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Don’t raid the funds, PAR says

The state’s operating budget is out of balance for this year, severe cutbacks to essential services are proposed for next year and further major cuts are projected for the following year. As state budget officials seek ways to balance the budget without either raising taxes or severely cutting back on services provided to citizens, particularly in the areas of healthcare and higher education, the rules guiding the use of the state’s so-called Rainy Day Fund and other trust funds are frustrating their efforts. A set of proposals before the Legislature this session would create exceptions to those rules and postpone the difficult decisions facing budget makers today.

Each of these proposals offers a partial solution to the state’s problem with funding shortfalls in higher education and healthcare. However, most of these solutions are shortsighted maneuvers that would circumvent measures designed to force fiscal discipline when budget crises hit. Budget crises of similar severity in the past have stunted Louisiana’s progress on social and economic development. It is imperative that the state adhere to the spending restrictions set in the wake of those crises and resist the inclination to prop up an unsustainable fiscal future.

In the past few decades, Louisiana implemented a variety of fiscal reforms to stabilize the state’s budget when economic and market swings create surges and contractions in revenues. Generally, these reforms aimed to restrict the use of one-time money for one-time expenses and reduce the state’s reliance on volatile mineral revenues. Most of these reforms were established as amendments to the state Constitution so that when a crisis hits, the temptation to use the funds for short-term benefit would be avoided.

The proposed changes to the state’s Budget Stabilization Fund, also known as the Rainy Day Fund, should be rejected. One set of proposals (SB 1 and SB 2) would allow the Rainy Day Fund to be tapped when certain federal revenues drop. The current restriction is that it can be tapped only when state general fund revenues drop. The overall projected shortfall for FY 2011 is due to a drop in federal revenues, and the FY 2011 forecast for general fund revenue is $158 million greater than the forecast for FY 2010. So, money from the Rainy Day Fund cannot be budgeted for next fiscal year unless a constitutional amendment is passed.

The Rainy Day Fund is designed to fill budget gaps left by a drop in recurring state revenues. If the new trigger is added, around $285 million would be made available to spend in fiscal year 2011, but the state’s reliance on mineral revenues would be increased.

Other proposed changes to the Rainy Day Fund rules would prevent the fund from having to be refilled until the year after money is spent. In the case of a deficit caused by a drop in mineral revenues, this change would not be relevant because there would be no excess mineral revenues to divert from the general fund to the Rainy Day Fund. But, in the current situation, where the deficit is caused by a drop in other revenue sources, this change would lead to an increase in the amount of mineral revenues that flow through the general fund to support ongoing expenditures and would leave state services more vulnerable when oil prices or production drop.

Other proposed changes would apply to the 8(g) fund spending restrictions and should be accepted. SB 462 and SB 637 would expand the allowable uses for money generated by the Louisiana Education Quality Trust Fund, also known as the 8(g) fund. The proposals would allow the 8(g) Support Fund to be used for instructional operating expenses when the current or proposed budgets for higher education or elementary and secondary education fall below their previous-year levels. The Support Fund contains recurring revenues and investment earnings that are available for appropriation every year, so this would be a reasonable stopgap measure for education budgets in deficit years.

A separate set of proposals (SB 463 and SB 623) to change the rules safeguarding the principal of the 8(g) fund should be rejected. These changes would allow 10 percent of the fund’s principal to be tapped when a deficit occurs. This would erode the foundation of the Support Fund and increase the state’s reliance on unstable mineral revenues to support ongoing expenses.

Similarly, SB 434 and SB 410 would undermine another trust fund. These proposals would lower the amount of annual tobacco settlement revenues that are set aside in the Millennium Trust Fund (from 75 percent to 25 percent) and increase the amount that goes into the Louisiana Fund (from 25 percent to 75 percent). Only the earnings on the Millennium Trust Fund can be appropriated annually, and appropriations are limited to certain healthcare and education purposes. The Louisiana Fund is not a trust fund and can be appropriated entirely each year for specific education and healthcare purposes. This reallocation would make around $30 million of additional funding available to balance the budget in the short-term but also would substantially reduce the growth in earnings revenue that would have been available to spend from the Millennium Trust Fund in future years.

PAR supports the limited changes that would expand the use of 8(g) earnings (not the principal) to cover instructional expenses when budgets are cut due to a revenue shortfall. But, any change granting new ways to spend or erode the growth of trust fund principal dollars or any loosening of the rules constraining use of the Rainy Day Fund should be rejected.

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