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Turbulent times require LA revenue downgrade

As Louisiana political leaders assert they’ll come up with a quickie budget in case they have to move fast, they must recognize the other shoe will drop with lagging state revenues.

Yesterday, the Legislature’s Republican leadership described efforts to put together a contingency package, sparked by fears if Wuhan coronavirus could continue for some time to radiate as rapidly as it has then the Legislature would have to shut down. Democrat Gov. John Bel Edwards joined them in that assessment. The state has to have its several budgets complete for next fiscal year by Jun. 30.

But they have to recognize that to rely even on existing official revenue forecasts likely overestimates the money the state will have available for the next 12 months starting Jul. 1. The Edwards Administration made an attempt to create estimates $103 million higher in the general fund as part of $285 million more in spending, backed by other increases in sources of revenues such as dedications. However, GOP leaders argued for a much lower number, which Edwards’ Commissioner of Administration Jay Dardenne rejected.

Subsequent events proved them right and Dardenne wrong, but even a maintenance of the current forecast, which they essentially wanted, likely now is too generous, starting with the obvious reason that oil prices have tanked as hysteria beyond market fundamentals has gripped investors. Market conditions now foreshadow the disappearance of the entire assumed surplus, and perhaps more, solely due to the reduced severance tax receipts and other spirces from the lower economic activity generated by the energy industry.

Yet that dropped only the initial shoe. The other hits the floor for two other reasons. While Louisiana doesn’t have a startlingly high state sales tax – only 38th among the states – it disproportionately collects that from touristic activities. And those will taper dramatically over the coming weeks, with cruise ships almost in mothballs, airlines discounting heavily to overcome advisories not to fly, and cancelation of high-profile events such as the National Collegiate Athletics Association Division I Women’s Final Four in New Orleans. All those sales taxes from all those tourists spending will evaporate.

Plus, there’s the hidden unfunded accrued liability factor. The Constitution requires elimination by 2029 of a portion of the UAL (termed the original). This ticking time bomb increasingly pulls resources from state government, where agencies not only must pay for current pension obligations but also additionally to get rid of this.

That amount decreases as the value of state investments increases, because then more assets exist to offset the obligation. With equities losing about a third of their value in the past three weeks — admittedly, irrationally from imagining a worst-case scenario that should end with a substantial rebound in equities by the end of the year — this large paper loss will force much higher additional payments than planned, because policy-makers have to budget with the numbers as of Jun. 30. Yes, equities are well oversold and in the long run will overcome the market psychology of the moment, but budgeting is a short run exercise and, barring a miraculously quick recovery, this will put additional pressure on the fiscal year 2021 document.

So, if the steep fall in oil hasn’t wiped out already the supposed surplus, an assuredly significant drop off in tourism and deflation of equities held in state retirement accounts needing additional spending commitments will do that, and erase any additional spending contemplated by Edwards (except for that legally required), and create a deficit, unless budgetary look at cuts and look at these now. That goes against the grain of the tax-and-spend agenda of Edwards, but is the responsible thing to do.

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