SADOW: Rainy-Day Resolution Might Just Lead To Meaningful Budget Cuts

If the Revenue Estimating Conference and Louisiana budget prognosticators are right, it looks like the state better start budgeting for the next couple of fiscal years on increases less than a rise in the cost of living, courtesy of a little-noticed provision in this past legislative session’s “funds sweep” bill, which might finally provide the impetus for historic major cutbacks heretofore absent in state budgeting.

For fiscal year 2010, the state took a dip out of the Budget Stabilization Fund, better known as the “rainy day fund,” to shore up the budget for that year. The problem was, under the BSF’s rules, it essentially required repayment during that fiscal year. That inconvenience was worked out by statute, essentially resetting the rules going forward. The unusual situation was that with sufficiently high mineral revenues that would force money into the BSF when it was below its cap of four percent of total most recent past state revenues, even as there was a declining state revenue picture, so the reset suspended repayment under those conditions.

But the problem with that was statute cannot override the Constitution, and some spoilsports sued to reinforce that reality. Meanwhile, lawmakers and Gov. Bobby Jindal hoped in 2011 to amend the Constitution to erase the conflict. That would have opened up the BSF to more trivial uses, and voters wisely rejected that. A court eventually initially sided with the statute, prompting the state to take another helping out of the BSF for FY 2013. But policy-makers realized that judgment was unlikely to survive informed judicial scrutiny, so the next year, this past spring, into Act 420 went language undoing the fix for the beginning of FY 2016.

The REC most recent adopted forecast for FY 2016 expects an extra $433 million in revenues compared to this year, FY 2014. The latest estimate of the money to be paid back is in the $330 million range, leaving only little more than $100 million in cushion. But the baseline budget projection for the next five years put out after the session by the Division of Administration predicts this would be more than eaten up by $1 billion. That is, given the current rate of spending increase adjusted by future legal changes, by FY 2016 the state will be spending a billion more dollars from its resources. Throwing the payback on top of this puts the actual deficit then close to $900 million.

Keep in mind that the baseline includes such things as Jindal Administration health care reforms already saving well over $200 million annually. Making government operations more efficient will go only so far. Assuming that will not be, and likely not even come close to, bridging the gap, and that revenue projections should not increase dramatically, then only a combination of spending cuts and tax changes, by raising them and/or reducing exceptions, can erase that shortfall.

More interestingly, only spending cuts could be considered prior to FY 2015, because regular legislative sessions in even-numbered years, as in next year, cannot increase taxes including through excising exceptions. Further, because the 2015 session occurs mere months before state elections, this provides a further disincentive for tax increases that invite voter retribution, and the dismantling of tax credits, exemptions, etc. that might activate special interests and other constituents to launch vendettas of their own against elected officials.

One potential strategy to mitigate might be the object of the bill this past session, a funds sweep. That’s possible, but given the enormity of the gap this cannot be used to make it all up. Nor could a repeat of the original action that wound up elevating the crisis – drain the BSF – occur, because that may happen only with a reduction of revenues from state resources, which is not forecast.

Unless economic conditions unexpectedly improve substantially nationwide or some kind of unanticipated bonus source of revenue comes Louisiana’s way, the limited revenue enhancement possibilities delayed in any event until 2015 (there’s zero chance a special session to do just that would occur prior to then) and decreasing efficiency gains in state government present the 2014-15 budget as the perhaps the best opportunity in the history of the state to purge to a significant degree spending. Lopping off nongovernmental organization spending plus the extra spending engorged by the majority combination of Democrats and the Republican “fiscal hawks” in the FY 2103 budget by itself can reduce spending by a couple of hundred million bucks. Hopefully, the remainder would come from elimination of, in unprecedented fashion, significant entire but low-priority programs – a welcome sea change that only this kind of crisis could produce, and therefore perhaps its silver lining.

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