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Looming deficits beg reevaluation of handling mechanisms

As Louisiana goes forward to contend with a budget deficit of $341 million this year (so far; there are two more regularly checkpoints at minimum on this figure before the end of the fiscal year) and a potential $2 billion deficit for fiscal year 2009-10, the question arises how the state’s fiscal mechanisms can deal with these deficit situations which cannot exist according to the state’s Constitution except for extreme circumstances. A review of these procedures is in order.

As of this year note that about 65 percent of the state operating expenditures can be financed currently through federal monies of some kind. Thus, the total being discussed here is about $14.5 billion. (Recognize this excludes any disaster recovery federal dollars.) Of that, a little over 63 percent is discretionary funds that have no strings attached to them in their expenditures, a little over 10 percent are non-discretionary in that they are fees or other self-generated revenues that go back into the programs from which they are generated, and the remainder is by law revenues dedicated to a certain purpose. (Technically, about three percent of the grand total really goes to capital outlay projects.) The “undedicated” monies go into the general fund, and the dedicated funds have each of 36 funds into which they go.

When there is a budget deficit in the current year reported in a fund, appropriations from the fund in question may be reduced. Typically, the only meaningful deficits that exist are in the general fund, and to take care of those typically appropriations must be reduced to the discretionary areas. In this instance, on Friday the Joint Legislative Committee on the Budget is likely to certify the deficit numbers coming from the general fund with little or no deficits from the others.

If it occurs during the current fiscal year, the Constitution empowers for smaller cuts the governor, for larger cuts him and the Committee, and for the largest cuts special sessions of the Legislature, to authorize reductions in appropriations. Except in the latter case, cuts come only in the fund from which the deficit exists, because only in the latter case may statutory changes of a permanent nature be made to shift revenues around rather than interim measures that are not statutory in nature. The only way around this is for the governor to issue freeze executive orders that could cover any program (such as his recently declared ones on hiring and program implementation), which only address smaller amounts, or to get two-thirds approval of the Legislature to redirect revenues.

The problem with this regime as many have identified is that the general fund, except in the extreme cases, bears almost all or all of the cuts, and since health care makes up 40 percent of those expenditures and higher education 34 percent, those two areas in particular bears the brunt of any such cuts. This results potentially in drastic reductions in services, either in provision of low-income and indigent health care services (Medicaid), or in college instruction.

One suggestion (as mentioned here before) to spread the burden around is to reevaluate the dedicated funds and make statutory changes better matching revenues to identified needs, perhaps by removing dedications. This increases political disbursement of funds, but that flexibility may be what is needed.

Another suggestion is to amend the Constitution to make it easier (instead of having a special session) for interim measures to “break into” the dedicated funds – leaving them intact and the discretion to create and sustain them, but making them less secure in cases of emergency. This would require greater legislative will up front to produce the amendments to change the procedure and an affirmative vote of the people, and in a way begs reexamining the entire philosophy about “dedication” – as of now it implies a certain level of mistrust of legislative intent that can be set aside when reality doesn’t match budgets, so a procedural change might admit that when deficits are severe enough that trust is warranted?

In other words, if mistrust is high, the amendment solution would be preferred. If it is not so high, changes of dedication could occur to allow more annual discretion in appropriations, a statutory solution. Either way, in a midyear deficit situation, politicians would have more flexibility, but in the budgetary process itself, the former would be more constraining.

Finally, worth noting is that the Constitution permits far more flexibility in the budget compilation process than in deficit redress. If revenues for the next year being budgeted are forecast at least one percent below the revenues forecast for the current fiscal year, dedication disappears as an absolute concept as the budget may use up to five percent projected going into any fund to be appropriated for any purpose, not just that tied to the fund, as long as the total for this year and the next year combined do not equal five percent of the fund. To make this more flexible also would require an amendment. This consideration is relevant because the general fund next year is predicted to be down $1.3 billion over this current year (8.6 percent), and this method could reduce that shortage by nearly $200 million at maximum.

Gov. Bobby Jindal has said he prefers the statutory solution for midyear cuts which does place greater faith in politicians in their appropriations decisions, and it would be simpler to implement. Regardless, as the state looks to have a few lean years ahead, this debate over the system should occur.

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