Special session needed to deal with LA budget nightmare

It’s great that the Governor’s Office and Division of Administration are holding the line, even finding some savings, to stave off the looming budget disaster for Louisiana beginning in Fiscal Year 2011. The problem is, it’s not nearly enough and they can’t print money.

We won’t know for a couple of more weeks, but come Oct. 1 the Gov. Bobby Jindal Administration may report an actual uptick in state revenues, even those going into the general fund. But too low state-generated revenues up against higher state spending isn’t the main culprit for a budget deficit for the upcoming year estimated at $1.5-2 billion dollars, or roughly 6.5 percent of all current spending. Rather, it’s that a fair portion of federal dollars won’t be coming in next year compared to this one.

While the causes of this are varied – Medicaid formula changes, old bills being collected by the federal government, a reduction in one-time aid given to all states, among others – the practical impact is that the state is going to have to make up for the absence of these funds, unless something unexpected happens and revenues come from somewhere else. Don’t count on that. Jindal is opposed to raising taxes and most legislators will join him in an election year, and with big spending Democrats about to get wiped out in seven weeks time in Washington, a new Congress won’t be in any mood to bail out states.

However, as noted many times in this space, it’s not a revenue problem primarily facing the state, but a spending problem. And part of the reason why overspending occurs is its straitjacketed fiscal structure that essentially mandates spending in lower priority areas in lean times.

To review the current numbers, if backing out the federal dollars required to be spent on mandated activities, dedicated spending (from 35 constitutionally dedicated funds and almost 300 statutorily-dedicated funds where monies collected in certain ways must go), statutorily required expenditures (like debt service), and agency fee collections (which must go to fund their activities), only 12 percent or $3.1 billion of truly discretionary funds are left. From this, if all else stays the same, 55 percent of this will have to be cut.

The agencies mentioned above are part of this discretionary block, but even throwing in the other few discrete agencies that are unconnected to higher education and health care, they comprise only about a third of this amount. The other two-thirds are split equally between health care and higher education. They are the areas really at risk because of the budgeting process and what may happen with projected shortfalls in state-generated revenues year over year.

For those dedicated funds, they only can be cut in small amounts. Worse still, the large bulk of these funds are in the constitutional funds which can only be changed by amendment which could occur only after the next fiscal year goes into affect without a special session. Worst of all, available deficit reduction measures often are tied into only to the state’s general fund while much if not all of the anticipated drop is to come from the removal of federal funds which may not trigger the devices in law to allow money to be taken out of these funds.

Thus, the several aspects of this system that create budgeting problems are (1) dedications that have escaped review for years, even decades, that may be pumping revenues into areas of lower priority than higher education and health care, (2) a system that permits only limited redirection of these funds (in all but the case of the Minimum Foundation Program at one percent, five percent), and (3) redirection occurs only when reduced revenues occur in state-generated money, not from federal dollars. While the first may be altered through a regular legislative session, the others would require a constitutional amendment – which would be passed too late for the fiscal year beginning Jul. 1.

Therefore, Jindal and the Legislature must act now. The Armageddon cut for higher education solicited as the disaster-case scenario by Commissioner of Administration Paul Rainwater of $518 million is more than twice what has been cut from it in less than two years. Combined, those cuts would be close to what already has been whacked from health care, which would suffer a similar amount of paring under this scenario. This doesn’t mean that both can’t be pared some more, but to foist so much onto these areas would be apocalyptic to both which is what the current fiscal mechanisms unchanged would do.

To avoid this runaway lack of prioritization, the following need to occur:

• Wider implementation of Commission on Streamlining Government recommendations. This won’t generate more revenues, but it will leave more dollars to plug into the discretionary areas.
• Change the law dealing with statutory fund protection. By increasing the current percentage that can be transferred out to other uses, reductions are more equally shared and better prioritization may occur.
• Eliminate unneeded dedications. Efficiency gains and greater flexibility will create more funds available for the discretionary areas.
• Have a special session of the legislature called early next year to propose some constitutional amendments to permit more flexibility in the budget compilation process. Then a statewide vote would have to occur on the April election date to ratify it in time for it to be useful in this budgeting cycle (assuming it passes voter muster). Specifically, amendments would have to allow dedicated fund redirection in the case of federal revenue reduction and of greater than the current five percent for a forecasted one percent deficit and including both state and federal dollars.

The clock is ticking, and unless these kinds of things are done, at the stroke of the new fiscal year Louisiana is going to be stuck with some very undesirable policy outcomes.