Meacham issues gloomy revenue picture, more problems ahead

By Patrick B. McGuigan

As he ordered another round of state government budget cuts last week, state Treasurer Scott Meacham forecast cuts in state government employment in an interview with The City Sentinel. However, Meacham said public sector jobs would not contact as rapidly as has been the case in the private sector. His comments came hours after he announced another significant drop in previously forecasted state tax revenues.

Meacham said that taking recent trends as a whole, “State agencies … have already absorbed a 7 percent budget cut; another 12% minimum cut in GR [General Revenue] is coming now. It will likely be higher for some agencies. Some staffing cuts happen naturally at a time like this. The Legislature and the governor do not micro-manage what the agencies do to meet mandated cuts. The simple fact is they have less money to spend, so they start finding ways to make cuts.”

As Meacham outlined the process unfolding in state 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, in today’s news stories, 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.”

Meacham ordered, for the second consecutive month, a 5 percent budget cut for state agencies because of declining revenues. Lumped together, all categories of state revenues are down about 31.6% compared to the same month one year ago.

Meacham reflected on differences in the response of business managers and government agency heads in tough economic times: “In a recession, private sector employment inevitably falls, and does so rapidly as businesses respond. Government employment reductions are always less than those in the private sector. Yes, public employment will decline but not by as much as in the private sector.

“At the heart of this is the mandated function, functions, of some state agencies. Government employers don’t have the option to idle plants or shift jobs in the same way as the private sector. The Corrections Department, for example, can take some steps to manage cash, but it cannot shut down for a day or days at a time. The Department of Public Safety can achieve some savings but you can’t have a furlough for all state Troopers next Friday. The public wouldn’t stand for it and that’s not the way they should respond.”

To meet government spending goals the last few months, the state has shifted some $130 million from agency reserves. By June 30, 2010, by law, all that money must be paid back. Without the “raid” on reserve funds, cuts underway last month could have amounted to 20 percent rather than 5 percent. The reserve funds “claw back” is more than half the $223.7 million maximum that can be used this cycle from the $600 million+/- in the Rainy Day Fund.

Recent interviews with state fiscal analysts have revealed that Oklahoma government may have lower revenue in 2012 than in 2009. Some economists are beginning to refer to the combination of revenue shortfalls in 2011-12 and potential inflation fueled by federal deficit spending as “the cliff.”

As one response among many to the weak revenue scenario now unfolding, Meacham said Oklahoma government revenue forecasters should develop better economic forecasting models: “In the immediate to long-term Oklahoma’s economy is fundamentally driven by the price of natural gas. Energy prices are an absolutely critical factor in driving the state economy. We are always going to have cyclical patterns in revenue driven by the energy sector no matter what other arrangements we make.”
He continued:  “Legislatures in general understandably think in one-year time frames, and a Legislature finds a way to spend whatever comes in, with some variance in approach depending on who is in power. The challenge Oklahoma faces is that we need to move toward thinking in revenue terms in 5-10 year price cycles for commodities. I think that means Oklahoma needs a more robust Rainy Day Fund, larger than the 10 percent we can now hold back.

“In forecasting, we have to look at revenue cycles in longer terms. One observation is that we tend to miss on both sides – underestimating the revenue increases in good years, and underestimating the troughs in recessions.”

Meacham continued, “It was only a year ago that Oklahoma City was being touted as the third most recession proof city in the country. Well, we were ‘recession proof’ so long as natural gas prices stayed up. Again, it’s human nature that the Legislature likes to spend what they bring in. They are reluctant to save too much. So, a mandate or provision for 10% in the Rainy Day Fund is just not enough. Without the [federal] stimulus, we would have had to do sooner what is probably going to happen with the Rainy Day Fund.

“Oklahomans will put up with some contraction in public employment, but they’re not going to want the licensing agencies and other important functions to be closed when they need to get a permit or to get an issue addressed by government. So, I think the way forward is we need better forecasting and modeling, and certainly better reserves.”
Asked if he had any policy advice for the governor that he could share as the state faces this fiscal crunch, Meacham replied good naturedly to The City Sentinel, “Yes I have policy advice for the governor, but not anything that I can share right now.”