Louisiana has dealt with the collapse of oil prices before. The lessons learned then, state officials say, should stave off another near-bankruptcy like the one that befell state government 25 years ago.
But that doesn’t mean the state’s budget is not in trouble — far from it. In fact, the budget was in shambles long before oil prices dropped dramatically in recent months, exacerbating the revenue shortfall.
“Oil prices are bad, no doubt. But we had a billion-dollar (budget) problem before oil prices collapsed,” said state Rep. Brett Geymann, a Lake Charles Republican who is the titular head of a group of legislators called the “fiscal hawks.”
His day job is selling pipe in the oil field, where Geymann said he’s seeing a major slowdown. But like the state, his company is more diversified than it used to be, selling to different industries and investing in different businesses.
So the downturn in revenue caused by low energy prices can be partially offset, Geymann said.
The drop in the price of oil from about $100 a barrel to about $50 in three months will make it difficult for Gov. Bobby Jindal and state legislators to craft the annual law that allows state government to fund public schools, pave roads, incarcerate criminals and tend to the roughly 1 million Louisiana residents too impoverished to provide their own health care. But the difficulty is no longer as direct as it was in the 1980s, the last time Louisiana lived through a similar abrupt and dramatic fall in the price of oil.
The reason, said Geymann — echoing the words of dozens of economists, legislators and government watchdogs — is the way the budget is put together.
For years, the amount of money the state collected was less than was needed after factoring in exemptions, credits and other conditions. Administration officials usually start off each year warning of revenue shortfalls but end with the discovery of enough money from here and there to patch together a balanced budget.
It’s the reservoir of dollars collected on high-priced crude oil and natural gas in the form of severance taxes, royalties and other fees that has gone a long way to filling the annual gap when the revenues collected by government weren’t enough to cover the price of services.
Now the well is depleted, leaving Louisiana without enough money as it finishes up the year and casting a dark cloud over the next fiscal year, which begins July 1. Forecasts predict the state will collect $1.6 billion less than is needed to fund government services at current levels.
The $1.6 billion shortfall is roughly 15 percent of the $10.3 billion in taxes, licenses and fees that go into state government’s $25 billion budget. Oil and gas account for about 13 percent of the state’s revenues. That’s down sharply from about 42 percent in 1982.
“It’s a much lower share, but it’s still a pretty big number,” said Greg Albrecht, chief economist for the Legislative Fiscal Office. The state had hoped oil and gas would provide the state with more than $1.3 billion. Instead, the state will be lucky to get $1 billion, according to the latest Revenue Estimating Conference numbers.
The numbers show that the direct impact on the state’s economy, while significant, won’t be nearly as harmful as it was in the 1980s because of how the energy industry dominated Louisiana back then.
During the 1970s and ’80s, the state’s oil and gas industry expanded like crazy. Then, in 1986, Saudi Arabia opened the spigot and flooded the world’s market with oil, causing the price to drop by 67 percent in four months and catching Louisiana producers by surprise. The American drilling industry collapsed, leaving the Saudis in control as the world’s leader in oil production.
Buddy Roemer won election as governor in 1987, then walked into a $1.3 billion budget deficit.
“That just goes with the territory,” Roemer said in a recent interview. “Price is always fickle and, short term, people are always affected. For example, companies that borrowed a great deal of money, they’re over-leveraged and they can’t stand the downward prices.”
The industry quickly contracted, bankrupting hundreds of companies and financiers. That put tens of thousands of people out of work, leading to lower sales taxes and a massive out-migration of people, which in turn shrank income tax collections.
There was little to fall back upon for the state. Sales taxes at the time were about 2 percent, income tax rates were low, tourism wasn’t nearly as big as it is now and casino gambling wasn’t allowed.
John Kennedy, now the state treasurer, recalls walking into the crisis as an aide to Roemer. “There was no money in the budget for food at the Governor’s Mansion,” he said.
State government couldn’t make payroll, and contractors weren’t being paid.
“Having an unbalanced budget is one thing. Not having money in the bank — that’s quite another,” Kennedy said.
The Roemer administration and legislators cut every budget in sight and still came up short. Then they borrowed money that was repaid with the proceeds of a new 1-cent sales tax, Kennedy recalled.
That option is off the table for the current administration and legislators because such borrowing is now prohibited without the approval of voters. Even if such a plan were pursued, it couldn’t be organized in time to shore up next year’s budget.
“One of the things we did in 1987 and 1988 was take a look at all the statutory dedications,” Kennedy said, adding that should be one of the first things legislators scrutinize in the present fiscal crisis.
“Statutory dedications” is government jargon for revenues that by law must be used for a particular purpose, meaning it is not available for other purposes. For instance, some gasoline and fuel taxes go into a trust fund that can be used only for operations of the Department of Transportation and Development.
Before joining the Louisiana Public Service Commission, Scott Angelle was the cabinet secretary in charge of regulating the oil and gas industry for the state under two governors.
“Gov. Roemer did some incredibly smart things to structurally change the reliance on mineral funds,” said Angelle, who is running for governor. “We’ve become less dependent on oil.”
One of the most important changes the 1980s collapse set in motion was the institution of a system to adjust budgets as conditions change throughout the fiscal year. The framework is set by the Revenue Estimating Conference, a four-member panel made up of an LSU economist and one representative apiece from the House, the Senate and the Governor’s Office.
Within a few years of the collapse of the price of oil, state government had increased sales tax rates and corporate franchise taxes and found new revenues to add to the books.
But as the price of oil increased again, the Legislature moved to protect consumers from sales taxes — which have a greater impact on the poor — on items such as groceries. The change was financed by expanding income tax brackets, which led to modest tax increases for wealthier citizens. It was called the Stelly Plan, after its chief legislative sponsor, and was approved by a majority of the state’s voters in 2002.
The Legislature, prompted by governors of both parties, repealed the income tax increases step by step and then completely in 2008. But the sales tax cut remained in place. At the same time, legislators began approving an ever-growing menu of tax exemptions and credits to businesses, which further reduced tax revenues, again enlarging the role that oil and gas played in the state’s revenue collection.
Commissioner of Administration Kristy Nichols, the governor’s chief budget adviser, said the state has made “a huge change” in diversifying its economy.
“I wouldn’t say (the state is now) ‘overly dependent’ on energy,” Nichols said. “For the last 20 to 30 years, Louisiana has gotten on the right track.”
Joe Traigle disagrees, at least on the magnitude.
He was secretary of revenue at the height of the oil boom from 1972 to 1976, then president of American Bank & Trust Co. in Baton Rouge.
“We always talked about the need to diversify the economy,” Traigle said. “But when we had the money, we didn’t do what was necessary to diversify. ... There has been some diversity. Look at IBM coming to town (Baton Rouge). But we still lean on mineral revenues excessively.”
For a variety of reasons, Louisiana is attractive to the petrochemical industry, which has led to major industrial investment but also a form of codependency.
“You try to get new industries,” said state Sen. Bodi White, R-Central, a member of the Senate Finance Committee. “But really what you capture from that is not nearly what you capture from the oil and gas industry. It’s kind of our bread and butter, along with the Mississippi River. How do you get away from that?”
The Louisiana Mid-Continent Oil and Gas Association, which represents big oil companies in Louisiana, calculates that mineral production, refining and transportation generated more than $20.5 billion in household earnings and supported 287,000 Louisiana jobs in 2011. That’s almost 12 percent of all the earnings in Louisiana that year. Additionally, those industries paid almost $1.5 billion in taxes and fees.
“Somebody needs to lead us into diversification,” Roemer said. “It takes effort. The governor has to spend his time on it. That has not been done.”
A revamp of the way the state taxes its citizens and its businesses is critical, he said. A recent series in The Advocate highlighted the runaway growth of certain corporate giveways, which have quintupled from about $200 million to more than $1 billion in the last decade.
“We give exemptions to the rich, the powerful and the big. The result is the poor people and middle-class people pay the taxes,” Roemer said. “It’s a burden.”
Others also say it’s time to take a hard look at Louisiana’s tax structure, noting that the business community also needs long-term stability. At the direction of the Legislature, LSU economics professor Jim Richardson, who is a member of the Revenue Estimating Conference, is leading a study of the state’s tax system, including exemptions and credits, that will recommend ways to improve it. His report is due before the legislative session that begins in April.
In the end, legislative economist Albrecht said, the recent drop in oil prices will cost some people their jobs. But the overall economy should not contract, as happened a quarter-century ago. “The time, the impact is going to largely concentrate in the public ‘fisc,’ ” Albrecht said.
Meanwhile, state government will face even leaner times but not the crisis of a generation ago. Louisiana’s sources of revenue, while perhaps not as diverse as they could be, are more broad-based than they were when the 1980s bust hit.
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