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Louisiana's Budget Has More Than Just an Oil Problem

Unlike other oil-dependent states, Louisiana has deeper financial issues that began nearly a decade ago after Hurricane Katrina. The legislature is meeting in special session to deal with them.

Louisiana Gov. John Bel Edwards speaks during the opening of the special legislative session.
(AP/Gerald Herbert)
The global oil surplus is forcing some energy-dependent states to rethink their financial arrangements. Already, Alaska, North Dakota, West Virginia and Wyoming have hit the official recession marker of sustained job loss, according to Moody’s Analytics. These and other states are slashing spending to right-size their budgets.

But in Louisiana, the financial turmoil runs deeper than fallout from the last 20 months of declining oil prices.

Last week, Moody’s Investors Service slapped Louisiana with its first credit rating downgrade in more than a decade. It’s the only energy state other than Alaska to be downgraded since the oil price slump began, yet Louisiana is far less dependent on oil than the Last Frontier. Severance taxes -- the taxes imposed on the production of oil and minerals -- made up nearly three-quarters of Alaska’s tax collections in 2014, compared to about 9 percent in Louisiana, according to an analysis by the Rockefeller Institute for Government.

What makes Louisiana different is what it was doing before the precipitous decline in oil prices.

“They were building this structural imbalance that was getting bigger and bigger each year,” said Moody’s Investors Service analyst Emily Raimes. “When you put on top of that the very sudden and long decline in oil prices, that’s added to the pressure the state has faced. Oil is not the major driver of their economy or their revenues, but the oil price decline has been the icing on the cake.”

Lawmakers must close a $900 million budget shortfall by June 30 and a more than $2 billion shortfall in the next fiscal year starting July 1. Legislators are currently two weeks into a 25-day special session to resolve the budget gap.

The problems began in the years after the devastation caused by Hurricane Katrina in 2005. The massive amounts of federal, insurance and other aid money that flowed into Louisiana for the rebuilding efforts inflated the state’s tax collections, particularly its sales tax. In response, first-term Gov. Bobby Jindal pushed through tax cuts in 2008 and 2009 when the rest of the country was dealing with massive budget shortfalls due to the national recession.

Eventually, the aid money petered out, and the Great Recession caught up to Louisiana. But Jindal wanted to keep his pledge not to raise taxes and most lawmakers were happy to oblige. The result was a patchwork of budget fixes over the next several years that drew down reserves and other funds to supplement the state’s general fund revenue.

The Louisiana Budget Project, a nonprofit advocacy group for low- and moderate-income families, calls the current situation the “most serious budget crisis in a generation.” It's not alone in sounding the alarms. This year's legislative session kicked off with a warning from the legislature’s chief economist that “for all practical purposes,” the state is already in its own recession. Revenue collections are weak in every major category: personal and corporate income taxes, sales taxes and mineral taxes. Already, halfway through the state’s fiscal year, it has paid out more in business tax rebates than it is taking in as revenue.

To make matters worse, before Moody’s downgraded the state last week, it placed Louisiana State University, the University of New Orleans and six other Louisiana public universities under credit rating review because of the cuts lawmakers are expected to make to this year’s budget.

Lawmakers and first-term Gov. John Bel Edwards remain at odds over how to close the shortfall. The legislature is reportedly $150 million to $200 million shy of closing the $900 million gap and remain reluctant to heed Edwards’ calls to raise revenue to address the remainder.

To some, lawmakers are just delaying the inevitable. Even if they resolve this year’s budget with cuts, they will soon be tasked with passing a structurally balanced budget for fiscal 2017 and will then face the same questions all over again.

“At this point, you’ve cut down to the bone and you’re gnawing into the marrow,” said Sujit CanagaRetna, a fiscal analyst at the Council of State Governments. “Those old budgets were all smoke and mirrors. You have to clean up all that mess and you have to raise taxes to do it.”

Liz Farmer, a former Governing staff writer covering fiscal policy, helps lead the Pew Charitable Trusts’ state fiscal health project’s Fiscal 50 online resource.
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