LA flooding likely to have little budgetary impact

Upon pondering about the fiscal impact of the recent floods striking the Baton Rouge area, my Advocate colleagues got it half right and half wrong. Through an editorial correcting the misimpressions of some, they argued that, no, the volume of recovery money shoved through the economic system will not produce a “bonus” that will solve a looming budget deficit, but missed the mark in neither will it also exact a significant penalty that could worsen the fiscal situation further.

When the hurricane disasters of 2005 occurred, at first policy-makers believed the massive scale of devastation would put a serious crimp into the state’s economy, driving down collected tax revenues. Two months after the levees failed in New Orleans, the Revenue Estimating Conference convened to slice nearly $1 billion out of budgeted general fund collections for fiscal year 2006, and a subsequent special session of the Legislature went out to chop around that much out of the budget.

What they did not figure was that exact extreme destruction would prompt so much recovery spending coming from sources outside of the state – the federal government and private insurers – that this produced a surge in general tax collections. In the decade afterwards, the federal government would spend $18.2 billion on various aspects related to the storms, its flood insurance would pay claims of $13 billion, and private insurers would pay out around $25.9 billion, almost all of these coming in the first five years.

This threw off REC estimates immediately. By Feb. 2006, it increased its projection of general fund revenues by $600 million, and by May it added on nearly $600 million more – actually producing a higher total by over $200 million than its prediction of the previous year prior to the storms. In its last 2005 meeting, for FY 2007 it also revised this amount upward by over $600 million – which when in May 2007 it performed the final projection ended up another nearly $1.4 billion low.

When temporary taxes roll off at the end of FY 2018, at present this would reduce general fund revenues by around $1.5 billion. Considering the last disaster inflated revenues by about $2 billion, the precedent exists to think recovery dollars could boost Louisiana’s economy again.

Except that the 2005 calamities far exceed what has happened in 2016. Consider that private insurers, in an early estimate, estimate $1.5 billion in damage, far below that of 11 years ago. Assuming 40,000 buildings damaged with 20 percent of them insured for flood loss  and an average of $10,000 for non-insured properties that could get reimbursement from the federal government and an average $50,000 for insured structures, makes for around $720 million in reimbursements for insurance.

This pales in comparison to the claims coming in from 2005. An economic bonus will occur in the coming year or so, but will not come nearly close to matching that from 2005. Presuming from these data it ends up having one-twentieth of the impact as in 2005, extrapolating from past figures that bump could generate an extra $60 million in tax revenues.

Which may end up about how much the state pays for dealing with the destruction from this year. If the total expenses approach $600 million, the federal government will pick up 90 percent of these, although less means the state must cover 25 percent without additional Congressional action. If not reaching the higher figure, then the flooding’s impact may have a net negative effect on state finances, but if going over it things ought to even out.

That doesn’t mean avoidance of fiscal stress. Bills will come due sooner than the federal government will match, so the state will have to engage in some deft fiscal maneuvering perhaps involving short-term borrowing. Still, over the long term the flooding likely will not make Louisiana’s fiscal difficulties worse.

As for the 2018 fiscal cliff, in 2005 policy-makers wisely curtailed spending in anticipation of a revenue slowdown that never came. Present policy-makers should follow that lead, regardless of the flooding’s influence on state finances.