DALLAS – After Oklahoma declared a revenue failure due to falling oil and gas prices, Moody's Investors Service cited the state's crisis as representative of those facing major energy producing states in coming years.
"All states with large energy sectors will be affected by the oversupply of oil and natural gas in the U.S., but differ in their direct reliance on oil revenues and reserve levels," said Moody's analyst Julius Vizner in a Dec. 21 report. Moody's still has a stable outlook on Oklahoma's Aa2 rating.
On Dec. 15, Oklahoma officials lowered revenue projections for the fiscal year ending 30 June 2016 by $444 million, or 8%. They also projected a $900 million, or 13%, decline in fiscal 2017 as a result of the deepening energy glut.
The state considers a shortfall of more than 5% versus the forecast to be a "revenue failure." The state expects total tax collections for full fiscal 2016 to miss its forecast by 7.7%, which will lead to expenditure cuts of 2%-4% starting as early as next month. The revenue failure also legally permits the legislature, which reconvenes in February, to access up to $144 million of the state's $385 million rainy-day fund.
The last time the state declared a revenue failure was in 2009 during the recession.
"A shortfall is all but certain after 18 months with the oil price as it is, so agencies have been formally advised to prepare for a midyear reduction if they have not already," said state finance director Preston Doerflinger. "It's going to be the biggest fiscal challenge since the years following the 2008 recession, and we'll need to meet it head on with all hands on deck."
Oklahoma Gov. Mary Fallin in October ordered state agencies to plan for 10% cuts to balance the budget for the current fiscal year.
With oil prices falling from a 2014 high of $112 per barrel, the price for West Texas Intermediate crude has fallen below $35 per barrel.
As a result, Oklahoma during that time has lost 11,600 energy jobs and 59% of its active oil and gas rigs, which has caused significant tax revenue declines, Doerflinger said.
Other major energy-producing states, such as Alaska, Wyoming, Louisiana, North Dakota and West Virginia, are experiencing similar tax revenue declines.
Moody's has negative outlooks on Alaska's and Louisiana's Aa2 ratings but still has stable outlooks on New Mexico's triple-A, North Dakota's Aa1 and Texas' Aaa ratings.
Unlike Alaska, which built up its reserves in anticipation of a collapse, Oklahoma and Louisiana have more diversified tax structures and economies but also have lower reserves that leave them with less room to address growing budget gaps, Moody's wrote.
The falling revenues are "collateral damage in the market warfare OPEC is waging on U.S. energy producers," Doerflinger said.
"The universal truth of Oklahoma state finance – as oil goes, so goes state revenue – is playing out once again," said Doerflinger, who is Fallin's lead budget negotiator with the Legislature. "To panic is not productive, and neither is forgetting history. Oklahoma is resilient and will emerge from this boom-bust cycle as we have many times before."
The Oklahoma Board of Equalization will make a second revenue estimate in February that will be used by Fallin and the Legislature to develop the FY 2017 appropriated state budget.
For an 11th consecutive month, November collections from oil and natural gas production taxes were lower than the same month of the prior year, according to Oklahoma Treasurer Ken Miller. November gross production collections were more than 54% lower than last November. Monthly receipts are based on oil field activity from September when the average price of benchmark West Texas Intermediate crude oil was $45.48 per barrel.
Sales tax collections, often viewed as an indicator of consumer confidence, have been lower than the same month of the prior year for seven of the past nine months. In November, sales tax collections fell below the prior year by almost 5%.
"The only revenue stream in positive territory for the month is gross income tax, up by more than $40 million, or almost 18%, due primarily to the tax commission's PAYRight tax amnesty program," Miller said.
For the first time since at least March 2011, when the treasurer's office began tracking gross receipts, sales tax collections are less than during the previous 12-month period, down by about $39 million, or just less than 1%. Twelve-month gross production taxes are off by more than 42%. Only gross income taxes are higher than the previous 12 months, up by almost $227 million, or 5.4%, Miller said.