When Louisiana lawmakers returned to the State Capitol in early May after a six-week hiatus because of the coronavirus, they faced the prospect of passing a budget that was down almost $1 billion in revenues from previous estimates.
While that type of fiscal cliff typically produces bruising fights over how much to raise taxes versus cut services, the budget produced strikingly little controversy. The federal government had sent $1.8 billion in aid money to Louisiana’s state coffers, and the Legislature found broad agreement with Edwards’ plan to use more than $900 million to plug holes in the state budgets.
Next year, state leaders might not be so lucky.
Louisiana is facing a particularly troubling prospect in recovering from the ongoing recession. The state relies heavily on oil and gas, tourism and the service industry, three areas that have been rocked by the virus. A key driver of the state’s economy – and tax base – is New Orleans, which needs huge numbers of tourists to prop up its economy.
If the federal government doesn’t drop another influx of cash on the state, Louisiana’s economy will have to make a dramatic turnaround if the state is to avoid a fiscal cliff next time lawmakers are in Baton Rouge.
“There’s a lot to be worried about,” said Robert Travis Scott, president of the Public Affairs Research Council, a Baton Rouge-based nonpartisan think tank.
State economists in May downgraded Louisiana’s revenue forecasts by more than $1 billion compared to the previous estimate a year earlier. But Scott noted the new projections were actually somewhat rosier than some thought, and only represented a drop of under $600 million compared to the state’s existing operating budget.
That meant lawmakers had a relatively easy path to patching up the budget this time, given the billions in aid. It also means the projection for next year assumes a “modest if not strong” economic recovery, Scott said.
The outlook a year out is remarkably uncertain, and it’s possible revenues could drop further from the current estimates. Meanwhile, losses in the state’s pension funds, from a rocky year on Wall Street, could mean agencies are on the hook for bigger contributions to their retirement plans. And it’s not clear what appetite the U.S. Congress and the Trump administration have for bailing out state and local governments, though another stimulus package is expected.
With those stressors on the state’s financial situation looming, Republican lawmakers took steps to mitigate the need to make drastic budget cuts, while also passing millions in tax breaks for businesses.
The Legislature set aside about $60 million that was destined for pay raises for employees in the fiscal year that began July 1 to be potentially used to fill a mid-year shortfall come October, when another special legislative session is possible. And they took out $120 million in construction spending planned by the Edwards administration to save for a rainy day.
Lawmakers and the governor also agreed to use $275 million in aid to provide grants to small businesses, and $50 million to dole out $250 checks to up to 200,000 front-line workers.
And, business lobbyists and executives convened by Republican legislative leaders to craft their agenda for the session successfully ushered through tax breaks that could cost the state budget more than $20 million in the next year, though the price tags are hazy. Republicans have argued the tax breaks will keep the doors of small businesses open, while Democrats have chastised them as giveaways.
“It’s all about balance,” said Senate President Page Cortez, R-Lafayette. “Tax breaks, we believe, were to incent business, which provides jobs, which provides revenues for the government to operate.”
Rep. Blake Miguez, the House Republican Delegation chair, said lawmakers were aware of the potential that the budget next year could be in dire straits. “The Legislature recognized that and decided to try to preserve some of the surplus dollars we had to put them in a fashion to be used in the future,” he said.
Edwards, who has voiced his opposition to some such tax expenditures, is deciding whether to sign or veto the tax breaks. At a press conference after the special session ended, Edwards declined to say what he’ll do with the measures, noting many of their price tags are unclear. He said he’s concerned about blowing a further hole in next year’s state budget, however.
“You obviously have to worry about that because we did an awful lot of work over the first four years to restore sanity to Louisiana’s fiscal situation,” Edwards said, referring to raucous political battles in his first term that ended with a deal to raise the state sales tax slightly, among other things, to patch up the budget.
“You don’t want to return to the days we just came out of.”
The projections for the next fiscal year, which is the budget that lawmakers will debate next spring, assumes state general fund revenues will rebound by $235.1 million compared to the current year’s projection, and, as PAR noted in a post-session commentary, $700 million more than the current year's budget.
Greg Albrecht, the Legislative Fiscal Office economist who built that projection, said it’s likely smart to be pessimistic about the outlook. Right now, the economy is coming back slowly – not at a rate that would suggest revenues bounce back considerably in the coming year.
“Louisiana was particularly vulnerable,” Albrecht said. The state was hit with cratering oil prices – a big part of Louisiana’s economy and a cash cow for the state budget – at the same time the pandemic roiled thousands of businesses in key sectors like accommodations, food service and tourism.
Without tourists coming back to Louisiana, Albrecht said the state’s economy will “stay depressed for some time.”
Scott, of PAR, worries of a crisis in New Orleans, in particular. At the end of July, supercharged unemployment benefits of $600 a week on top of the state’s cap of $247 a week will end. Evictions have resumed after being suspended for months. The Paycheck Protection Program funds for many businesses are being exhausted, and the customer base for a significant chunk of New Orleans’ economy, tourists, have vanished.
“You could end up with both a financial crisis for government services and also a real struggle for the human condition,” Scott said.
When those unemployment benefits end, Albrecht said he’s not optimistic there will be a lot of job openings laying around for people to return to, and he noted unemployment is at historic levels, which has injected huge sums into the state’s economy week after week.
“We’ve been supported by federal aid,” he said. “The whole country has. If that doesn’t continue it’s going to be a real test of what the private sector’s really got.”