Louisiana state lawmakers on Monday received a sobering glimpse of the state’s economic downturn, which one economist warned would be worse than the one experienced after Hurricane Katrina, as officials race to figure out how much tax money the state will lose as the budget is thrown into turmoil.
A cratering price of oil, coupled with business closures mandated to slow the spread of the new coronavirus, has quickly reversed the state’s budget outlook from where it was in early March, when the legislative session began. Commissioner of Administration Jay Dardenne signaled Monday to the House Appropriations Committee that investments in schools, early childhood education and teacher pay are no longer likely.
Instead, Gov. John Bel Edwards’ administration is asking state agencies for contingency plans to avoid layoffs of state employees. Economists are trying to come up with projections for how much revenue Louisiana will lose, when it is unclear how fast the economy will recover once restrictions are loosened. Edwards' administration is grappling with how to use $1.8 billion in federal aid that can’t be used where some say it’s most needed, to replace lost revenue.
“The numbers are going to go down pretty bad for a while,” said legislative economist Greg Albrecht. “I don’t expect them to boom back up at the end of the fiscal year.”
Among the most important questions faced by Louisiana's economists and budget leaders is how long will it take for the economy to recover. Albrecht cautioned that even if the state lifted all its restrictions, people will likely be "very very slow" to return to their normal spending habits.
Albrecht and Manfred Dix, the administration's economist, will present their projections to the state’s Revenue Estimating Conference on May 11th. Whichever estimate the panel chooses will serve as the amount of money the state Legislature and governor have to spend in the budget, which Dardenne called the most essential work of the session that ends June 1.
The crashing price of oil, which was trading in the $20 a barrel range Monday, will likely have the biggest effect on the state’s revenues, Albrecht said. Currently, the state’s revenues are based on a roughly $60 barrel of oil, and for each $1 drop in the price over a year, Louisiana’s revenues drop by around $12 million.
Complicating the picture is Louisiana’s economy wasn’t roaring to begin with, Albrecht said, which made the state particularly vulnerable to such a dramatic shock. Dix said the state was facing a “double-whammy” of oil prices and business closures from the pandemic.
“It’s not easy when from one day to the next you basically tell the economy to shut down and close doors,” Dix said.
Stephen Barnes, an economist at the University of Louisiana at Lafayette who sits on the Revenue Estimating Conference, walked lawmakers through the staggering levels of unemployment stemming from the pandemic. After Hurricane Katrina, unemployment claims hit 211,000, a previous record. Louisiana currently has upwards of 300,000 claims, Barnes said, with the number still rising quickly.
“As severe as Katrina was, I think this event is a bigger hit to the state’s economy,” he said.
Dardenne said the administration will get lawmakers a list of recommended cuts shortly after the revenue estimate is cemented a week from Monday.
While the $1.8 billion in federal aid for Louisiana can’t be used to offset lost revenue, officials are hopeful Congress will give the state that ability, or pass a new aid bill for the states, like one sponsored by U.S. Sen. Bill Cassidy. Edwards said he asked Vice President Mike Pence to support that bill Monday.
Louisiana’s state government has spent roughly $466 million on the coronavirus pandemic, a number that has fluctuated as the state has placed and canceled orders for things like ventilators, personal protective equipment and temporary hospital and testing sites.
The Federal Emergency Management Agency is currently slated to pick up 75% of those costs leaving Louisiana with a “considerable” share of the tab, Edwards said at a press conference. The good news is Edwards said the state will be allowed to tap into the $1.8 billion to fund its share, which currently sits at roughly $116 million.
While most of the state’s direct coronavirus-related costs are picked up by that FEMA share, Edwards said the Treasury Department is giving states more flexibility on how to spend that $1.8 billion, 45% of which will go to local cities and towns.
“I anticipate at the end of the day we’re going to be able to find good and constructive uses for all of that funding,” Edwards said.
In the meantime, Dardenne said a more favorable federal formula for Medicaid will free up close to $200 million in Louisiana’s budget, which should ease the pressure some. Plus, he noted the federal government has injected money in a host of areas – to individuals, businesses, schools and hospitals, among others.
The governor is also proposing using much of the state’s surplus from 2019 – nearly $350 million – on infrastructure projects that Dardenne said will help stimulate the state’s economy as hundreds of thousands of people remain out of work.
And the Appropriations Committee passed a bill by state Rep. Gary Carter, D-New Orleans, to free up money from the state’s rainy day fund for use after emergencies.
While lawmakers were debating where to send millions in extra revenue when they arrived in Baton Rouge in early March, Dardenne on Monday pointed to a “huge hole” at the Office of Motor Vehicles’ budget, which is funded by fees that dried up, and at the state’s corrections agency.
“Now we’re in a whole different world,” he said.
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