Louisiana’s $1.6 billion problem: How did we get here?

By Steve Spires

Later this week, Gov. Bobby Jindal’s administration will lay out its recommendations for filling a $1.6 billion gap between revenues and expenses in next year’s state budget. Early media reports say the budget will call for steep reductions to state services that citizens depend on, such as higher education, health care and roads.

But before the budget comes out, it is worth noting how we got to this point. The falling price of oil – down more than $50 per barrel since last summer – certainly contributed to the budget gap. But a much bigger culprit is the budget decisions made by state policymakers starting in 2007. That’s when the state made the first in a series of large tax cuts. When revenues predictably went south, policymakers responded with a series of stopgap measures.

It is this gap – the difference between money the state takes in each year from ongoing revenue sources like sales and income taxes and the basic cost of running the state – that officials now refer to as a “structural deficit.”  Revenues come in lower than what is needed to fund current services every year.

The structural deficit existed before oil prices dropped, when the state was already facing a $1.2 billion shortfall. That’s because the real culprit for our budget woes is the historically large amount of “one-time” or “nonrecurring” revenues used to pay for recurring expenses. The recent plunge in oil prices just made a bad situation worse.

In recent years, Louisiana has drained multiple trust funds, sold property, refinanced debt and relied on tax amnesty programs and piecemeal money from legal settlements to pay the annual cost of keeping colleges and hospitals open, pave roads and pay police. This has led to yearly scrambles to find new ways to fill ever-growing budget holes.

But the state is now running out of options for filling the gap. There is only so much big-ticket property to sell and funds to raid. For example, the Medicaid Trust Fund for the Elderly—which had a balance of $800 million just a few years ago—has been almost completely emptied, leaving a gap of $233 million next year that will need to replaced with other state dollars to pay for nursing homes.

In addition to the growing difficulty of putting together a balanced budget during session, Louisiana has experienced mid-year cuts in six of the last seven years. Ironically, the administration’s mid-year deficit reduction plans in December and January made next year’s shortfall deeper, pushing the amount of one-time money that will have to be replaced to almost $1.17 billion from $990 million, according to the Legislative Fiscal Office.

Severance and royalty revenues have certainly taken a hit as the price of West Texas Intermediate (WTI) crude fell from a high of $107 a barrel in June to around $50 a barrel by February. But this just made an already bad situation worse. Since last May, the severance tax revenue forecast for next year has been reduced by $295 million. State royalty and rental payment forecasts have dropped another $88 million. That is a big drop, but accounts for less than one-quarter of the $1.6 billion budget shortfall.

If the state opts for another year of temporary fixes, it only pushes the problem to the next administration. The state’s budget baseline, which forecasts future revenues and expenditures based on current law, shows huge deficits through the rest of the decade. It is highly unlikely that the next governor and legislature will be able to drum up enough one-time money to close those shortfalls, given how effectively the current administration has drained the savings account to pay the utility bills.

There are two primary factors driving these deficits. The first is the repeal of the Stelly plan income tax changes in 2007 and 2008, which permanently reduced the state’s tax base. The second is the unbridled growth of spending through the state tax code through credits, exemptions and other giveaways. The annual cost of five incentive programs examined by The Advocate newspaper alone jumped from $200 million to more than $1 billion in just a decade.

We won’t know until Friday what solutions the governor will propose to fix the latest budget shortfall. And no matter what is proposed, the Legislature will have two months to put its own ideas into law. But we do know that there are only two ways to fix the kind of structural imbalance the state is now facing: Either cut spending, or find sensible ways to raise revenues.

For seven years, Louisiana’s approach has been to cut programs and services that citizens count on, and make up the difference through gimmicks. Isn’t it time we tried a different approach?