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15.3.06

Blanco budget bombs waiting to explode and wreck state

Gov. Kathleen Blanco does have a point when she observes that her 2006-07 executive budget for Louisiana really does not increase state spending when you remove from it extra monies given by the federal government for recovery from the 2005 hurricane disasters. But there are still plenty of bombs waiting to go off in that budget unless a lot of things break right.

Blanco’s thinking is that, after the cuts made near the end of 2005, monies from them can be in part reallocated to other uses. Of course, this assumes that the lofty revenue projections based on a quick recovery from the disasters, a rather optimistic scenario, pan out. If not, a lot of new spending of a permanent nature suddenly will have to find more revenue in a state with a hampered economy already overtaxed.

Her administration claims the total amount of state operating expenses from state sources will actually be 3.3 percent less than the existing budget. However, almost all of this decrease results from a “disaster dividend” said to be realized by offloading disproportionately users of, in particular, health care and labor programs in the state. This is far from certain given the unknown nature of who has left the state and who will return and when. This alone is a predicted expenditure reduction of around $600 million.

Even assuming these projections are correct, some troubling situations remain especially regarding health care. Spending there gets balanced by a net $34 million removal from the Louisiana Medical Assistance Trust Fund and an injection of $138.2 million net of one-time federal money. In addition, the state is having to take on an additional annual commitment of $123.1 million due to changes in the federal government’s matching policy and the Medicare drug benefit. In other words, this is asking the state to pump in almost $300 million a year in new money to pay for health care – assuming the “dividend” actually exists; if not, it could be much higher.

Significant revenue losses also are occurring in several areas. The Superdome and New Orleans Arena are losing over $30 million in potential revenue because of the disruptions of the hurricanes. The Department of Environmental Quality is losing $17.6 million in statutory dedicated revenue, while the Department of Labor will lose $26.5 million. However, these may well bounce back but, then again, at a reduced level of economic activity, they may not, and a cautious budget would recognize as such.

Similarly, before making new ongoing spending commitments, increased revenues from certain areas should not be used to fund them. Growth in gaming revenues, sales taxes, and severance and other petroleum-related sources of revenue are a result of abnormally high oil prices and the effect of the disasters, which probably will not be permanent. Simultaneously, many other sources have taken huge hits, with income taxes alone nearly $500 million below previous levels. This too should change, but it may not very quickly so some conservative budgeting now can save some pain later.

Some areas get hit both ways. Higher education’s costs to the state will rise $75.4 million through the requested faculty salary pay increase and unfunded mandates. But revenues are expected to decrease $16.6 million because of the decline in students (thus tuition), creating a $92 million negative swing. But TOPS, the state’s program to pay for college tuition for students who achieve marginally well in high school, is budgeted at the same $122.3 million, despite an enrollment decline of possibly ten thousand or more. And secondary education’s costs are expected to be about the same despite the loss of 55,534 students over the past two years.

Several areas of reduced expenditures seem questionable. For example, Corrections is thought to save $42.5 million from not having to pay local authorities to house 3,100 inmates and by paying $5 fewer per inmate contracted out to work release (the budget assuming the contractors will make up the difference by billing the inmates!). Does the state think it will have 3,100 fewer inmates because they evacuated the state?

(Oh, and if you’re keeping score on these matters, debt service is projected $118.7 million higher, while not an extra cent is allocated to pay down the $12 billion and growing unfunded accrued liability for retirement systems. And this doesn’t count any payments to the federal government to match its disaster aid; the only one made so far was $155 million. And what about an additional request by secondary schools, $85 million more than Blanco wanted?)

Add all of these things up not including the “disaster dividend” and debt service and that’s over a billion dollars in lost revenues which may not come back and new, permanent commitments if Blanco has her way. Throw in everything mentioned and it’s closer to $1.75 billion. And, again, as the budget points out in several places, nothing is included regarding possible payments to the federal government for assistance.

It would seem prudent to put some kind of cushion in the budget in case the “disaster dividend” was less than expected, if revenues disappointed, and if federal funds did not continue in some areas past this year. But Blanco has chosen otherwise, perhaps to increase her chances of reelection. Maybe she senses it’s time to go for broke given her chances have increasingly dimmed. Yet if things don’t go the way she has precariously forecast, she won’t be the one that goes broke – that will be Louisiana.

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