These 5 Major Fiscal Problems Await Louisiana's Next Governor

When John Bel Edwards takes the oath of office on Jan. 11 to become Louisiana's next governor, he has his work cut out for him to figure out ways to get the Pelican State's long beleaguered fiscal house in order.

Edwards, a Democrat, will be taking the reins from term-limited Republican Bobby Jindal, and the governor-elect has signaled his intentions to call a special session in February to address the state's ongoing budget woes.

Jindal relied on many short-term fixes to address a nearly $500 million mid-year budget gap, sparing Louisiana's already-squeezed institutions of higher education but hitting the Department of Health and Hospitals with $130 million in spending cuts, according to The Times-Picayune.

But Jindal's mid-year budget moves did nothing to "address years of unresolved structural budget deficits that have collided with a weakening state economy and a sharp drop in revenues from oil and gas extraction taxes," according to Moody's Investor Services, which released an assessment of Louisiana's current fiscal situation on Friday.

Louisiana's mid-year budget mending, Moody's wrote, relies "almost entirely on the use of fund sweeps, payment delays and other nonrecurring actions."

The governor-elect, who also plans to use his executive authority to expand Medicaid insurance for Louisiana's poorest residents, knows the challenges ahead.

“All of the easy work was done a long time ago,” Edwards said following his election last month, according to The Wall Street Journal. “It’s time to do the hard work.”

Moody's detailed Louisiana's long-term budget problems in its assessment:

• Louisiana continues to face sizeable budget gaps. In November, the state’s Department of Administration announced a $487 million mid-year deficit reduction plan. The plan was developed to address a $117 million fiscal 2015 deficit, required by state law to be resolved in the current fiscal year, and a $370 million fiscal 2016 revenue shortfall.

• Operating deficits persist. Fiscal 2015 is the state’s second consecutive year of general fund operating deficits, following a 2014 deficit of $140 million. In both fiscal 2014 and 2015, the deficits stemmed from revenue underperformance relative to forecasts. The 2014 deficit was covered by one-time use of carry-forward reserves during fiscal 2015. In fiscal 2016, the reserves were no longer available. Louisiana’s fiscal year ends June 30.

• The fiscal 2016 deficit reduction plan relies almost exclusively on one-time actions. Of the $487 million plan, $126 million is a delay of Medicaid vendor payments, while most of the balance is from fund sweeps, additional federal Medicaid funding estimated to be worth $132.6 million, agency spending freezes and a $28 million withdrawal from the state’s rainy day fund. With this balancing plan, the volume of one-time resources in the budget has doubled from an average of $500 million during fiscal 2012-2014 to a total of $1 billion in fiscal 2016. This is roughly on a par with $1.18 billion of such actions in fiscal 2015. (See Exhibit). The state’s total general fund budget (including statutorily dedicated funds) is about $10 billion.

• The collapse of oil prices since mid-2014 has contributed to the state’s woes. The state’s fiscal 2016 baseline oil price assumption has fallen from $83.54 per barrel at the time of the November 2014 revenue estimate to the latest forecast of $48.02. The share of severance and royalty taxes in total state general fund revenues (including dedications) has fallen to a projected 6.3% in fiscal 2016 compared to 12.6% in fiscal 2014. Furthermore, Louisiana job growth has decelerated sharply to 0.5% average growth in 2015, about one third the pace of 2014 job gains, and the state posted a year-over-year employment decline in the month of October.

• Reserves provide a mediocre cushion. The state’s rainy day fund has hovered around 4% of operating revenues since 2012, a meaningful but not significant cushion for an oil-dependent state budget. The state also relies heavily on internal borrowable funds for liquidity throughout the year. The borrowable base has historically provided a very comfortable margin but borrowing against it has increased at the same time that fund sweeps and statutory changes have impacted the base. In mid-November, the state had a borrowed position of $2.1 billion against a base of $2.7 billion; together with November’s average borrowed position of $1.8 billion, this signals narrower liquidity than in recent years. Louisiana is expected to receive significant settlement funds from the BP Deep Horizon oil spill settlement, but only $200 million will be received in fiscal 2016 and that amount has been statutorily committed to special funds. Although the state has proved adept at redirecting dedicated funds to the general fund, we do not expect the settlement will provide recurring general fund support to the state.

So what's next?

A Republican strategist, John Scurich, told The Wall Street Journal in November that the "Republican majority is not going to raise taxes."

But the strong electoral victory by Edwards—who will be the only Democratic governor in the South when he takes office—might give him enough political capital to "make wholesale changes to the budget."

Louisiana business leaders have signaled their desire to work with Edwards to figure out ways to reinvest in higher education and push tax reform, including "lowering the personal and corporate income tax rate, doing away with certain exemptions and phasing out the inventory tax on businesses," according to the Greater Baton Rouge Business Report.

“They’ve got to come up with revenue,” Democratic blogger Bob Mann told The Wall Street Journal. “If the Legislature is unwilling to do it, we’re back to where we were a year ago, on the verge of shutting down universities.”

And that certainly doesn't send a good message about the condition of Louisiana's fiscal foundations.