

During Monday’s State of the State address, Gov. Mary Fallin shared her proposals for fixing the fiscal crises (which is expected to grow even larger).

She proposed more than doubling the tax on cigarettes and collecting $200 million more by applying a state and sales use tax to certain good and services that are currently exempt.

“We can use this budget crisis to create new opportunities to build a solid foundation for Oklahoma,” Fallin said during her speech. “We have tough decisions ahead, folks. If we work together, we can overcome this.”

Decline in the oil industry

While the price of a barrel of oil was more than $100 in 2014; it now hovers in the $30 range. The decline in oil prices has several negative effects on state revenue, as state production taxes from energy companies drop substantially. As thousands of energy industry employees are laid off, it hurts other categories of state revenue as well., described the negative consequences from the decline of the energy industry as a ripple effect.

“The energy sector has a huge hit to our budget,” Sears said. “What hurts the budget more is the energy sector and the layoffs they have had; 12,000-plus people, and they’re now not paying income tax. They’re high-paying jobs.”

When Oklahoma’s private sector is suffering, the state is going to see total-revenue declines, said Jonathan Small, president of Oklahoma Council of Public Affairs. The oil and gas industry represents about 25 percent of state-tax collections, and the mining sector makes up about 20 percent of private-sector employment, he said.

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Although falling oil and gas revenues play a hefty part in state budget deficits, they’re not the only factor.

David Blatt, Oklahoma Policy Institute executive director, said not all of the state’s budget shortfalls can be explained by low oil and gas prices.

In 2014, when the price of a barrel of oil was more than $100, the state faced a $188 million deficit for its FY2015 budget, which was cobbled together with ample use of non-recurring funds.

“Energy prices are unquestionably compounding the problem and explaining the enormity of the shortfall, but at the same time, there are several other things going on,” Blatt said.

Oklahoma has a chronic budget deficit, largely due to a lack of recurring revenue, he said.

The state cut more than $1.022 billion in  income tax collections over the past 12 years, which has taken some sources of revenue off the table, Blatt said, referencing an analysis prepared for Oklahoma Policy Institute by the Institute on Taxation and Economic Policy. That’s why when energy companies were enjoying record profits, the state was still facing budget shortfalls.

Until the state restores its tax base, budget problems won’t be fixed with more spending cuts, Blatt said.

During past budgeting crises, state lawmakers used one-time revenues to finance recurring expenses.

Besides the downturn in the energy sector, unnecessary government spending is at the root of the state’s budget problems, Small said.

“I think the main thing to really stress is that this talk about what the income tax costs us is a myth, and it’s fiction,” Small said. “It doesn’t even make any sense suggesting that somehow the state is leaving a magical number of a billion dollars in the pockets of Oklahomans.”

Oklahoma also gives away $1.7 billion in tax credits, incentives and exemptions each year.

From 2004 through 2007, state lawmakers passed bills that reduced the state’s top income tax rate from 6.65 percent to 5.25 percent.

In 2013, Fallin and the GOP-led legislature pushed through the latest cut, a quarter-point reduction from 5.25 percent to 5 percent in the top income tax rate. The cut came with a $147 million price tag for the state. In 2018, the rate is scheduled to fall to 4.85 percent if upcoming revenue is considered sufficient.

Sears said every time the state dropped the income tax rate, it generated more money. However, he said the credits, incentives and exemptions have been generous and “absolutely need to be reviewed.”

“I’m in uncharted waters,” Sears said. “With the oil price down and the economy down, what I will personally be interested at the end of this fiscal year is what has that impact had, this cut? Will we make up the $147 million?”

Spending cuts expected

Sears said state lawmakers have been meeting for several months to discuss how to tackle the budget deficit.

The “Rainy Day Fund” could help fill the more than $900 million hole. The fund, used for state budgetary emergencies, has a balance of $385 million. Lawmakers will likely use a large amount of the fund, but not all of it, he said.

“Everything’s on the table,” Sears said. “We’ve met with state agencies and informed them to be sure to look at your budget and don’t spend money that’s not necessary to save for, to help you get through the year.”

Fallin’s budget, which she proposed Monday, does not make use of the Rainy Day Fund or non-recurring revenue. She said her budget also includes a 6 percent reduction in appropriations for most state agencies and 3 percent cuts for seven agencies that provide core services, including the Department of Health, Department of Human Services and Department of Public Safety.

In December, Preston Doerflinger, Oklahoma’s secretary of finance, announced the state was in the midst of a revenue failure and ordered cuts of 3 percent to all state agencies.

Budget cuts have hit education hard, as nearly $47 million was cut from Oklahoma school districts in January.

“Right now we’re at bare bones,” said Alicia Priest, president of Oklahoma Education Association. “We’ve gotten more students and less funding. We’ve had the worst cuts in education appropriation since 2008.”

This year, the state issued about 1,000 emergency teaching certificates to fill vacant positions.

Class sizes have grown across school districts, and as a result, students aren’t getting the one-on-one attention they need to succeed in school, Priest said. Low teacher salaries are a part of the shortage problem, she said.

Oklahoma had the fourth-lowest average teacher salary in the nation during the 2013-2014 school year, according to a report released last year by the National Education Association. Fallin’s proposed budget calls for a $3,000 pay raise to public school teachers. Several other lawmakers have also proposed teacher pay raises.

“We’ve known that we have a shortage of teachers and the low pay is part of the problem,” Sears said. “So, proposing a pay raise and actually funding a pay raise, we’ll have to see. But we’re excited that people are acknowledging that there’s a teacher shortage and that part of the problem is the low pay.”