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Is the gravy train coming to an end?

By Dan Juneau -   Oct 30, 2008

For a number of years, higher government revenues have been flooding into the state’s coffers. Budget surpluses have set records and state spending has hit unprecedented levels. Now the “embarrassment of riches” may be coming to an end, and it will be interesting to see how the governor and a Legislature with many new faces handle the new economic reality.

Two factors drove the recent explosion of state revenues: hurricane recovery spending and record-setting oil and gas prices.

In the aftermath of Hurricanes Katrina and Rita, higher levels of recovery spending propelled state sales tax revenues to record levels. Road Home money, insurance settlements, and personal spending fueled these increases. Construction and retail activity led to higher levels of business revenue and resulted in higher business tax collections.

In addition to soaring revenues from hurricane reconstruction, record oil and gas prices have also led to huge increases in state tax collections. Our Revenue Estimating Conference has done a good job of using conservative estimates for oil and gas revenues at a time when the price of these commodities has skyrocketed. The end result has been budget surpluses in the billion dollar range and constant upward revisions of excess revenues available for spending by the Legislature--and the Legislature has not been bashful about spending those excess revenues.

A confluence of factors is now bringing Louisiana’s revenue party to an abrupt end. The U.S. is experiencing an economic meltdown that has undoubtedly ushered in a recession.

Louisiana will certainly feel the effects of this downturn. Even more of a problem for our state finances is the huge decline in oil and gas prices.

For the current budget, the Revenue Estimating Conference budgeted oil at a market price of $84 per barrel. As this column was being written, the price had plunged below $70. The price had risen as high as $147 per barrel. For a long time, billions of dollars in oil and gas revenue went directly into the state’s general fund and was quickly spent. It is more fun being a legislator when you are spending surpluses and excess revenues instead of cutting the budget. The fun is now gone.

Governor Jindal recently stated that he expected a billion dollar shortfall in revenues available to fashion the 2009/10 state budget. He also stated that he had no plans to raise taxes in order to address that shortfall. Hopefully, he will stick with that approach.

For openers, the billion dollar shortfall the governor was referencing undoubtedly was in the context of a “continuation” budget. In state government, new budgets are not submitted using the base of the old budget. An automatic “inflation adjusted” increase is added in before any other changes are made. By simply not submitting a “continuation” budget to the Legislature, the governor could reduce the potential red numbers by $600 million or more. That would leave a shortfall of approximately 3 percent to be made up in the $12 billion state fund budget.

Taxpayers will soon find out if our current Legislature is going to take a fiscally conservative approach to address the new economic reality or if it will attempt to continue record levels of spending that no longer can be sustained with current revenue streams. Governor Jindal’s initial comments are encouraging. Some in the Legislature will not share his view. He will need to provide strong leadership to insure that our state government lives within its means and adds no additional financial burdens to taxpayers who have their own fiscal problems to address.

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