"Today is not to look over our shoulder," Oklahoma Gov. Mary Fallin said in her final state-of-the-state address.
“I can’t help but feel we missed an opportunity to do more to reform our budget process and consolidate agencies,” Oklahoma Gov. Mary Fallin said after passage of the fiscal year 2017 budget.

DALLAS – After reducing a record revenue shortfall of $1.3 billion, Oklahoma Gov. Mary Fallin and state legislative leaders acknowledged serious flaws in their patchwork budget.

"We still need to do more to address structural imbalances in the state's budget, fix problematic tax policies and make available more recurring, stable revenue," Fallin said in a report on the 2016 legislative session that ended May 27.

That statement echoed comments from ratings analysts who have tracked the state's efforts to close the budget gap amid falling oil and gas revenues.

All three of the major ratings agencies have the Sooner State on their watch lists for a possible downgrade.

"The negative outlook reflects our view that the state faces significant challenges to achieve structural balance, given a 19.1% budgetary shortfall for fiscal 2017, and that lower reserve balances could limit the state's financial flexibility should revenue weaknesses continue or another economic downturn occur," Standard & Poor's Global Ratings analyst Carol Spain wrote when S&P shifted its outlook downward April 6.

Oklahoma carries ratings of AA-plus from S&P, Aa2 from Moody's Investors Service, and AA-plus from Fitch Ratings.

The budget passed by the legislature and awaiting the governor's signature sets 2017 fiscal year appropriation levels at $6.78 billion, which is $360.7 million, or 5%, less than the 2016 fiscal year budget appropriated prior to a midyear revenue failure.

The budget is $67.8 million, or 1%, less than 2016 fiscal year appropriations as adjusted by the midyear revenue failure.

"This budget closes a sizeable portion of a monumental budget hole and prevents the dire, unacceptable outcomes so many Oklahomans have feared may happen this session," Fallin said. "There are still reductions in this budget, but it is certainly a workable budget even amid a major energy sector downturn that is creating difficulties all across Oklahoma."

To reduce demands on the general fund, lawmakers followed Fallin's guidance by approving $200 million of bonds for transportation and another $125 million to complete restoration of the State Capitol building.

House Bill 3231 would allow the Oklahoma Capitol Improvement Authority to sell the $200 million in bonds to pay for repairs on highways and bridges statewide over the next eight years.

Rep. Earl Sears, R-Bartlesville, who co-authored the bill, said the maturities on the bonds will be limited to 15 years.

State Bond Advisor James Joseph said that 15-year maturities with level payments at today's rates would require annual debt service of $15.75 million or $236.25 million over the life of the bonds.

The bonds to restore the Capitol were authorized under HB 3168 by House Speaker Jeff Hickman and Senate President Pro Tem Brian Bingman, both Republicans. The bill is the second time bonds have been authorized for restoration in recent years.

"This new round of bond funding allows for its continued restoration by addressing the building's many infrastructure needs, which include outdated plumbing and electrical systems," Bingman said. "The bill secures funding up front so we can fully execute the master plan without unnecessary delays."

Most funding cuts to state agencies range from less than 1% to 10%, according to legislative leaders, with many agencies receiving an approximately 5% appropriation reduction for the 2017 fiscal year.

"With $1.3 billion less to build a budget this year, it was impossible to shield every agency from cuts," Hickman said. "However, lawmakers responsibly avoided worst-case scenarios, crafting a conservative state budget which protects core-services such as education, corrections, transportation, and health care. We identified new revenue streams and created a budget stabilization fund to assist legislators during future downturns."

The budget maintains existing funding at the Department of Corrections by annualizing the department's 2016 fiscal year supplemental appropriation of $27.6 million and making no further changes.

The Department of Mental Health and Substance Abuse Services receives a $6.9 million, or 2.2%, appropriation increase to offset some reductions caused by the midyear 2016 fiscal year revenue failure.

Fallin said she was "disheartened" that lawmakers did not approve a personal consumption tax on cigarettes.

"Lawmakers approving an additional $1.50 per pack would have been the most important thing we could have done to improve Oklahoma's health ranking," Fallin said.

"I was also disappointed lawmakers did not pass legislation to get more money to classrooms and enhance educational outcomes in a more effective way," the governor said.

Treasurer Ken Miller gave lawmakers a grade of "C" for their work.

Legislators were "presented a unique opportunity to make structural reforms not as politically possible in better years," Miller said. "The Legislature ended the session with a balanced budget that avoided dreaded worst case scenarios, but leaves significant structural reform on the table."

On Monday, Miller reported that last month's monthly gross receipts were the lowest May total in six years.

"The monthly bottom line has been less than the same month of the prior year for 13 consecutive months," Miller said.

After hitting a 17-year low in April, oil and natural gas gross production collections rose slightly over the month, reflecting a modest rebound in crude oil prices, Miller said. However, May gross production tax payments are lower than payments of a year ago by almost 37%.

Monthly gross income tax collections, a combination of individual and corporate income tax payments, are down more than 9%, while sales tax collections are off by 6% and motor vehicle tax collections dipped by 1.2%.

David Blatt, executive director of the Oklahoma Public Policy Institute, gave the session a grade of "D," citing lawmakers' refusal to reverse previous tax cuts that were premised on sufficient revenues to operate state agencies.

"Ultimately, lawmakers failed to make those hard choices and instead slapped a bunch of Band-Aids onto gaping wounds," Blatt said. "The budget that got rolled out in the final days of session relies on over $600 million of one-time revenues raised primarily through bond issues and transfers from various funds.

"To make matters worse, one of the few sources of recurring revenue comes from cutting the Earned Income Tax Credit, a vital income support for low-income working families," Blatt added. "At a time when courageous leadership was desperately needed, we got business as usual."

One tax break that was eliminated was Oklahoma's double deduction on income tax that results from the state's income tax forms. While most other states require filers to add state income tax that was deducted from federal income back to their state form, Oklahoma did not as of this year.

Other tax adjustments include a cap on tax credits for at-risk oil wells and a change in the credit for coal production.

"I am pleased that lawmakers were able to make targeted spending cuts and free up revenues through tax reform and structural budget reforms to close the gap," Fallin said. "Those reforms included making some money in the Cash Flow Reserve Fund available for legislative appropriation, improving revenue stability of the General Revenue Fund through passing legislation creating the Revenue Stabilization Fund and apportionment reform."

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