Mo Money Mo Problems: House Bills 1400 and 1401 (Guest Post: Rep. John Montgomery, HD62)

NOTE: Rep. John Montgomery was elected to represent HD-62 (Comanche, think "West of Lawton") in 2014 and re-elected this past November. I consider him a friend to #oklaed and a decent guy all 'round. He's also unexpectedly amusing when he's mocking me privately on social media. Like, he's REALLY good at it. That's rare.

Not the mocking part - I get that a LOT. But being good at it - THAT'S a gift. 

When I started my recent post on positive potential legislation sitting in the OK Legislative queue recently, I reached out to him along with several other legislators asking what I might be overlooking. Rep. Montgomery brought up the bills he's discussing here, and explained them to me as clearly as could be expected one Twitter app to another. But I know my strengths, and economics-made-easy isn't among them. I half-jokingly suggested he should just write a guest blog explaining it instead.

And he did. 

I very much appreciate him taking the time to share this information and explanation here. I wish more of our elected leaders would be so communicative. 

JMontgomery Header

While I cannot endorse all of the messages Notorious B.I.G. puts out there, the name of this song seems fitting to a discussion on state finances. The underlying wisdom seems to hold true elsewhere: more than a few articles have been written pointing out that up to a third of lottery winners end up declaring bankruptcy

I wish I could make a blog post about state finance more exciting. Nobody likes talking about checkbook balancing, or for the hip young readers out there, paying your bills with Venmo or Google Wallet. No, we cannot just pop open a GoFundMe and plug our budget holes, and yes I have tried

Lottery WinnerMuch like those lottery winners, Oklahoma has also in a way won the economics equivalent of the winning numbers by way of our oil and gas resources. Unfortunately, we as as a state have similar problems to many winners – just one a larger scale. Mental health, divorce, tensions with others, and… trouble keeping our finances in order. The Economist has written rather extensively on what could be termed the “resource curse.”  

In my humble opinion, it is time we turned our Achilles heel into our greatest blessing.

Fortunately, there is a way to insure permanent investments into education and put ourselves in an incredible position if we make the long-term commitment. I realize in a day and age when some folks my age are setting up dates at the swipe of a screen, that “long term” might be somewhat of a foreign concept for some. However, if you talk to more than a handful of my constituents and I suspect many Oklahomans, a long-term plan and vision is what they want most out of state government and other community leaders.

For the better part of two years, I have been watching and analyzing how our revenue streams function, as well as considering what other states (or countries) do that might make an improvement for Oklahomans. One idea is to set up a permanent fund or an endowment or two that would take in some level of revenue and grow large enough that interest from the fund can replace or eliminate our reliance on volatile revenue sources, as well as help stabilize the way we approach other revenue as well. Ideally, this would have a tangential effect of unleashing the spirit and ingenuity of Oklahomans.

“Whoa whoa whoa now, don’t hurt yourself, Mr. Big Talk,” I can almost hear you saying. “We’re on to you legislator types and your fancy-but-often-bewildering plans!”

Easy ButtonBacking it up a bit, if we carry our personal finance analogy forward, we could say that we need to plan for retirement primarily from our oil and gas tax revenue, but secondarily from other potential tax sources. You know, diversify. 

If I had a dollar every time I heard, read, and said “we need to diversify our state economy,” this discussion would be unnecessary because the state would be LOADED. Unfortunately, that’s not how it works.

Another problem with “diversify our state economy,” is that there is no big red “that was easy” button we can push and all of the diversity happens. Many very intelligent, caring, and tireless legislators and community leaders before me have made significant efforts in this direction – and with a high degree of success. Contrary to what many might believe, this most recent downturn could have been much worse for many Oklahomans. 

The State Chamber of Oklahoma estimates that the oil and gas industry makes up roughly 13-15% of our state economy. However, state government reliance on tax revenue from the oil and gas industry can reach as high as 25% of state revenue. 

Houston, we have a problem. 

JM Chart

If you want us to try to take the bumps out of that chart above, I would refer you to HB2763 from last year. Fortunately, 2763 passed and we will stabilize that revenue in future years. http://www.oklegislature.gov/BillInfo.aspx?Bill=HB2763&Session=1600

If you think we also need a long-term vision and plan, then keep reading.

Fortunately for us, many states and several countries have trail-blazed the idea of saving sizeable amounts of what may not be an indefinite source of revenue and using the interest earned from investments, equities, real estate, etc., as revenue. Many countries like Norway, almost every country on the Arabian Peninsula that can pull oil from the sand with a straw, and most recently Israel, have set up a savings plan like this. Norway is sitting on just shy of $1 trillion in their fund, depending on which way the markets are going and if there’s a notion of divesting from the latest company to militarize farts. Saudi Arabia has been eating some of its $700 billionish fund in its global War on Fracking.

In the United States, 8 of the 9 states that rely heavily on oil or gas severance/gross production taxes have a permanent fund, endowment, or major savings plan for that revenue. I would not be writing this if Oklahoma were one of those 8.

Oil IndustryNorth Dakota has become probably the most famous and envied. Voters there approved setting aside 30% of their oil and gas revenue into a Legacy Fund in 2010. That fund has grown to over $4 billion due to an oil production explosion of literally ten-fold over the past decade (compared to doubling in Oklahoma). They also set aside 5% of the revenue into an education endowment which has been growing since the late 1990s. The interest from the fund goes to schools, and thus it’s not hard to see how the ten-fold production increase translated to double digit education spending increases there. 

They did not establish how the Legacy Fund would be used, which has caused some debate given the energy downturn. The state spent its $750 million rainy day fund to shore up against what we have called “revenue failure” here: that spending was coupled with a 3-4% across the board cut as well. This next two-year budget does not look much better for them either.

The state that has not received much attention in this regard is Alaska. 90% of state revenue there comes from the energy industry, so they were talking about $3-4 billion shortfalls most recently. However, they are also sitting on a $50 billion Permanent Fund that is used to generate interest and kick out a couple grand to each man, woman, and child in the state. They, by the way, have a $10 billion Rainy Day Fund that they technically owe $3-4 billion to because paying the fund back is required. There are some hot debates going on in that state over budget too of course, but the difference of position they are in financially is not by any accident

We should take what these other places have done, and put Oklahoma at the forefront of state financial dynamism. This year, I have introduced HB1400 and HB1401 to do just that.

HB1401 is primarily geared toward what I have spent most of this post talking about doing: setting aside a significant part of our oil and gas gross production tax revenue into what would be called the Legacy Fund. 20% of future revenue would be dedicated in this way. The fund would have subfunds for common education and higher education, who currently receive up to roughly the first $145 million of this revenue (which has actually caused some issues in the most recent downturn, but that’s a different topic). That would be directed into endowments that would become large enough that modest investment earnings could replace that revenue, permanently within about 10-12 years. Ideally, we would continue putting some part into these sub endowments after then, and can redirect another part of the funding either for more savings or bolstering current spending at the time.

HB1400 establishes a Vision Fund. It is aimed toward a position Alaska finds itself in: not levying the traditional, major state level taxes on income and sales. Once fully implemented, Oklahoma would be perhaps the second state to be in a position to eliminate a major tax source while providing a potent source of funding for education, research and development, and a group that was created after the 1980s oil bust called Oklahoma Center for Science and Technology (OCAST) – a group whose basic mission is the diversification of our state’s economy. We will build this fund through a structure in our state budget process which ends up leaving cash on the table to be appropriated, in addition to taking in a crude version of what could be called “micro-financing” where we will take a barely noticeable fraction of revenue each year and set it aside.

This plan will require a high degree of resolve, and it likely requires shielding from short term whims and thinking that have held our state back. We must rally behind a Vision or we leave no Legacy. Let’s not throw away our shot.

My Shot

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