State lawmakers propose a questionable remedy

The curtain is going up on what should be a legislative session full of financial angst. For the past few years, legislators have enjoyed spending huge surpluses and larger appropriations fueled by soaring revenues from record oil and gas prices and exploding sales tax collections driven by hurricane recovery spending.

As Sir Isaac Newton taught us, whatever goes up must come down, and state general fund revenues are now dropping like a rock. Legislative glee from spending windfall revenues has now been replaced with the misery of having to cut hundreds of millions of dollars from the budget.

The revenue shortfall is in the $1.5 billion range. Some of that can be plugged by using federal stimulus money – a temporary, partial fix that, if utilized, can create an even larger budget crisis in two years. Since legislators are much more adept at spending than cutting, they are pursuing any means of lessening the amount of spending cuts needed to balance the budget.

One proposed “solution” is to take money out of the Budget Stabilization Fund, commonly referred to as the Rainy Day Trust Fund. That fund is fully funded at the level of $778 million.

The state constitution would allow the Legislature to tap up to one-third of the fund to apply toward the budget deficit, which would reduce the projected deficit by about $250 million. Since any port in a storm looks good to legislators dealing with a budget shortfall, there is support in both the House and the Senate to take this route, but before going down that road, there are some facts the legislators need to consider.

The reason the Rainy Day Fund is at capacity is because oil and gas revenues in excess of approximately $950 million annually have been flooding into it during the last few years taking it up to its cap.

If $250 million is drawn from the fund, $250 million in general fund revenues coming from oil and gas taxes in the next budget will go back into the Rainy Day Fund instead of into the general fund. The net result could be little change, if any in the state general fund revenues.

Additionally, the constitution dictates that if money is taken from the Rainy Day Fund now, there must be a two-year wait before it can be tapped again.

The federal stimulus dollars are only committed to Louisiana for two years. The Legislature is considering using most of that money to plug the budget deficit. Official revenue forecasts indicate that state general fund revenues will be going down, not up, during the next two years.

If the Legislature taps the Rainy Day Fund now to plug part of the budget shortfall, it will not have that option to fall back on if falling revenues necessitate mid-year budget cuts or larger deficits during the next two years. Common sense would suggest that legislators should bite the bullet now and save the Rainy Day Fund for further revenue declines that are almost certain to happen.

State general fund revenues climbed 15 percent between February, 2006 and February, 2009 – substantially higher than the historical average of state revenue growth. The current budget problem stems from the extremely high levels of spending in 2007 and 2008.

Logic would indicate that the extra spending of those two years should be brought back in line with historic revenue growth levels. If that is done, most of the budget shortfall would disappear. The other option is kicking the budget down the road that will likely result in a larger crisis two years from now – when most legislators are running for re-election.