Spending Gap Game Continues

Just a few months ago, the Blanco administration urged the Legislature to use the December special session to increase the state spending cap by a whopping $2.4 billion.

A fiscally responsible minority in the Legislature used the two-thirds vote requirement necessary to raise the cap ceiling to prevent this humongous increase in the constitutionally imposed spending limit.

Two months have passed, and the Blanco administration is poised again to significantly increase the spending limit. How they propose to accomplish it is something that taxpayers—and legislators—should note with interest.

The spending cap is set each year, not by the Legislature or the Revenue Estimating Conference, but by the Commissioner of Administration. Historically, the Division of Administration (DOA) computes the annual cap figure when it is putting together the executive budget.

The formula used to compute the new cap calls for averaging the most recent three years of personal income growth in Louisiana. One problem with how the formula has been applied is the fact that data from the fourth quarter of the previous year is not available when the computation is made. Unfortunately, the current and previous Divisions of Administration have historically used a rather convoluted method for computing that missing quarter.

Instead of averaging the first three quarters of the last year, the DOA has made a quarter-to-quarter comparison between the first three quarters of years two and three to plug in a number for the missing quarter of the third year.

In a recent memo on the subject, the Legislative Fiscal Office noted this historic method is not a very accurate system for getting a reliable number for personal income growth. A more accurate method would be to average the first three quarters of the third year, or simply wait a week or two until the actual number is available from the U.S. Department of Commerce.

Putting aside the formula for a moment, what are the spending cap implications for the 2007/08 budget that the Legislature will adopt in the regular session beginning on April 30? If the missing 2006 fourth quarter number is adopted by using the historic method, it equates to $228.45 billion. Consider for a moment that the actual number for the third quarter of 2006 was $134.47 billion. If the DOA uses the historic method for figuring the cap, it is saying that personal income in Louisiana in the last quarter of 2006 increased by 70 percent, or almost $100 billion. Do you recall seeing your personal income rise by such a huge amount toward the end of last year? Most would say, “No way!” That number is totally bogus.

By the same token, if the first three quarters of 2006 are averaged to determine the fourth quarter number (as the Fiscal Office suggests), it comes out to about $132 billion. If that figure is used, it would result in a spending cap increase of $540 million for the next budget, not the $1.25 billion that the Blanco administration plans to use at this point.

The $540 million figure would be very close to the historical 5 percent increase trend for the spending cap, not the 12.4 percent increase the administration plans to use.

A spending cap twice as high as it should be will open the door for much higher state spending in an election year. The danger to taxpayers is that the revenues to cover the higher spending may not be around in the future. If that happens, our wallets are likely to grow lighter, while state government grows larger.