DALLAS — Credit analysts are watching closely as Oklahoma Gov. Mary Fallin and the legislature begin the process of closing a nearly $1 billion funding gap in the next fiscal year's budget.
"Heading into fiscal 2017, lawmakers are challenged to make cuts on top of already lean budgets," Standard & Poor's analysts Carol Spain and John Sugden wrote in a commentary.
"We expect that lawmakers will be tempted to draw on reserves, and the outcome of the final budget could pressure the state's AA-plus stable rating," they wrote.
Oklahoma lawmakers began their 2016 session Feb. 1 with more than 3,400 measures to consider, not counting the budget-balancing proposals in Fallin's spending plan.
The collapse of oil prices and decades-old structural budget problems caused the deficit, according to Fallin, who asked lawmakers to approve a measure that would shift some agency non-revolving funds from "one-time" funds to general revenue. Those funds, which contain about $1.5 billion, are there every year, she said.
"This budget takes control of the challenges we face today and puts us on far better footing for the future," Fallin told lawmakers in her State of the State address. "It makes necessary cuts that will require continued efficiencies from agencies, prioritizes spending and lessens those reductions in our core service areas wherever possible."
Oklahoma launched across-the-board cuts at an annualized rate of 3% beginning in January, which amounts to 6% of monthly allocations for the remaining six months of the fiscal year.
The state reported it reduced general fund allocations by $176.9 million to cover an expected $157 million shortfall.
Agencies experiencing the largest cuts are the Department of Education at $46.8 million, the Health Care Authority at $27.4 million, Higher Education at $24.1 million, Human Services at $18.7 million, and Transportation at $11.8 million.
"Even with these cuts, Oklahoma expects to draw down its constitutional reserve fund to $385 million, or 5.4% of the budget, leaving lawmakers with less flexibility to address future budget gaps," the S&P analysts said.
To raise more revenue, Fallin is proposing an increase in cigarette taxes, a step that neighboring Kansas used last year to help cover its budget deficit.
Oklahoma reported that since oil prices have fallen 70% since June 2014, the state has lost 11,600 energy jobs and 59% of its active oil and gas rigs.
The state's manufacturing and construction sectors also have ties to the oil industry and have shown signs of weakening.
"Although direct oil and gas severance taxes make up a small fraction of Oklahoma's general fund revenues, the downturn has translated into lower tax receipts overall," S&P wrote. "State officials have reported that one out of every four dollars the state collects is associated with the oil and gas industry."
S&P has taken a position that oil and gas prices will remain low through 2017 and recently lowered assumptions reflecting the ongoing oversupply in the global oil market and abundant output of natural gas.
Despite the tight finances, Fallin is asking the legislature to authorize another $120 million bond issue to complete restoration of the Capitol building.
"The issue was a start, not a finish, and contractors estimate it will take another $120 million to complete the work," Fallin said. "No one should want to stop construction. Interest rates remain low, and the new bond wouldn't be issued until 2018, when 40% of our existing bond principal rolls off the books, so we can do this in a way that doesn't affect next year's budget."
