The continuing drop in the price of oil likely will require state government to change its spending plan for a second time to balance this year’s budget.
And for next year’s budget, which is being drafted now, the collapsing oil prices are added to an already monumentally large shortfall in revenues. “We’re going to have to make some tough choices,” Commissioner of Administration Kristy Nichols warned Friday in an interview.
The administration is chipping away at the size of next year’s budget hole, and decisions are still weeks away, but Nichols said everything would be considered, including the possibility of more cuts to higher education and the possibility of no merit pay raises for state workers.
Nichols’ staff will start meeting with agency officials Monday. The executive budget proposal is due on Feb. 27. Then negotiations begin with legislators who will rewrite and vote the budget into law during their session that begins in April.
Of more immediate concern is the impact of the price of oil on the remaining months of this year’s budget.
“Oil prices have hit a five-year low over the last week, and they’re trending downward,” Nichols said. “We’re anticipating that the oil prices likely will get dropped again, likely in January.”
As tough as falling oil prices are on this state’s ability to fund services, the drop means lower prices at the pump for Louisiana drivers. The average price of a gallon of unleaded gasoline on Friday was $2.42 — down from $2.76 last month and $3.11 last year, according to the American Automobile Association.
The price originally used to calculate the revenues for this fiscal year was $95.80 per barrel. (In July, when this year’s budget went into effect, the price was about $105.)
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The price of oil is used to calculate severance and other taxes as well as royalties that state government collects. The general rule of thumb is about $12 million less available to state government for every $1 drop in the average annual price of oil.
In November, the Revenue Estimating Conference determined that the state would collect $171 million less than the originally anticipated $10.6 billion in collections from taxes, fees, royalties and other revenue sources. That’s a drop of about 1.9 percent for the remaining months of fiscal year 2015, which ends on June 30.
Nichols said she likely would ask the four-member Revenue Estimating Conference, which certifies how much money state government has available to spend, to again lower the amount available for the remaining months of the fiscal year, which likely means additional cuts and changes to the budget.
It’s all supply and demand. The advent of fracking to extract oil from underground rock has revitalized the domestic oil industry. The large OPEC producers are trying to protect their market share by releasing enough oil for the price to fall below what it costs to profitably produce oil in America, said Gifford Briggs, vice president of the Louisiana Oil and Gas Association.
In the meantime, Nichols, Gov. Bobby Jindal’s chief budget aide, said her staff are looking for ways to reduce the $1.4 billion hole in next fiscal year’s revenues.
Budget watchers say the revenue shortfall is that big because, among other reasons, this year’s budget used dollars that aren’t available every year.
Nichols said the number includes a lot of assumptions that don’t necessarily have to be included. For instance, removing inflation, estimated increased use of medical care by the poor and uninsured, and not funding merit pay increases reduces the amount by about $212 million. The shortfall may decrease by $200 million in cost savings identified by the Government Efficiencies Management Support study plus surplus monies from this year and possibly by another $100 million in other revenues.
Still, the number was so large to begin with that, even with what Nichols’ office has found, the likely shortfall in revenues is still huge.
“The bottom line is that while we don’t have a $1.4 billion shortfall, we do have a significant shortfall that we got to resolve and that can’t be accomplished without making reductions,” Nichols said.