Red ink woes plague Louisiana budget

Just 29 days before Governor Jindal and the 144 members of the Legislature are to be sworn in, they got a strong hint that governing might not be a bed of roses during the next four years.

The four-member Revenue Estimating Conference (REC) met Dec. 14 to give revised revenue estimates for the current 2011/2012 fiscal year and for the 2012/2013 budget year as well. The news was not good.

After reviewing revenue trends, the REC dropped the revenue estimate for the current budget by $198 million and reduced the estimate for 2012/2013 by $214 million. The immediate effect of the REC action is the need for the Jindal administration to cut the current budget sufficiently within the next 30 days to bring it back into balance. When the Legislature convenes in March with many new members, any hopes it had of having expanded revenues for budgeting now seem forlorn.

The biggest element in the downward revision of state revenues is due to lower estimates for personal income tax collections. The revised estimates lowered this source of revenue by $143 million. There are no startling new developments that are impacting personal income tax collections. The downward trend was noted at the last meeting of the REC in May just before the current budget was adopted. The REC chose at that time not to adopt a lower figure for the personal income tax collections. The trend continued. Now the estimate must be corrected and the budget must be cut.

The other revenue stream significantly underperforming is in the area of the oil and gas severance tax. The fiscal analysts at the REC meeting noted that while onshore drilling has increased in recent years, most of the activity has been in the Haynesville Shale area in Northwest Louisiana where the severance tax is not collected for two years on wells utilizing horizontal drilling. The analysts noted that drilling has diminished greatly in South Louisiana where there is no corresponding exemption.

The analysts didn’t present the entire story, however. Many oil and gas operators are boycotting South Louisiana inland drilling due to the rash of "legacy" lawsuits being filed. By drilling in other states or on previously undeveloped leases in shale zones, there is less likelihood of operators being hit with these prohibitively expensive lawsuits. Bringing about a reasonable legislative solution to the legacy lawsuit problem could positively affect state revenue collections going forward. It should be a priority for Governor Jindal and the Legislature.

The fiscal picture painted at the recent REC meeting is one of a state whose economy is trying to slowly gain traction while the national and world economies grapple with a persistent economic downturn. That picture should be studied in detail by the governor and the Legislature as they make budget decisions going forward. The fiscal crisis in Europe is far from over. The common currency there is under assault, and the banks are drowning in sovereign debt from nations on the edge of default. The European Union is a major trading bloc with the U.S. If another recession hits there, it will impact U.S. banks and businesses as well.

Federal regulations and policies are still throwing cold water on our national economy as it tries to struggle towards meaningful growth. The Obama administration continues to throw roadblocks in the path of developing a robust energy industry, and employers large and small still don’t know what their health care costs or tax bills will be going forward. Against that backdrop, the REC, the Legislature, and the governor should exercise extreme fiscal caution going forward when adopting budgets and fiscal policies.