SADOW: Making Lemonade Out Of The State’s Capital Outlay Lemons
It’s not that Louisiana has run out of money (or, as one breathless headline asserts, is “broke”) to pay for capital improvements, it’s that it faces a constitutional limit on what it can spend on them, compounded by slow growth in state revenues. And this points to the key to resolution, entirely within the spirit of the concept of the limitation.
The Constitution places a debt ceiling of six percent of state-generated revenues, as ascertained most recently by the Revenue Estimating Conference, on the total amount of debt outstanding at any given time, this put into place after the blatant end-run around the Constitution by former Gov. Buddy Roemer and the Legislature with its creation of the notorious Louisiana Recovery District that enabled debt to be spent on current operations. The problem that has come to the state is the slower, near zero, growth in these revenues have not kept up with the rate of increase in capital spending, creating a coming crunch predicted to hit the ceiling by the end of the legislative session.
In other words, the state take hasn’t increased as fast as its capital outlays, and the limit will choke off adding any more debt necessary to start or complete projects until current receipts can pay back to eat into the overall level. This seems to have caught everybody by surprise; last year at this time, Treas. John Kennedy issued the annual report on debt capacity which showed a comfortable cushion for a couple of decades to come, as well as a level of debt $30 million lower than actually transpired for this year. Even in the breach, several solutions present themselves, but almost all go against the grain of fiscal conservatism preached and, even if not always nevertheless often, practiced by the Republican-led Legislature and Republican Gov. Bobby Jindal.
And one of them is not to do nothing and wait for some debt to get paid down. The problem with that is that delay for certain projects underway will add to costs, either because contract stipulations won’t be met and might entice contractors to withdraw, adding more costs still, or they are in positions where the halt in work would create more costs in its resumption, including for maintenance while idle. That can be part of a strategy, by delaying starts and completion where financially feasible, but it can’t be the only response.
One would be to bust the cap, by a two-thirds vote in each chamber. Not only does that violate fiscal prudence in a state trying to keep debt under control while facing huge potential spending challenges down the road (such as with its unfunded accrued liabilities in pensions), it might not go down well politically for conservatives who run state government. To this day, Jindal gets criticized by populist conservatives for his spending of surplus nonrecurring revenues at the beginning of his first term on capital items because it exceeded the state’s spending cap (even as they erroneously draw a comparison between him and his predecessor Gov. Kathleen Blanco for her efforts in spending beyond the cap on recurring items). Given these factors, any attempt to go over the cap would have to have significant mitigating factors for it to be successfully sought and received.
Another is to exclude selectively certain kinds of debt – which was done by Blanco and the Legislature after the hurricane disasters of 2005 – which actually presently adds over $300 million to overall debt and makes the actual percentage figure currently at nine percent. But the extenuating circumstances then were compelling for this exception, and nothing about the present situation comes close to justifying, in both terms of fiscal prudence and politically, a redefinition to skirt under the limit and the two-thirds vote in each chamber to get there.
Perhaps the longest shot would be to amend the Constitution to raise the limit. Not only would that not happen in time, but for the same reasons of prudence and politics not only may legislators hesitate to give the two-thirds vote needed to get it on the ballot, but it’s questionable that a majority of the voters would approve it.
Still another would be using current revenues to pay for capital projects, bypassing debt altogether, or to pay down existing debt – in theory. In practice, with the state struggling to pay for current operations as they are without large reductions, this is not realistic.
Finally, the state could refinance debt in order to reduce the overall overhang, by establishing lower interest rates, then voluntarily paying more that would reduce principal more quickly. Whether this could be done any time soon, whether any holders would agree, and whether the conversion costs would be too high to make this feasible all are big question marks.
Yet something must be done, and the best chance is a most-of-the-above amalgam as a strategy. Refinancing (a recent instance of which that cost the state dearly reduces leeway here) might enable shaving off a bit of the problem. Delays also might accomplish a bit more of that. But it’s unlikely these together will be enough.
If so, then breaching the cap should occur, but done responsibly in the form of a promise to the state’s citizenry that shows a good-faith effort to live up to the spirit of the cap. That is, along with any vote to breach, the Legislature should have as part of that resolution (backed by a law also passed) that identifies certain assets to sell, whose proceeds would be diverted to paying down debt. This demonstrates that the state will correct the imbalance as soon as possible and an admission that it, even if inadvertently, was living beyond its means as far as capital goods went. The implicit admission and demonstrated rectifying should be taken as a sign of good faith by the public and earn its support of the exception that would be made.
It’s possible to make lemonade out of lemons here. The imposed asset sale will force state government to ponder whether something truly is needed and/or whether it could not be used more efficiently by the private sector with the state paying for use of it. As difficult as this process may be, especially in the short time frame, the state would be on firmer fiscal ground by pursuing it.