Tuesday, November 21, 2006

The Wealth Effect, Louisiana Style

Louisiana Governor Kathleen Blanco is feeling a bit bullish these days, because her administration is projecting about five years of post-hurricane budget surpluses. This year, the hacks in Baton Rouge estimate that the state's coffers have an extra $827 million, and like any good group of politicians, our leaders are already plotting ways to parlay all of that money.

"This is good news for Louisiana after all the challenges we've been through," Blanco told the Louisiana Association of Educators. (Times-Picayune, 11.21.2006)

Of course, it is salient to note who her audience had been when she spoke those words, because, as a part of her proposal, the governor is seeking pay raises for her professional brethen. She wants teachers to get as much as an additional $2,100 per year. Beyond that, Governor Blanco is eager to convince state legislators to pony up the rest of the surplus for family tax credits, a few business tax cuts, financing of the infrastructural needs for a pending steel mill, rebates for insured property owners, and (if anything is left) financing for a few highway projects.

Indeed, it is an ambitious agenda, but it is an ambitious agenda that might not be beneficial to the citizens of this state...Don't get me wrong here; I am not saying this just because I am anti-Blanco. In fact, I am very proud of her for shaking her money-maker in Asia. But her hopes to use the current surplus, even for benevolent purposes, are not without a need for scrutiny.

Indeed, a special session is planned for the coming weeks, and already, some leaders in Baton Rouge are blasting the governor's proposed spending as bunk. The truth is, much of the spike in tax revenues should be attributed, rightfully, to the insurance monies and the private construction dollars that have followed since hurricanes Katrina and Rita. There has been no new and sustainable economic development along the Louisiana coast, and with less than 40 Road Home checks dispersed, out of the thousands awaiting closure, there are certainly no real federal recovery dollars flowing into the wallets of residents in this state. Consequently, nonpartisan analysts and the governor's Republican nemesis are right in saying that, while appreciated, the surplus is only a shot in the arm and a little far from being permenant.

Of course, for their own part, the legislature may not be too realistic in its own hopes of avoiding the painful insurance crisis facing the state. Leaders who concede that the surplus, like any near-term surpluses, are not sustainable, regretfully enough, will also have to admit that using these monies for an insurance "fix" will only be a short-lived endeavor, as well. When these surpluses dry up in a few years, Louisiana property owners will be hit with some of the most oppressive insurance rates and coverage gaps in the nation. The scenario may not be avoidable. That is because the insurance markets, and particularly the reinsurance markets, are eager to swallow up pools of Louisiana policies--and definitely not those from a vulnerable region below I-10. That said, if a solution to this dilemma does exist, then it is surely with the markets who will need federal approval to create new types of investment vehicles to bundle policies and diverse risk. And that means Baton Rouge could hold on to its extra dough.

So how could our leaders use the current surplus and any extra monies in future? Well, last month Dan Juneau of the Louisiana Association of Business & Industry gave us some ideas. He did not call for teacher pay raises, though they might be deserving, and he did not encourage an unrealistic insurance "fix". Rather, Mr. Juneau says Baton Rouge should do something extraordinary: it should save the money...What a profound thought, and here are his words.

Will the surplus be spent wisely?

The Joint Legislative Budget Committee met on October 20 and announced that the budget surplus for the 2005-06 Fiscal Year is estimated to be a whopping $827 million. The Committee further indicated that the revenue estimates for the current fiscal year may also increase. These projected surpluses are some of the largest in decades. In fact, the $827 million surplus alone reflects an increase of over 10 percent of the state general fund.

The surplus will be recognized by the Revenue Estimating Conference as “non-recurring” revenue when it meets in early December. Louisiana’s Constitution provides that 25 percent of non-recurring revenue must be deposited into our Budget Stabilization Fund (aka, the “Rainy Day Trust Fund”). The cap on our Rainy Day Trust Fund (currently fully funded at $680 million) is expected to increase by $70 million. With the deposit of the additional $70 million, the Rainy Day Trust Fund will expand to about $750 million—a viable safeguard against future revenue declines.

Our state constitution also requires that the balance of the $827 million surplus be spent on non-recurring items, such as paying off state debt, paying down the unfunded accrued liability (UAL) of the state retirement systems, and capital outlay. If these constitutional mandates are followed, taxpayers will see huge dividends in the future. Paying down state debt reduces our interest expense on the general obligation bonds used to fund state government, while every dollar paid towards the UAL saves taxpayers exponentially in the future, and having the state match fully available for federal highway projects brings better roads and highways to Louisiana. However, if these constitutional provisions are merely looked upon as suggestions, and the surplus is spent on recurring expenses or more pork-barrel projects, then taxpayers will be stuck with a more bloated state budget next year.

Prior administrations developed maneuvers for using surpluses for recurring expenses, despite the constitutional protections. For example, paying down short-term debt with surplus funds frees up current cash flow to spend on recurring items in the budget. So, rather than paying down the “mortgage,” which would reduce expenses later, all this does is use surplus dollars to make payments towards next year’s bills today. While such techniques may not technically violate the state constitution, they certainly do not fit within the spirit of the law.

As the Legislature heads into the 2007 fiscal session with huge surpluses, all proposals for new taxes and tax increases should be off the table. The fact that 2007 is an election year should make that a reality. Legislators would indeed look foolish voting for increased taxes or fees with the treasury flush with dollars. Considering the impact of the hurricanes of 2005, the state’s fiscal picture has been far better than expected, at least on paper. Yet, with tens of thousands of businesses lost and over 175,000 fewer employees on payrolls, the big question is not whether but when will our economy and state budget begin to reflect the cold hard fact that our state and our economy are smaller than before the storms.

While talk of new taxes often leads to emotionally charged debates at the Capitol, watching legislators spar over these surpluses should be at least as interesting. Having too much money is just as rancorous as not having enough. Needless to say, these are significant sums of money which, if spent wisely, could yield tremendous long-term benefits for taxpayers. But if the surplus is carved up for pet projects, new spending and other recurring items, taxpayers will be left to pay the tab for years to come.

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