Every state will take a noticeable hit from the Wuhan coronavirus pandemic and the significant economic slowdown it has triggered for more than a month, with more to come. However, Louisiana remains more vulnerable than just about any, with its oversized energy and tourism sectors, underperforming economy, and inefficient fiscal structure. Two different assessments place the state as the sixth-most and the most vulnerable economically to the crisis.
The math is painful, both for this concluding fiscal year and the next. One analyst sees the state encountering a 40 percent shortfall from its current budget, which in state-supported dollars means in the neighborhood of an $8.3 billion haircut. Some back-of-the-envelope calculations don’t support such an extreme view, but produce sobering numbers nonetheless.
On the plus side, Louisiana did have a potential $170 million surplus for this year and $103 million for the next (assuming all that banked prior to the end of February). And it can dip into the Budget Stabilization Fund to help offset shortages, but only $135 million of that remains available across the two years.
It goes downhill from there. For fiscal year 2020, revenues take a hit that state government must absorb quickly, exacerbating the pain. Assuming that on May 1 a number of restrictions would expire, that the economy would operate at 70 percent capacity prior to then and 85 percent capacity from then until the end of the month and 100 percent for June, except for gaming other than the lottery that would have no activity through April and then 50 percent through May, and that oil would average $20 a barrel for the rest of the FY 2020, you get the following (in millions of dollars):
Energy revenues: - 156; Sales taxes: - 174; Gaming taxes: - 147; Other taxes: - 40; Individual income taxes (not counting deferred): - 29; corporate income taxes (not counting deferred): - 4; unrecognized surplus: + 170; full BSF withdrawal: + 135; total: - 245.
Keep in mind that this FY 2020 projected revenue shortfall of $245 million doesn’t include an estimated $235 million in individual income taxes and $284 million in corporate income taxes pushed from FY 2020 collection into FY 2021 with the change in filing deadlines. Perhaps optimistically, assume that state government can finesse a way to push temporarily an extra $519 million of expenses in FY 2021.
But that won’t work for a couple of items. Spending in FY 2020 will see increases in at least two areas not qualifying as pandemic expenses that, for now, Louisiana appears will have covered by the federal government. Medicaid applications will shoot up, and more people will qualify for the Earned Income Tax Credit. This will increase expenditures by an estimated minimum $67 million in the former and $5 million in latter (although some of that could be pushed into FY 2021 if filing from Jul. 1-15, since almost all of EITC filers expect a refund above their liability they have the incentive to file as soon as possible but some may lag).
That makes the total budget hit for FY 2020 $312 million (again, not counting the pushed forward income tax revenues) that the state must contend with in the next 60 or so days. That’s about 3.2 percent of expected general funds, implying an over 19 percent cut in May and June.
The fiscal year 2021 revenue picture likely will suffer degradation even if by its commencement no economic restrictions exist in state. With West Texas Intermediate cruising below $15 a barrel recently, even an average of $25 for next fiscal year could be high, and would cost the state $420 million in revenues. And let’s be generous and declare an average of 98 percent economic activity throughout the year, reflected in general fund revenues only off two percent from their predicted levels (which includes the $103 million) and everything else hits their marks. This adds another $203 million of revenue loss.
Worse, FY 2021 spending will jump significantly as a result of the crisis. Medicaid costs will inflate $134 million beyond projections and perhaps unemployment insurance payouts past what Louisiana has banked, which at current rates would become exhausted in mid-August. However, any federal government loans to take care of that liability actually would come due in fiscal year 2022. Assuming the state has enough to weather much higher numbers of payouts, the opening bid on the projected FY 2021 deficit is $757 million.
Recall these assumptions may lack some precision; for example, the Legislative Fiscal Office rule of thumb that a change of a dollar in the price of oil causes a $12 million variance in taxes received overlaps a bit on the income, sales, gaming, and other taxes received. Yet these also should be considered optimistic given the unknown nature of the aftershock: what if the bite in March and April is deeper than the initial data suggest, will employment levels really return to pre-crisis marks before much of the summer has gone, will economic activity including especially gaming be close to 100 percent by July, will demand for benefits surge beyond the predictive baseline of 2008-09?
Yet the biggest wild card is political. If the Legislature doesn’t override Democrat Gov. John Bel Edwards’ extension of almost all restrictions he proclaimed last month by the end of this week and the economic lockdown continues statewide into the middle of May, all the revenue numbers presented here go down further and expenditure numbers rise.
Consider the numbers above a best-case scenario that can become worse if the crisis is dragged out. Contingency plans have floated in some parts of state government to budget for 10 percent cuts immediately, but that won’t be enough. The Legislature remains in limbo although that may change before the week ends and Edwards shows no leadership on this issue. As badly as the virus has inflicted pain on Louisiana’s economy, the real suffering in the form of disrupting government services has yet to arrive.