Anatomy of a deficit

The Revenue Estimating Conference (REC) met on December 15 to do its constitutionally required task of giving the official estimate for state revenues for both the current budget and the one for the fiscal year beginning next July.

According to the economist for the Legislative Fiscal Office, the news was “bad and badder.” The REC adopted estimates that result in a revenue shortfall of $341 million in the current budget and $1.1 billion for the 2009/2010 fiscal year.

The Joint Legislative Committee on the Budget officially adopted the revenue forecasts and authorized that a letter be sent to the governor notifying him of a deficit for the current budget. That notification triggers a constitutional requirement that the budget be balanced within 30 days.

State law allows the governor to cut up to 3 percent of each budgetary unit and the Joint Budget Committee to cut up to 2 percent more, without the Legislature being in session.
The media reports of the REC meeting mentioned a $2 billion estimated deficit for the 2009/2010 fiscal year. That led to some confusion since the revenue shortfall for that budget year is only estimated to be $1.1 billion. One might reasonably ask how a $1.1 billion drop in revenue triggers a $2 billion deficit. Here is some information to shed some light on that difference:

Part of the difference comes from the use of “continuation” budgeting. What “continuation” in a budget means to ordinary folks doesn’t necessarily carry the same meaning in government. In government, “continuation” doesn’t mean “carry on with what you have.” It means carry on with an automatic increase in spending. Not many households or businesses are going to fashion budgets with automatic increases next year. State government won’t have that luxury either.

Another practice that is a potential cause for the deficit exceeding the revenue loss has to do with the use of “special funds” in budgeting. When revenues were surging, the Legislature—in conjunction with sitting governors—often stuffed money into funds they created in order to prevent the money from rolling over into surpluses. (Our state constitution restricts the use of surpluses to one-time expenditures in limited areas. State officials don’t like to have their hands tied when it comes to spending.) This was especially true when state spending was bumping up against the expenditure cap. Recent budgets utilized a considerable number of these “special funds.” To the extent they were used for truly one-time expenditures, they shouldn’t have an impact on the 2009/2010 budget. If they were used to fund appropriations that were recurring in nature (or if there is no money left in the funds), it adds to the projected deficit.

To balance the current budget, state officials must cut more than the $341 million projected revenue shortfall. Half the budget year is over, so to balance the books, $600-$700 million must be reduced on an annualized basis. If Governor Jindal and the Legislature bite that bullet now (as required by the Constitution), they greatly reduce the potential $2 billion deficit for the 2009/2010 budget. If the actual 2008/2009 budget—adjusted for the cuts that must now be made—is used as a baseline instead of a “continuation” budget, the problem becomes manageable.

If those steps are taken and more still needs to be done, state officials should go back and look at what items were added to the 2008/2009 budget. The state general fund increased by approximately $1 billion in the current budget.

Certainly some of those spending increases could be adjusted downward without ending critical services in Louisiana.

 

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