Sex, forecasting and fiscal planning (okay, no sex)

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by April 14th, 2014 Posted in ,

crystal ballTwice a year,  the seven members of the State Board of Equalization – six statewide elected officers and the Secretary of Agriculture – get together to certify how much revenue the legislature will have to appropriate for the upcoming fiscal year. The Board is presented with revenue estimates that come from the Oklahoma Tax Commission based largely on a forecasting model operated by Oklahoma State University economic professor Dan Rickman.  The Board certifies an initial estimate in December, which is used to develop the Governor’s Executive Budget. They make a revised estimate in February that becomes binding on the legislature.

This year, it had been widely expected that the February estimates would see an increase from December. Instead, the estimates were down, due to a steep drop in projected collections from the corporate income tax. After prolonged questioning of Finance Secretary Preston Doerflinger, Attorney General Scott Pruitt voted against certifying the revised estimates, while Treasurer Ken Miller made clear that he was voting yes with great reluctance.

While this was the first time since the late 1990s that any member of the Equalization Board had voted against certification, the limits of Oklahoma’s revenue forecasting procedures have long been apparent.  Back in FY 2010, during the depths  of the fiscal crisis that accompanied the Great Recession, Oklahoma was found to have the largest mid-year revenue shortfall of any state. General Revenue collections through the first five months of FY 2010 ran 24.5 percent below the estimate and came in almost 15 percent below projections for the full year. 

FY 2010 was an extreme case, but historically, the state’s track record has not been great. As the chart below reveals, in only three years since FY 2002 have actual General Revenue collections come  within 5 percent of the certified estimate, while in four years projections missed the mark by over 10 percent. Four times, actual General Revenue has been more than 5 percent below the estimate, exceeding the 5 percent cushion built into the budget and triggering mid-year across-the-board budget cuts. This year, revenues through February are running very close to 5 percent below projections; in five of eight months in FY 2014, monthly collections have been below projections by more than 5 percent.

GRestvsact02-13Forecasting revenue collections for a period 6 to 18 months out will always be an inexact science and will always be subject to abrupt changes in economic conditions, commodity prices, or other circumstances. However, Oklahoma could do better by providing for greater input into the development of its annual revenue forecasts.

In a recent Oklahoman op-ed, Elizabeth McNichol of the Center on Budget and Policy Priorities and OK Policy’s Gene Perry asserted that when it comes to developing critical revenue forecasts, “two – or even three or four – heads are surely better than one.” They suggested that Oklahoma could follow Tennessee’s example for developing revenue forecasts. In Tennessee, the State Funding Board develops a revenue estimate based on forecasts from two academics, the Department of Revenue, and the legislature’s Fiscal Review Commission.

Back in 2010, a bill was introduced that would have created such a board. Its membership would include the director of the Office of State Finance, the directors of the fiscal staff for both the Oklahoma House of Representatives and the State Senate, a member of the Oklahoma Tax Commission, and one economist each from the faculty of the University of Oklahoma and Oklahoma State University.

In addition to preparing the annual revenue estimates for certification, a revenue forecasting board could assume related responsibilities that would lead to better-informed decisions on budget and tax matters. This could include regularly preparing and publishing detailed multi-year revenue and spending projections, and preparing a current services baseline, which is a projection of the cost of continuing to deliver the same quantity and quality of services as in the current budget period. These are among the best practices for fiscal planning identified in a recent report by the Center on Budget and Policy Priorities, which ranked Oklahoma’s current planning practices across ten measures as the weakest in the nation.

Fiscal planning may not be a sexy topic, but it has a big effect on our lives. To help lawmakers make more responsible budgeting decisions, and to ensure well-managed public services that make the best use of taxpayer dollars, Oklahoma needs better forecasting.  

News Source : Sex, forecasting and fiscal planning (okay, no sex)
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