Analysis: Oklahoma's Budget Problems Are Worse Than You Think

I have friends who suffer from drug or alcohol addiction and others who, when untreated, manifest dreadful misbehavior rooted in mental disease. Those who effectively grapple with such issues tell me repeatedly the verity of an old expression that lies at the heart of recovery philosophies: The first thing is you have to admit you have a problem.

The American states, including Oklahoma, have a problem. The current budget and appropriations crises for state and local governments are the result. In sum, we are spending more than we take in, and planning to spend even more based on assumptions that used to work, but don't any more.

In September, state Treasurer Scott Meacham ordered, for the second consecutive month, a five percent budget cut for state agencies because of declining revenues. Lumped together, all categories of state revenues are down about 31.6 percent in the past year.

The bad news gets worse: To meet government spending goals the last few months, we've robbed Peter to pay Paul. The state has shifted some $130 million from agency reserves. By June 30, 2010, by law, all that money must be paid back. To be sure, if we hadn't robbed Peter to pay Paul, last month's cuts would have amounted to 20 percent rather than five percent. To be clear: the reserve funds "claw back" is more than half the $223.7 million maximum that can be used this cycle from the approximately $600 million in the Rainy Day Fund.

When the Legislature returns in February for their regular session (or in a fall special session), the Rainy Day Fund may be used to cover some gaps and government will limp along somehow. Stopgap steps can ease, but not entirely counter, the revenue crunch.

In a recent interview, Mr. Meacham outlined to me the process unfolding in our government. "The first response is the simplest, and that is to not fill positions that become vacant due to attrition. The next is to offer early retirement options to some employees. We're already seeing that ... at the Department of Corrections and other agencies. Then comes furloughs, mandated time off without pay. That is the controllable expense, the fastest way to get savings without permanent staffing cuts."

These first steps are prudential, even essential, but permanent staffing cuts are the only way to get ahead of this curve. Yet, most state agency managers are assuming that eventually the revenue stream will return. The problem is that it almost certainly will not.

Indiana Gov. Mitch Daniels drew national attention with a September 3 Wall Street Journal column in which he revealed his state will have less money to spend in 2011 than it had in 2007--and that the same problem faces every other American state government and most local governments. His assessment has quickly become conventional wisdom among most conservative, and some liberal, economists and forecasters.

My interviews with state fiscal analysts have revealed a new expectation that Oklahoma government will have lower revenue in 2012 than in 2009. Please take the time to read that sentence again. Economists are beginning to refer to the combination of revenue shortfalls in 2011-12 and inflation fueled by unprecedented federal deficit spending as "the cliff."

In public, few state officials are talking bluntly about the absurdity of Oklahoma's government employment growth in the midst of a recession. Bureau of Labor Statistics data reveal that Oklahoma's private sector has shed more than 36,000 jobs during this recession, while Oklahoma's state and local governments have added 8,600 jobs.

And of course only a few address the fiscal dysfunction of "holding harmless" more than half of all spending, i.e., public education.

But wait, that's not all: Knowledgeable state fiscal analysts have told me the Oklahoma Teachers Retirement System, already one of the most unsound public retirement funds in the world, will go "cash negative" in 2019.

The only way to address these issues is to address them--to actually link economic conditions to public-sector employment, rather than trying to force the economy to fit the rose-colored scenarios like those at the Department of Transportation where across-the-board pay raises were awarded just a few weeks ago.

If Oklahoma ignores its fiscal addictions, we will drive off "the cliff," and the result will not be pretty.

Other than all this, you're doing fine, Oklahoma.

Have a nice day.