The Week in Public Finance: Will Oklahoma Finally Wean Its Budget Off Oil?

A ballot measure would do just that by adopting a financial practice already common in most other oil-dependent states.



OCTOBER 26, 2018

Oil pumps in rural Oklahoma 


For a full summary of November's most important ballot measures, click here.

Oil prices fell to a two-month low this week. Any time they tumble, oil-dependent states like Oklahoma are on edge. More than most states with economies heavily reliant on oil and natural gas, its budget is extremely vulnerable to the ebb and flow of the oil economy.

The reason Oklahoma is so susceptible to the oil market is because it's one of only two oil states in the country -- the other is Louisiana -- that doesn’t protect its budget by reinvesting at least a portion of its oil revenue.

Come Election Day, however, that could change if residents approve Question 800.

The so-called Oklahoma Vision Fund proposes putting 5 percent of the state's gross oil production revenue into a kind of investment fund starting in July 2020. That percentage would increase by .2 percent each year with no cap on the total amount that can ultimately be transferred. The fund could help wean Oklahoma’s budget off oil and make it less volatile.

“The pattern in Oklahoma had been that they were spending all of the [oil revenue],” says Scott Drenkard, director of state projects at the conservative-leaning Tax Foundation. “But the whole concept of severance taxes is partially supported by the idea that the thing you’re taxing is not renewable. So you have a tax and you save some of that for future generations.”

Setting aside some of the proceeds for the future is common in nine of the 11oil-producing states, as well as in many countries whose economies rely on natural resource extraction. The practice essentially works like an endowment: The money is invested, and the earnings are used to help pay for critical government services.

In Oklahoma, it's expected that between $20 million to $35 million a year -- depending on oil prices -- would be transferred into the fund. The state Chamber of Commerce predicts the fund would grow to total hundreds of millions of dollars within the first few years. Each year, 4 percent of the five-year average balance in the fund would be transferred into Oklahoma’s general revenue fund to support the operating budget.

Education advocates in the state have raised concerns about the initiative, saying they're worried about the immediate impact. They argue that education funding could be compromised in the short term as oil revenues are transferred into the fund. Only recently has education funding in the state stabilized after years of cuts, and that was after a massive statewide teacher strike earlier this year.

Currently, about 10 percent of oil revenue goes to schools, according to the Oklahoma State School Boards Association. “There’s nothing visionary about the planned erosion of dedicated funding for public education,” the association’s Executive Director Shawn Hime told the Tulsa World. “It’s bad policy and a step backward.”

For their part, supporters argue that in the long term, all government services -- especially big line-items like education, transportation and health care -- will benefit from having the trust fund support the budget.

Polling on the initiative is not available. However, the measure had wide bipartisan support in the legislature, which placed the initiative on the ballot.

In other public finance news:

Vermont Downgraded

Nationally, our aging population is weighing on state budgets. Now, Vermont has lost its AAA credit rating because of it.

In its one-notch downgrade to Aa1, Moody’s Investors Service cited Vermont’s low growth, older population and pension debt. “With slower than average growth, Vermont's long-term liabilities will weigh more heavily on its economic base and may manifest in growing cost pressures,” Moody’s said.

In response, Vermont Treasurer Beth Pearce has said state policymakers need to work collaboratively to address the issues Moody’s outlined in its analysis. She also noted that recent changes in the way Moody’s scores government ratings played a role in the downgrade. “While Moody’s updated methodology made maintaining a Aaa rating more challenging for small states, such as Vermont, this is not the time to resign ourselves to that outcome,” Pearce said in a statement. “Vermont is still the highest rated state in New England.”

New Jersey’s Gas Tax is Complicated

A few years ago, New Jersey lawmakers gave the state transportation fund a much-needed lift by raising the state’s gas tax. But that’s had some unintended consequences.

This week, a proposal to exempt school buses from the state gas tax passed a key committee. The bill would provide some relief for school districts who have had to boost the rate they pay drivers to compensate for the higher fuel costs. The state has already awarded a similar exemption to emergency services vehicles.

Proponents are arguing the bill could help lower property taxes, which are mainly used to help fund local schools. But in reality, that’s likely a longshot as many other factors enter in to the cost of running schools.

For a full summary of November's most important ballot measures, click here.