Is Louisiana primed for another budget bonanza?

The Revenue Estimating Conference (REC) recently met and continued its string of announcing rosy fiscal estimates in post-Katrina/Rita Louisiana. The REC was actually meeting to establish its official estimate of the Unemployment Compensation Trust Fund, but used the occasion to announce that the projected budget surplus for the Fiscal Year 06/07 budget was expected to be approximately $1 billion.

The actual figure will be announced in December. Once it is established, our Constitution dictates that the funds are used for specified categories of non-recurring purposes, such as capital outlay, paying down state debt, and coastal restoration.

Most of the major candidates for governor expressed some opinions about the surplus and its potential uses.

Public Service Commissioner Foster Campbell said the surplus should be used first to shore up the unfunded accrued liability (UAL) of the state’s public retirement systems.

He makes a good point. The last budget ended with an $827 million surplus. The Blanco administration and Legislature didn’t spend a dime of that money on paying down the retirement system debt. Making a substantial down payment against the debt now will mean that the future burden on Louisiana’s taxpayers could be greatly reduced.

State Senator Walter Boasso said he thinks much of the potential surplus should be used on highway construction. While our Legislature did put some of the excess revenue into highways last session, much more needs to be done. Whittling down the backlog of state priority projects would certainly be a good use of the anticipated surplus.

Congressman Bobby Jindal expressed relief that the potential surplus wasn’t spent for more recurring expenditures in the spending spree that occurred during the last legislative session. Jindal is concerned, and rightfully so, that the budget surplus to be announced in December will be accompanied by another hefty increase in excess revenues for the current budget that could fuel more recurring expenditures in an already bloated budget.

Where is the excess money coming from?

There appear to be three major sources, two of which are rather suspect. Approximately $200 million of the potential surplus comes from the fact that most Louisiana income tax filers did not claim the property insurance tax credit passed by the Legislature last December. The income tax form did not clearly indicate where to take the credit, so most individuals failed to claim it. Another major contributor to the surplus is record energy prices. Oil was budgeted at $57 a barrel and is currently trading at over $80.

But how long will $80-a-barrel oil prices last, and what happens if those prices fall significantly while we rely on them to cover recurring expenditures?

A significant amount of the projected surplus comes from higher corporate and individual income tax revenues. Employment levels are now starting to approach pre-Katrina/Rita levels again, and the worker shortages brought on by the storms have resulted in higher wages being paid in many areas. The corporate income tax increases are influenced in part by the energy industry, but those revenues have been very volatile in the past and will likely prove to be the same in the future.

From all indications, the REC will meet in December and shower more revenues on state government. Those revenues will be used by a new governor and a Legislature with many new faces.

It won’t take long to find out the quality of leadership of the new batch of state officials. How they address the explosive growth of state revenues and how they treat recurring versus non-recurring revenues will tell us all we need to know about their character.