Dropping oil prices continue to impact state budget _lowres

Advocate staff file photo by BILL FEIG -- Aerial of the State Capitol building and grounds.

The dramatic 20 percent drop in the price of oil over the past couple months might be good for drivers, but it’s causing state government to recalibrate its spending plans, which could include dramatic cuts in state government services during the next seven months.

Oil prices dropped Thursday to their lowest levels since March 2010, largely due to the highest production in the United States since 1972. Because the price of Light Louisiana Sweet crude oil dropped from about $105 a barrel, when this year’s state budget went into effect July 1, to about $80 now, the Jindal administration expects to collect less money than anticipated and has rushed the process necessary to allow the governor to make budget-balancing cuts because of now-reduced revenues.

Usually, the Revenue Estimating Conference meets in late December or early January to analyze the state’s collections of taxes, fees and royalties. But the REC is convening at 11 a.m. Friday to reconsider the revenue number that ultimately will limit spending on state services.

“The adjustments are very likely to be downward,” said LSU economist James Richardson, one of the four members of the REC, adding that he hasn’t seen hard numbers yet but bases his opinion on broad general information about the current economic environment.

Commissioner of Administration Kristy Nichols, who drafts the administration’s budget proposal each year, said her office has been tracking how the changing atmosphere, specifically oil prices, could be causing a deficit in the budget. “We do have some concerns that revenue isn’t keeping pace with expenditures in the current budget,” she said in an interview.

Nichols, who is a member of the REC, said the meeting “puts us in a position where we have a firm handle on how revenues are tracking in the real time so that we make good decisions and swift decisions.”

If the REC adjusts its revenue projection downward, the administration then must come up with a plan to balance spending with available revenues. The governor generally has more authority and flexibility to cut spending on programs, reduce workforces and move around money. Cuts could be targeted on a handful of agencies or across the board.

Just what will happen really depends on how much the anticipated revenues are reduced by the REC, said Robert Scott, of the Louisiana Public Affairs Research Council. “The sooner you address the shortfall, the easier it is, the more months you’ll have to spread the pain,” Scott said.

Midyear corrections have happened before, though perhaps not as frequently as in recent years. But this time, it’s more precarious. In addition to lower than expected oil prices, individual income taxes have not produced the collections legislators expected. Those taxes account for 27 percent of total tax receipts. Also, sales taxes, which account for 29 percent of the total, are flat.

But the largest expected drop is in mineral revenues, which account for about $1.3 billion — or about 13 percent of the forecasted $10.3 billion total state tax receipts for fiscal year 2014. Given the lower prices, that number is likely to fall.

Louisiana Light crude oil sold at $80.76 per barrel Thursday and the U.S. average for regular unleaded gasoline was $2.92, according to the U.S. Energy Information Administration. At this time last year, the cost of regular gasoline was $3.19 per gallon.

The major force driving the price down is U.S. oil production, which increased to almost 9 million barrels per day and continues to grow largely because of the new fracking techniques used to free the fossil fuel trapped in rock underground, according to the U.S. Energy Information Administration. Simply put, wrote Don Briggs, of the Louisiana Oil and Gas Association, the amount of product exceeds demand, and that is driving down the price.

When Louisiana legislators and the administration were putting together the state’s spending plan, they were calculating from a price that had hovered mostly between $100 to $110 per barrel for more than three years. Severance tax collections and royalty payments are based on that price.

Lawmakers pegged the average price at $96.69 per barrel, which is how they calculated how much money they would have available to spend on services.

If the average price for the year drops below that level and is not offset by gains in other taxes, then state government won’t have enough money to pay expenses. Roughly speaking, state government receives about $12 million less revenue for every $1 below the $96.69 figure, said Greg Albrecht, the state economist from the Louisiana Fiscal Office.

Albrecht on Friday will tell the REC his best estimate for how much money will be collected, as will an economist from the Division of Administration, Manfred Dix.

The REC vote on whether to change the forecast chooses one of the economists’ predictions and that becomes, under law, the number that state lawmakers use to balance the state budget for this fiscal year, which ends June 30.

The panel also will look at adjusting the outlook for the financial year that begins on July 1.

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