The governor and Legislature should pay close attention to a recent bit of economic news. Data just released by the federal Bureau of Economic Analysis (BEA) had some sobering news for Louisiana. Due in large part to the devastation wrought by Hurricanes Katrina and Rita, Louisiana’s per capita income fell by an ominous 9.1 percent during 2005. The drop was so severe, it knocked Louisiana’s ranking from 42 to 50.
According to the BEA, in 2005, Louisiana’s total personal income fell by $19.9 billion. Households saw uninsured property losses hit $26.8 billion and only recovered $8.5 billion from insurance settlements. Net income for Louisiana residents dropped by $1.6 billion.
Some might argue that the personal income data for Louisiana isn’t as bleak as it seems since the per capita income figure was derived by dividing year-long income data by pre-hurricane population estimates. Using post-hurricane population figures might improve the income figures somewhat, but the fact remains that those Louisiana citizens who moved out took their money with them. Those dollars are not circulating in our state’s economy and aren’t feeding government tax revenues.
Governor Blanco has submitted to the Legislature a proposed budget for 2006-2007 that would be the largest in the state’s history. It contains a significant amount of new spending. To pay for those increased expenditures, the governor is asking the Legislature to rely on large amounts of one-time revenues and volatile revenue sources in the new budget. In good times, that would be a risky proposition, but in the very uncertain times we face, the proposed budget is a dangerous document.
Government revenues are fueled by increased business and individual spending that expand the economy. Household spending is the most critical aspect of economic growth. When consumers spend more, businesses grow-and when they cut back on spending, business activity subsides and governments collect less in revenues.
Unfortunately, there are some strong indications that consumer spending in Louisiana may decline further in the foreseeable future. Residents in every part of the state are seeing higher insurance premiums due to the storm-related losses. Additionally, governments in some of the affected areas are raising property tax millages to offset declining property values in the damage zone. On top of those factors, utility bills are going to go up as utility companies are allowed to recoup their losses by charging higher rates to customers. These factors will result in less consumer spending, which could become a significant drag on our economy.
If Louisiana citizens have to cut back, state government should follow suit. The Legislature should go through the administration’s budget line by line, flagging questionable revenue sources and removing any spending that isn’t absolutely critical. Last November, the governor and Legislature reduced the current budget by hundreds of millions of dollars. They were praised for doing so. Unfortunately, in February those same officials restored most of that spending. The current budget — with the restored cuts — is now the base that the Blanco administration is using to propose the largest state budget ever.
If the BEA analysis of personal income loss in Louisiana is remotely close to being accurate, state government should expect the worst-and budget accordingly. If the Legislature enacts-and the governor signs-a budget with recurring spending that actual future revenue can’t sustain, the state is going to be in one heck of a mess in the not-too-distant future. The BEA data is a clear warning to our state officials to proceed with extreme caution in fashioning the next budget. We will soon find out if they heed the message.