Wisdom vs. expediency

By: Dan Juneau

On December 15, Louisiana Revenue Estimating Conference (REC) will meet at the state Capitol to certify some very important fiscal data. The group is charged with giving the official estimate for state revenues that the governor and the Legislature must use to limit state spending.

In recent years, the conference has done a commendable job of establishing conservative revenue estimates. While some in the Legislature would always like to have higher estimates to grease the skids for more spending, the members of the conference have resisted that temptation.

When they meet on the 15th, the REC will also officially certify the surplus (projected to be approximately $850 million) for the fiscal year that ended June 30. They will also certify the amount of money in the state’s Rainy Day Trust Fund, which is expected to be in the $800 million range. As the price of oil and gas plummet and world economies crash, the status of the Rainy Day Fund is going to get a lot of attention from legislators very soon.

The findings of the REC on the 15th will be heavily influenced by several sobering facts. Last February, the REC estimated oil revenues based on a crude oil price of $73.45 per barrel. Last May, with oil prices escalating worldwide, the conference upped the estimate to $84.23 for the current budget and $72.17 for the 2009/2010 fiscal year. Crude oil prices continued to soar, reaching a peak of $147 per barrel in July. Then the bottom fell out. Today, crude oil is selling for less than $45 per barrel. The importance of the price decline lies in the fact that for every dollar the price of a barrel of crude oil declines, the state loses $13 million in revenue.

The math is ugly. Soaring crude oil prices during the first half of 2008 were the primary drivers of the surplus. The precipitous drop in those prices - along with an ailing national economy - will remove the word “surplus” from legislative budget discussions for the foreseeable future. Natural gas prices have also dropped significantly, triggering an additional revenue problem for both the current and the following fiscal years. If the REC continues its practice of conservatively estimating oil and gas revenues, the impact on the current budget could be a reduction of several hundred million dollars. That shortfall will have to be addressed once the revenue estimates are certified by the REC.

Some in the Legislature will want to tap the Rainy Day Fund in order to avoid making cuts in the current budget. Perhaps as much as $270 million would be available from the fund to fill the void, but that would be a very foolish move for the Legislature to make. Faced with a 2009/2010 budget shortfall of as much as $1.3 billion, the governor and legislators should begin to reduce current levels of spending now to start addressing the problem. If state officials opt to start using the Rainy Day Fund to cover shortfalls in the current budget, they are setting themselves - and the taxpayers - up for a nightmare scenario if revenues plunge even further than estimated during the next fiscal year (a definite possibility.)

The actions taken by the REC on the 15th will begin a very interesting and important series of decision-making events that will cast light on how fiscally responsible our state leaders will be in handling our budget problems. A lot is at stake. Hopefully, they will do a better job of resolving Louisiana’s problems than our “leaders” in Washington have done in handling the nation’s.

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