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Attempt to subvert fund likely to fail, but without consequences

Prosperity in Louisiana has forced austerity, in a sense, putting the state on the hook for a rash action of a couple of years back, but that same prosperity might end up saving the state from the consequences of that decision.

Voters wisely rejected this past fall’s Amendment 4, which would have loosened up requirements on use of money in the state’s Budget Stabilization Fund. Under narrowly-defined circumstances defining its use the BSF acts as a savings account. It gets deposits from a variety of constitutionally-defined sources, which is where the state got into trouble in budgeting for the 2010-11 fiscal year.

One source of funds is when severance tax revenues, most of which is from oil and gas extraction, exceed a statutorily-defined figure of $850 million.
Up to that amount, the state may use that money in any way except for that some goes back to the parishes from which extracted. Past that limit, the state must deposit excess funds into the BSF, unless the BSF is greater than four percent of previous total state revenues.

When the BSF was created, policy-makers did not really envision as scenario where the state would decline in overall revenues from state sources and have high severance tax receipts. Thus, a claim on “excess” mineral revenues never would be made in a year of budgetary stress that might include removing (legally, up to a third) of money from the BSF. But with the emergence of the Haynesville Shale discovery and rapidly escalating oil prices, combined with the economic recession and tepid, almost insignificant recovery, created precisely this situation.

So, as a stopgap measure, policy-makers passed a law trying to delay “excess” revenue payment into the BSF to a fiscal year after withdrawal from the BSF, by waiving the necessity as long as revenue declines year-over-year continued. The problem was that contradicted the Constitution, at the time pointed out by some but who eventually acquiesced. However, it did not escape the notice of others legally inclined, and drew a lawsuit that was suspended until an attempted constitutional fix, Amendment 4, could be passed.

It didn’t, and the lawsuit is back on. The defeat still stings some, who incorrectly argue as far as the BSF it means that “it doesn't matter how much it rained, we would never be able to use it.” It’s only the certain set of circumstances at the time that prevents its usage, and a necessary set that makes government less likely to live beyond its means. As gas and oil revenues are volatile, the restriction seems prudent.

The Constitution seems pretty clear on the subject, so the plaintiffs should win and put the state in a $150 million hole. Whether than occurs in the 2012-13 fiscal year depends upon the alacrity of the plaintiffs (who don’t seem to be in a big rush), the courts, and the state’s desire to drag things out by appeal. This may prevent the necessity of payment that next year and push into the next, when the fiscal picture may be brighter – and turn the $150 million into an interest-free loan of two years or more duration, saving the state money there.

Yet the problem may solve itself. Mostly in the area of gas, the boom has occurred because of advancement in technology that allows horizontal drilling. Louisiana law exempts for 24 months or well cost recovery, whichever comes first, proceeds from wells drilled this way that comprises most of the newly-producing wells. This means that of almost all of the recent tax exemptions in this area – about $250 million in the prior two years – much will get captured in future years (some decline in production will not be there for taxation). This will blast mineral revenues much higher, so high in fact that the four percent cap on the BSF will be hit (it’s around $800 million now) and thus these funds may get utilized by the state, to pay off the judgment and for other purposes.

So this probably will not turn out to be a crisis, and the integrity of the BSF will be preserved. Understanding this reinforces the wisdom of keeping the BSF unaltered from its present state.

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