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PAR Says “The ‘Rainy Day’ Has Arrived”

Louisiana’s “Rainy Day” Fund was created to address the type of deficit situation currently facing the state. While controversial, the administration’s proposal to use $86.4 million from the fund to buoy up this year’s budget is justified at this time for a number of reasons.

The “Rainy Day” Fund is not really designed to deal with a massive and continuing decline in revenues. However, it can be used effectively as a temporary solution to address a moderate mid-year decline and prevent the disruption of ongoing programs. Tapping the “Rainy Day” Fund now would avoid another immediate round of spending cuts and preserve substantial federal funding tied to health programs. It would also postpone any further cuts that might be required until after the effective date of the new constitutional amendment which allows more flexibility in making cuts.

As a temporary solution, using the fund now should serve as a wake-up call for the administration and legislators to remind them that some hard decisions must be made to avoid repeating current problems in next year’s budget. Anticipated spending requirements cannot simply be left out of the budget to make room for low priority, but politically attractive programs, such as the urban and rural “slush funds.” Other spending for local purposes needs to be placed in check as well.

Since 1998, when the voters placed the Budget Stabilization Fund, better known as the “Rainy Day” Fund, in the constitution, 25% of any state surpluses or one-time receipts have gone into the fund, which has grown to over $263 million. When revenues are projected to decline in the next budget year or the revenue estimate for the current year declines, the Legislature can, by two-thirds vote, apply up to one-third of the fund every two years to help close the deficit. In October, the latest official revenue estimates projected an $86 million drop in revenues for the current year. Coincidentally, one-third of the “Rainy Day” Fund is about $88 million or just enough to cover the shortfall.

Unfortunately, revenues are not the state’s only problem. Additional spending requirements not provided for in the current budget, again coincidentally, amount to about $86 million. This amount includes $28 million in medical costs and housing for prisoners that was recklessly and inexcusably omitted from the budget. However, $50 million of the total is for the unforeseeable cost of paying the state’s match for FEMA funding for hurricane damage occurring after the budget was adopted.

Earlier this year, the administration recognized the added spending needs and the continuing decline in revenue by placing a freeze on $75 million in agency spending B primarily in health programs. This also eliminated approximately $120 million in federal matching funds. The freeze took care of all but $11 million of the added $86 million spending problem, but the new $86 million revenue shortfall remains unaddressed. The administration has released a list of additional cuts that it will make if the “Rainy Day” Fund is not tapped. These new cuts, together with related federal funds, would total $220 million or more.

The proposal to use the fund has drawn a number of objections from critics who have called it a “raid on the piggy bank” and chastised the Legislature and administration for adopting a budget that ignored obvious spending needs and for failing to recognize the extent of the revenue decline. Some have suggested that after the fund is tapped, revenues could improve leaving the state with a year-end surplus.

Critics also suggest that the current fiscal situation is not serious enough and that the fund should be saved for a truly rainy day. However, considering the size of the fund and the fact that only one-third of the fund can be used once every two years, it would not have much impact on a situation worse than the one the state now faces. They argue that dipping into the “Rainy Day” Fund now would simply reward the unacceptable budgeting practices of ignoring known spending requirements and funding low priority programs.

That critical argument would have been much stronger if the administration were attempting to also fund the $46 million in annual road hazard claims that was left out of the current budget. However, payment of these claims is apparently being postponed and is not included in the $86 million in added spending.

The argument that revenues could improve and produce a surplus by year’s end does not negate the need to deal with the current deficit. If the fund is tapped and a surplus occurs, the surplus can and must be used to replenish the fund. This would require some uncharacteristic restraint on the part of the Legislature to avoid using supplemental appropriations at the end of the year to dissipate the surplus before it is recognized.

Some critics suggest that the Legislature should have second-guessed the Revenue Estimating Conference (REC) and assumed a sharper revenue decline than what was projected in the official estimate. Unfortunately, the REC, while usually quite accurate, is not clairvoyant.

However, it did make a substantial cut in its sales tax estimate in April prior to the session. It should be noted that, during the session, some legislators were warning of a possible surplus.

Particularly disturbing is the fact that the REC, at its October meeting, adopted the state budget office estimate of an $86 million revenue reduction rather than the Legislative Fiscal Office’s less optimistic estimate of a $182 million decline. The REC will meet again in December to see if the official estimate has to be cut further. At any rate, the most relief that the “Rainy Day” Fund can provide this year is $88 million. The likelihood that things might get worse provides an even stronger reason to make optimum use of the “Rainy Day” Fund now and, if further cuts are required, to do so when the new more flexible cutting authority becomes available.

The “Rainy Day” Fund should not become a cushion to make up for poor budgeting decisions. Nor should it be tapped every time revenues falter. However, after one round of significant cuts and with the prospect of more to come, PAR reluctantly suggests that this is an appropriate time to use the fund.

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