State Board of Equalization

Executive Summary

Key Questions

• In recent years, how have certified revenues differed from actual revenues?
• How does Oklahoma declare budget shortfalls, and how can the state better plan for financial challenges?
• What is the process leading up to the presentation of revenue figures to the BOE?
• What opportunities exist to better inform policymakers of revenue trends and economic conditions?

The primary role of the Oklahoma Legislature is to enact laws, and a required function within that role is to appropriate funds to state programs and services. Each year, the Legislature develops a budget, which is submitted to the Governor for approval.

As a mechanism contributing to meeting the State’s balanced budget requirement, the funds certified by the State’s Board of Equalization (BOE) are subject to an appropriation limit up to 95 percent of their total estimate. However, in recent years, economic events have resulted in dramatic fluctuations in this figure and added uncertainty to the budgeting process, mainly due to the volatility of gross production and corporate income taxes.

Through this limited scope evaluation, the Legislative Office of Fiscal Transparency (LOFT) sought to provide clarification to the Legislative Oversight Committee about the accuracy, communication, and revenue certification processes of the BOE. LOFT analyzed the accuracy of the revenue estimates, assessed the State’s strength to respond to economic fluctuations impacting accuracy, examined steps leading to determining those estimates, and finally, identified opportunities for policy changes to elevate efficiency and transparency.

This report examines current policies and practices related to determining the State’s budget, their outcomes, and identifies process improvements, including expanding the information provided to the BOE, engaging the Legislature in the creation of estimates, enabling both the Executive and the Legislative branches to work from the same estimates, folding the State’s budget management into the revenue management process, and adjusting the apportionment of taxes according to the State’s priorities.

Key Statistics

• By FY09-20, revenue projections were overestimated an average of 2.3%; however, GRF projections without GPT were underestimated by 1.4% on average.
• Out of eight years that GPT was overestimated, GRF estimates without GPT were exceeded by actuals half of the time.
• GPT actuals are $0.89 for every $1.00 estimated.
• The combined balance of the Constitutional Reserve Fund (Rainy Day Fund) and Energy Stabilization Fund is 3.4% ($230M) of GRF FY21 June estimate.

Finding 1: The revenue estimation process results in inefficiency of agency resources and time, and insufficient communication of actions and data.

Due to statutory constraints, the deadline for the Governor's Executive Budget is poorly timed when compared to the release of BOE estimates and legislative deadlines. The constitutional constraints of BOE’s revenue certification meetings and lack of alignment between the Executive and the Legislature leads to a budget process that begins in conflict.

Additionally, lack of policy guidelines leaves the revenue estimation process, particularly the special revenue failure certification and advisory meetings, subject to interpretation regarding deliverables.

Statutory separation of the revenue estimation processes and failure management between the Office of Management and Enterprise Services (OMES) and the Oklahoma Tax Commission (OTC) further contributes to inefficiencies in timely delivery of crucial information to the Legislature. Last, after the February revenue estimates are certified, the process does not allow flexibility to adapt to changing conditions.

Policy Considerations

• Ensure the Oklahoma Tax Commissioners are involved and informed about the preparation of budget estimates by enacting a statutory requirement. Although internal policies are currently in place, a statutory requirement would assure consistent policies across administrations
• Align the certification of estimates with the Governor’s Executive Budget to ensure that the Executive and Legislative Branches are building budgets from the same figures
• Codify current policies of the Oklahoma Tax Commission for frequent reporting of revenue trends that may impact state budgeting
• Allow for adjustments to estimates in the event of a revenue failure
• Expand data provided to all stakeholders involved in developing the budget to include the logic and methodology used in the selection of gross estimates, as well as all estimates considered
• Enhance the transparency and communication about state revenues by involving the Legislature in the revenue forecasting process, and/or combining the budgeting office (OMES) with the taxation and revenues office (OTC)

Finding 2: Volatility of revenue sources negatively impacts budget estimate accuracy.

Gross Production Tax (GPT) is the largest of the two volatile revenue sources Oklahoma uses to build its budget. As shown in Key Statistics (page 5), the volatile nature of GPT hinders Oklahoma’s ability to accurately forecast this revenue source on a consistent basis, even in strong U.S. and Oklahoma economic conditions. As such, the volatility impacts the State’s ability to build stable budgets, while additionally impacting the State’s ability to invest into stabilization funds intended to dampen the effects of the volatility of revenue sources and economic uncertainty.

Policy Considerations
Review reserve funds to identify opportunities to better prepare for the volatility of Oklahoma’s Gross Production Revenues

Finding 3: Shifting tax dynamics highlight need for more inclusive estimation process.

GPT and Corporate Income Tax represent an increasing share of the State’s general revenues. Despite the importance of these inflows, the Board of Equalization membership or internal process does not currently include experts in these fields. This leads to estimation inaccuracy; Oklahoma has overestimated revenue in 7 of the last 12 years. Utilizing a more consensus- driven model, a noted best practice, can improve estimation accuracy.

Policy Considerations
Enhance or change the composition of the BOE to include representation from Oklahoma’s leading economic sectors, including experts from volatile revenue streams