Part II: Chapter Three
Successful Money: Spending and Dedications
A Louisiana philanthropist once said, “Success in life is measured not by how much money you make, but by what you do with it.” That proverb ought to fit the definition of successful government, also.
The best financial practices for a state might include guidance that could apply to ordinary households: Live within the means of your operating budget. Don’t pay your operating expenses with resources that won’t be available in the future. Pay your debts. Plan for the long term. Start a good savings plan and stick to it. Work toward the best possible credit rating. Re-think your spending priorities regularly. And be honest, with yourself and those with whom you have a financial relationship. For state governments we might add: Keep it all transparent to the citizens.
Before a state decides what it wants to spend its money on, it should firmly establish these types of fiscal principles. A constitution is an appropriate place for foundational, common-sense thinking. Such prudence might include certain limits. For example, there are some values we like to see in a business or individual that we wouldn’t want government to pursue. We might celebrate a business that’s good at growth, diversification and expanding its forms of revenue. But we may think less of those qualities in a government that’s primarily bent on growing and making more money through new taxes or fines. These considerations are also on the table for a constitution.
Louisiana’s Constitution requires a balanced budget, which is common among states. This sound principle differentiates the states from the federal government, which often borrows heavily to pay its regular ongoing expenses. In addition, the state Constitution sets up a system for an expenditure limit, places a high priority on meeting debts, restricts the uses of nonrecurring income and requires budgeting based on consensus revenue forecasting. In other words, don’t make it easy to fake how much money you’ve really got. These are good provisions that, at least in principle, should be kept in any revised constitution.
So, this is the important balance that must be sought when writing the fiscal portions of a state constitution. For taxing or spending, don’t constrain the Legislature from making reforms and re-evaluating program priorities. Leave the details to the statutes. But the public needs protections, too. Limits will be needed in a constitution, and they should be made broadly, sparingly and wisely.
This chapter supports the concept of foundational fiscal guidance in a constitution. It focuses on our current constitution’s many dedications and spending mandates. It challenges the notion that all dedications must be immutable. And it questions whether we sometimes spend dedicated revenue simply because we have it, rather than rethinking its amount or best use.
PAR proposes an innovative restructuring of how Louisiana manages its dedications and its unusually large number of special funds that are locked in the Constitution. This chapter presents that new framework. Chapter Four follows with a detailed breakdown and recommendations for each of Louisiana’s constitutional funds.
Fecund with Funds
In addition to establishing the basic structure of Louisiana’s tax system, Article VII of the Louisiana Constitution addresses how the state can, or in some cases must, spend its money. More specifically, Article VII contains more than two dozen distinct dedications of various categories of state revenue, including taxes, mineral revenues, fees and settlements.
For almost all of these dedications, the Constitution creates a separate “special fund” within the state Treasury and requires that money in each fund be appropriated by the Legislature only for specific purposes and programs authorized by the Constitution.
The original 1974 Constitution contained only two special funds: The Bond Security & Redemption Fund and the Revenue Sharing Fund. Both of those funds essentially are financial pass-through mechanisms. Over the past 45 years, 26 new constitutional funds have been added, primarily to Article VII, each with its own set of detailed restrictions on the type of revenue that must be deposited into a fund and how the money can be spent.
Of note, over this same period, the Legislature has never passed a measure to eliminate a fund from the Constitution. Instead, history has shown that once a dedicated fund is enshrined in the Constitution, it is there to stay, regardless of how the state’s fiscal needs and priorities may change over time.
Louisiana’s Constitutional Dedications
In recent years, there has been much public discourse about “locked-up” spending. These discussions have focused primarily on the structure of the state’s finances and the amount of dedicated funding that has made it difficult for the Legislature to craft a budget each year to satisfy current needs and priorities. And while many might agree that freeing up more state general fund dollars and granting the Legislature greater flexibility to fund priorities are desirable goals, there has been little attention toward exactly how to get there.
To get to the bottom of this, let’s look at the types of dedications in the Constitution and how they fit into the state’s overall budget landscape. There are different types of dedications, each with a distinct set of conditions.
Diversions of the State General Fund
The first broad category is diversions of state general fund dollars. These are state taxes set aside for specific purposes and that otherwise would flow into the general fund. The general fund is basically the annual amount of money drawn from state taxes and fees, minus dedications. Most of these diversions are contained in statute, but some are also contained in the Constitution through designated funds and sub-funds.
The Revenue Estimating Conference, as part of its duty forecasting state revenue, estimates the amount that certain statutory and constitutional funds will divert from the general fund. For fiscal year 2019, approximately $4.2 billion of Louisiana’s total budget of $30.6 billion was “dedications” of state general fund revenue, which included both constitutional and statutory dedications.1
One example is the Transportation Trust Fund, which generates approximately $600 million in annual proceeds from excise taxes on motor fuels. The Constitution dedicates those dollars to construction and maintenance of roads, bridges and other major infrastructure. Another example would be the Lottery Proceeds Fund, a lottery tax that generates $150 million to $200 million each year. The Constitution dedicates those dollars to the state’s Minimum Foundation Program (MFP), which supports school districts and is largely drawn from the state general fund.
The effect of removing the dedications from these funds would vary. For example, removing the dedication from the transportation fund would allow the $600 million of state fuel tax revenue to go to the general fund. It would be new money for the general fund that could be spent elsewhere in the budget, at the expense of the transportation program. There would be important considerations, such as the need for state matching money for federal highway projects and long-term bond financing.
On the other hand, removing the dedication from the Lottery Fund in practice might not change much, since most of its money is going to the Minimum Foundation Program, which is supported by the general fund anyway. So, the supposed gains from freeing up the general fund diversions should not be overestimated. Still, eliminating general fund diversions would, at a minimum, create greater budget flexibility.
The other major category is fee-based dedications, or fees and “self-generated revenue” collected from particular groups to be spent on related programs. These vary widely and are contained in both statute and in the Constitution. Within the Constitution, the Oil Spill Contingency Fund (Art. VII, § 10.7) assesses a fee on Louisiana refineries that store or process crude oil. These funds are then used to pay for operations of the Louisiana Oil Spill Coordinator’s Office and to fund oil spill prevention and response efforts. Likewise, a significant portion of the money deposited in the Conservation Fund (Art. VII § 10-A) comes from fees collected by the Department of Wildlife and Fisheries for hunting and fishing licenses and permits. Monies in the fund are appropriated each year to fund the department’s operations.
The problem with eliminating these dedications is that legally the money might not be used to support general fund programs such as healthcare. For example, certain businesses or agricultural interests, often by mutual agreement, are required to pay a fee to fund particular regulatory programs for their industries. The amount collected from a fee is supposed to be commensurate with the cost of providing the related service. Thus, removing the Oil Spill Contingency Fund would not necessarily allow those dollars to be spent legally on whatever appropriation the Legislature decides.
However, that does not mean there is no value in removing some dedications from the Constitution. Doing so would, at a minimum, give lawmakers flexibility to better prioritize state needs and make changes to the dedication without the lengthy and expensive constitutional amendment process. Louisiana is unusual as a state that details so many dedications in its constitution.
In addition to revenue dedications, the Constitution also mandates and protects certain expenditures that do not necessarily have a related funding source. This often means that state general fund revenue must be used to meet an expenditure requirement. Many of these categories of expenditures are labeled as “nondiscretionary spending,” meaning that the Legislature believes it does not have discretion to eliminate the expenditure or reduce funding below a certain level. As illustrated below, approximately 2/3 of all non-discretionary spending ($4.1 billion) is mandated by the Constitution.
For example, the state is also mandated by the Constitution to distribute $90 million from the general fund to local governments each year through the Revenue Sharing Fund and to provide supplemental pay to local law enforcement officers, firefighters and other officials.
Likewise, the Constitution requires that the state pay the debt owed to bondholders through the Bond Security & Redemption Fund and to finance pension obligations of state employees. ate employees.
In fiscal year 2019, approximately 70% ($6.3 billion) of all general fund dollars in the state budget were classified as “nondiscretionary.” Ten years ago, 52% of the general fund was non-discretionary. The proportional growth in the use of general fund dollars for these “non-discretionary” expenses has left relatively fewer dollars every year for so-called “discretionary” items in the budget. And that’s not counting the billions of dedicated dollars that contribute to special programs and do not go into the general fund.
One of the largest constitutionally mandated expenditures is the Minimum Foundation Program, or MFP. The state is constitutionally obligated to fund K-12 school districts through the MFP with an annual cost currently around $3.8 billion. Removing its constitutional protection would not change the need for the expenditure. Some type of statewide education funding structure is required to ensure equity in funding across school districts. If the MFP was not in the constitution, there is a good chance it would be mandated by the courts. The main public policy issues for the MFP are how the distribution formula is designed, the amount appropriated and the accountability of school districts, not whether the MFP or something like it should exist.
Rationales For and Against Dedications
The growing number of revenue dedications protected in the Constitution has multiple effects on the operation of state government. Dedications take away the Legislature’s flexibility to prioritize state expenditures. Dedicated constitutional and statutory funds are earmarked for specific programs and uses before the governor and Legislature begin to craft the annual operating budget. While eliminating dedications in the Constitution would not necessarily create additional net revenue, it would nonetheless provide the Legislature with greater flexibility to finance today’s priorities.
An additional consequence of revenue dedications, particularly those in the Constitution, is that they often immunize certain state government operations and programs from meaningful oversight and scrutiny. The Louisiana Department of Wildlife and Fisheries, for example, is funded almost exclusively by the Conservation Fund, not by state general fund dollars. The practical effect of this funding structure is that the Legislature has much less discretion or inclination to make changes to the department’s budget or to scrutinize the department’s use of funds.
Similarly, not a single dollar of the Department of Transportation and Development budget comes from the state general fund. Roughly 80% of the department’s funding comes from the Transportation Trust Fund and the rest comes primarily from federal funds and other statutory dedications. Thus, unlike most other state agencies, the transportation department does not have to rely on the Legislature’s appropriation of general fund dollars each year to support its operations. In turn, this means the Legislature has little ability to use funding to influence the department’s operations or as a way to incentivize efficiencies within the agency.
Despite the aforementioned drawbacks, there are sound policy rationales for retaining certain dedications in the Constitution. Some dedications are necessary for the functioning of key budgetary mechanisms. The Budget Stabilization Fund, also known as the Rainy Day Fund, helps prevent temporary surges of overspending and allows the state to set aside revenue during good fiscal times to use when the state’s economy takes a downturn or encounters an emergency. Another example is the Bond Security and Redemption Fund, which is necessary to ensure that the state sets aside money to meet its debt obligations. These funds, if managed properly, lead to higher credit ratings and more favorable pricing of the state’s bonds.
Other dedications in the Constitution help force the Legislature to prioritize long-term needs, such as safe and effective roads and bridges, protection and restoration of Louisiana’s disappearing coast, and funding the state’s pension obligations. State legislatures, influenced by political pressures of the day and special interests, have a tendency to be short-sighted, particularly with respect to fiscal planning. This feature is not unique to Louisiana. By mandating that certain sources of revenue be set aside for investment in specific long-term needs, the Constitution may help protect against short-term thinking.
A New Framework for State Funds
As legislators or convention delegates grapple with how to apply these principles to a rewrite of the Louisiana Constitution, they should seek to establish a basic constitutional framework for dedications and funds. The framework should assess the need for certain dedications to protect important or long-term priorities but also the negative consequences of too many detailed constraints on the Legislature’s fiscal powers.
Additionally, when making changes to the Constitution’s existing revenue and spending provisions, drafters should address constitutionally mandated funding mechanisms – and not just funds – to ensure a thorough review of opportunities for fiscal flexibility. That is, the changes we make to the Constitution should ensure that Article VII does not once again morph over time into an overly detailed constraint on the Legislature.
To achieve this dual goal of cleaning up our current constitution and preventing future troubles, a revised version should authorize the Legislature to establish three separate classifications of dedicated funds, each serving a different purpose based on the type and magnitude of revenue expected to flow into the fund and the fiscal purpose that the Legislature is seeking to achieve.
We will call these three classes Constitutional Funds, Permanent Trust Funds and Program Funds. The Constitutional Funds are a certain few funds that should be preserved in the Constitution with the same status as they have today. The Program Funds and the Permanent Trust Funds would be set up as classes of funds with some constitutional protections while being subject to limited statutory provisions. In addition, some unutilized constitutional funds could be eliminated. Here is an explanation of the three fund categories followed by a list of how current funds in the Constitution could be treated under this structure.
Funds Category #1: Constitutional Funds
As the top class, a Constitutional Fund would be one of the few funds that already exist in the Constitution that should continue operating in a similar manner. These funds can be created or altered only with approval by 2/3 of both legislative chambers and a majority vote in a statewide election. There are sound policy rationales for including certain funds in the Constitution. The Bond Security and Redemption Fund and the Budget Stabilization Fund are necessary for important budget mechanisms to function properly. The Coastal Protection and Restoration Fund and the Transportation Trust Fund are necessary to force the Legislature to prioritize long-term needs in the face of short-term fiscal and political pressures. The number of funds that warrant constitutional protection should be small, but the Legislature and voters should continue to have the option to preserve or set up funds that enjoy this higher level of protection.
Funds Category #2: Permanent Trust Funds
The Constitution should create a class of funds known as Permanent Trust Funds. This class of funds would be recognized in the Constitution and the corpus of these funds would be protected by the Constitution. The spending of the investment earnings would be determined by statute and could be changed with a twothirds vote of the Legislature.
Currently, the Constitution has protected funds that produce investment earnings, the spending of which are determined and protected by the Constitution itself. The big difference with a proposed Permanent Trust Fund is that the Legislature over time would be able to rethink the priorities of the spending targets without having to pass a constitutional amendment, while the corpus of the funds would continue to be constitutionally protected.
A transition to this type of structure would not have to be disruptive. Certain existing funds in the Constitution could be converted to the new system with the same spending priorities housed in statute. The Legislature at a later time – perhaps with a required transition period – could reconsider the spending targets or let them continue in perpetuity. Also, new such funds could be created by approval of the people with a constitutional amendment.
What are some examples? Occasionally the state receives a large, one-time infusion of revenue, such as a legal settlement or judgment, that political leaders believe should be protected. The traditional thinking Public Affairs Research Council of Louisiana 50 has been that these pots of money should endure for the long run and that any spending from interest or investment earnings should be aimed at specific targets and be set in constitutional stone for all future time.
A notable example in the current Constitution are the five separate funds established as a result of the 1998 multibillion-dollar tobacco litigation settlement, which provides the state with lump-sum payments of roughly $140 million annually. Following the settlement, the Millennium Trust was established in the Constitution. Revenue in the trust was divided equally among three separate dedicated funds– the Health Excellence Fund, Education Excellence Fund and the TOPS Fund. Each fund was designed to protect against the Legislature blowing through the settlement money too quickly or using it to plug temporary budget holes. The fund structure also acknowledged the need to use some of the new revenue generated by the settlement for state needs. Thus, the Constitution restricts annual appropriations out of each fund to no more than the amount of earnings from interest, dividends and capital gains. As a result, a significant balance (the principal) in each fund has remained mostly constant over time, while modest annual revenues from interest earnings are spent down each year on permissible programs and activities. (See historical balance charts for each fund.)
Although Louisiana may never again receive a windfall as big as the tobacco settlement, the state might receive other large settlements or judgments in the future, whether from recent opioid litigation against drug companies or some other major case. Any constitutional rewrite therefore should establish a predictable structure for how the state should invest and spend these large revenue windfalls.
How the Permanent Trust Funds would work
To accomplish this, a revised Constitution should grant the authority, with a 2/3 vote of each legislative chamber and a statewide constitutional amendment vote, to create a new Permanent Trust Fund. A few existing funds in the Constitution could be converted into Permanent Trust Funds.
Since the mechanism would be intended only for large infusions of revenue, any such trust fund would need to have a minimum balance or secure revenue stream. Because the purpose of the trust fund would be to balance the state’s need for long-term security with the desire to address shorter-term flexibility, the Constitution would limit annual appropriations from any new permanent trust fund to earnings from investments. However, unlike in today’s Constitution, the Legislature would have the ability to direct how those earnings are spent provided the 2/3 vote threshold can be reached.
The Legislature could decide that the earnings should flow back into the fund, or allocated to the state general fund, or designated to a particular program. Once the spending target is identified in statute, it would remain the same unless the Legislature decided by a super-majority to change it. Flexibility – set at a high vote – is the key.
A Permanent Trust Fund would have no sunset provision. As its name suggests, a permanent trust fund is designed to provide a permanent, long-term investment and revenue mechanism for the state. Should the state eventually want to overhaul the purpose and rules of a Permanent Trust Fund, a constitutional amendment and vote of the people would be required.
The state’s long-term investment practices could be reevaluated as part of a restructuring of these state funds. Currently, most large state funds are limited to safe, low-yielding investments, delivering in the range of about 1% per year or slightly better. These earnings are scraped off and used for the authorized spending purposes of the funds. As a result, these fund balances do not grow and in fact diminish in value over time, counting inflation. The reason behind this investment strategy is to maintain at least a small amount of fairly reliable annual revenue and to avoid losing principal when the broader investment market declines.
Contrast this investment strategy to the state pension systems, which invest more broadly and profitably over time. Though the pension system portfolios have had investment declines in bad years, in the long run they produce much greater returns than the state’s typical static trust fund. The state’s current ultra-cautious investment policy for dedicated funds is not required by the Constitution and should be reconsidered.
Funds Category #3: Program Funds
Certain dedicated funds now enshrined in the Constitution should be converted into a new type of fund with supermajority legislative authority to modify them. This change would affect existing constitutionally dedicated funds for revenue that would otherwise flow into the state general fund. To help ensure that revenue is diverted by large consensus for the most critical priorities, the Constitution should require a 2/3 vote from both legislative chambers to amend or eliminate these dedications. This new standard would apply to certain existing constitutional funds. Recommendations for current constitutional funds are shown below.
The Constitution would define the general parameters of this class of fund, which could be called Program Funds to reflect that they are created from particular revenue sources for particular programs. Program Funds would enjoy a constitutionally mandated level of protection requiring a 2/3 vote for any changes in the structure or spending priorities of the funds. But with that supermajority, the Legislature could redirect the specifics of the fund and its spending targets.
What if the Legislature wanted to create a new dedicated fund? As it can today, the Legislature would be able to create a low threshold fund requiring only a simple majority vote to implement or change it. If the Legislature wanted a new fund with the constitutional protection of a 2/3 voting majortiy, it could create a Program Fund through the usual constitutional amendment process, as it can today. The constitutional language authorizing this system of statutory funds would need to be reviewed carefully. Just as taxes and fees can be changed and created in statute, they also are subject to constitutional limitations; Program Funds would likewise.
While this reform would not remove these existing funds from the Constitution, it would provide greater and much needed flexibility for modifications of how the funds are appropriated or structured. Program Funds, as outlined above, will be most suitable for recurring revenues that the Legislature wishes to appropriate for programs and services that are, at least to some extent, constant. For the most part, revenue will come into each of these funds throughout the year and be spent on operational needs or new projects. The money tends to flow through the fund rather than sit still as an investment account.
It is significant to note that for statutory funds associated with revenue from fees or fines, the Constitution already requires a 2/3 vote of the Legislature to impose a new fee or to raise an existing fee. Requiring a 2/3 vote to dedicate the funds for a specific purpose therefore would not impose a more stringent standard than exists today. Moreover, to the extent the Constitution is revised to clarify that fee revenue may only be used to fund programs or services with a substantial nexus to the activity that generated the fee, there should be less need for fee-based dedicated funds.
Sunsets for Program Funds & Other Statutory Funds
Regardless of the level of security a fund enjoys, no dedication of revenue should last forever without reevaluation. The needs and priorities of the state and its citizens change over time, and as they do, it is prudent for the Legislature to reexamine existing revenue uses to ensure they align with current priorities. Despite adding new statutory dedications and funds year after year, the Legislature has consistently been unwilling to eliminate dedicated funds. Indeed, history has revealed that once a particular interest group is successful in siphoning off revenue for its special cause, it is politically dicey for legislators to get rid of the dedication. The practical result is that once a dedicated fund is in place, it is likely to stay for the long-term.
For this reason, the Constitution should require that all statutory dedications of revenue that would otherwise flow into the state general fund automatically sunset after 10 years, unless renewed by the Legislature with a 2/3 vote. This sunset rule should also apply to new statutory funds that are created in the future.
Sunset provisions are intended to provide a built-in process for the Legislature to evaluate the effectiveness of existing laws and programs. Sunsets are routine business in the Legislature; state law requires the eventual sunset of entire agencies. As it relates to dedicated funds, the sunset evaluation should aim to answer the question of whether the dedication continues to serve the public interest or whether, instead, the dedicated funds might be more effectively used on other priorities.
To assist the Legislature in making a well-informed decision regarding the continued existence of a fund, the Department of Treasury, working with the Dedicated Fund Review Subcommittee of the Joint Legislative Committee on the Budget and the implementing agency, should be required to prepare a report that describes all activity within the fund during the past 10 years, including fund balances and how fund monies have been spent. Armed with this information, the Legislature will be able to make more informed decisions regarding the continued usefulness or purpose of each dedication.
Constitutional Fund Recommendations
The first step in constitutional fund reform is to adopt a new structure for classifying them. The PAR recommendations explained above would provide a workable new structure that balances new flexibility with appropriate protections.
The next step is to decide how the existing constitutional funds would be classified under a new system and to determine which funds might be eliminated. PAR counts 28 funds established in the Constitution that would require a constitutional revision or amendment to change.* PAR’s constitutional fund recommendations follow here. A more in-depth look at each fund can be found in Chapter 4.
The highest and most protected category, Constitutional Funds are those that should remain in the Constitution because they are necessary for important budget mechanisms to function properly and to make sure the state is ensuring its long-term financial and infrastructure needs. This category includes the following funds:
1. The Bond Security and Redemption Fund (Art. VII, § 9)
2.The Budget Stabilization (Rainy Day) Fund (Art. VII, § 10.3)
3. The Revenue Stabilization Trust Fund (Art. VII, § 10.15)
4.The Coastal Protection and Restoration Fund (Art. VII, § 10.2)
5.The Transportation Trust Fund (Art. VII, § 27)
The Budget Stabilization and Revenue Stabilization funds could be combined and simplified into a more streamlined set of mechanisms and fund balance requirements under a single Constitutional Fund. In addition to its role for long-term infrastructure planning, the Coastal Fund is a matter of integrity for Louisiana’s reputation in Congress and across the nation as a worthy steward of scarce resources applied to a vital mission.
The Transportation Trust Fund would continue to include the “Construction Subfund” that was approved by voters in 2017. As designed, this subfund would capture increased revenue from any new fuel tax and the money could not be used for state employee wages or benefits. Also, the recommended fund structure would not prevent the Legislature from shifting the transportation department’s operational budget partly into the state general fund, thereby placing the agency under greater scrutiny in the yearly appropriations process, as some reform initiatives have suggested.
Permanent Trust Funds: These are pots of money whose principal would be protected by the Constitution while the marginal spending authority for the investment earnings would be subject to a 2/3 vote of the Legislature. This category includes the following funds:
6.Health Excellence Fund (Art. VII, § 10.8)
7. Education Excellence Fund (Art. VII, § 10.8)
8. TOPS Fund (Art. VII, §§ 10.8, 10.10)
9. Louisiana Fund (Art. VII, § 10.9)
10. LEQTF Permanent Trust Fund (Art. VII, § 10.1)
11. LEQTF Support Fund (Art. VII, § 10.1)
Program Funds: These funds would allow a 2/3 vote from both legislative chambers to amend or eliminate any function or dedication.
12. Conservation Fund (Art. VII, § 10-A)
13. Artificial Reef Development Fund (Art. VII, § 10.11)
14. Hospital Stabilization Fund (Art. VII, § 10.13)
15. Louisiana Medical Assistance Trust Fund (Art. VII, § 10.14)
16. Mineral Revenue Audit and Settlement Fund (Art. VII, § 10.5)
17. Oil Spill Contingency Fund (Art. VII, § 10.7)
18. Oil Site Restoration Fund (Art. VII, § 10.6)
19. Lottery Proceeds Fund (Art. XII, § 6)
20. Patient’s Compensation Fund (Art. XII, § 16)
Funds to eliminate: Defunct funds and funds with longstanding zero balances or inactivity should be repealed. This category includes the following funds:
21. Millennium Leverage Fund (Art. VII, § 10.10)
22. First Use Fund. (Art. IX, § 9)
23. Higher Education Louisiana Partnership (HELP) Fund (Art. VII, § 10.4)
24.Agricultural and Seafood Products Support Fund (Art. VII, § 10.12)
25. Atchafalaya Basin Conservation Fund (Art. VII, § 4(D))
26. Tideland Fund (Art. IV, 2(d) (1921 Constitution); Art. XIV, § 10 (1974 Constitution))
27. Louisiana Investment Fund for Enhancement (LIFE) (Art. IX, § 10)
Additional moves: The 28th fund counted by PAR is the Revenue Sharing Fund. It is a constitutionally mandated automatic mechanism that distributes $90 million per year straight from the state general fund to local governments, based on a formula and annual legislation defining the distribution. If the fund is retained, it should require that local governments apply the revenue to programs of joint state and local interest, such as local matches needed for mental health facilities or early childhood education. Other constitutional dedications contained in Article VII of the Constitution should be addressed on a case-by-case basis. These dedications include the Medicaid Trust Fund for the Elderly (Art. VII, § 10(F)(4)), which was established in statute but added to the Constitution in 2012 for the limited purpose of protecting it from being swept during budget downturns. This fund should be retained in statute but references should be removed from the Constitution. The Parish Severance Tax and Parish Road Royalty Fund dedications (Art. VII, §§ 4(D), (E)) require that a portion of all mineral revenues from stateowned lands and waters be distributed to local governments. These dedications serve a valid purpose and should remain in the Constitution since local governments are otherwise prohibited from collecting revenue from natural resources contained in their parishes.
Further refinements would need to be considered, such as how to deal with the state’s mechanisms for treating budget shortfalls, which currently may include sweeps of cash from some constitutional funds. The recommendations in this report are not exhaustive.
Next steps and transitions
Reformers could overhaul the state Constitution with these new financial structures without simultaneously changing the existing revenue and funding streams. For example, an existing constitutional fund could be converted into the new structure while maintaining its current allocations of money and its constituency. Companion statutes tied to the reforms would accompany the constitutional changes. A transition period might even be mandated to keep the status quo for a year or two.
This approach would reduce controversies in shifting to the new system. The constitutional reformers could focus on the best new structure for finances rather than on tweaks for the peculiar interests of the various fund beneficiaries. With a better constitution in place, the governor and Legislature could then evaluate the next steps for change and perhaps determine better uses for the state’s limited resources.
A broader approach would be to retool both the Constitution and the details of the fund mechanisms at the same time. This approach would create a more heated battle between the financial winners and losers of the specific changes in the fund allocations. The risk is that fundamental constitutional reform could fail due to less important political skirmishes and needless detail.
Impact of recommended reforms
Is there some way to measure the advantages and added budget flexibility of implementing the recommended reforms? The answer is yes, but with managed expectations.
Once we eliminate the seven useless funds and create the five top-tier Constitutional Funds, the remainder of the funds combined represent about $1.14 billion in annual expenditures. That figure is not the total value of the money in the funds, which would be much greater. It is the amount passed through and drawn from the funds for certain dedicated purposes each year. The new structure therefore would indicate a potential increased state spending flexibility of an amount more than a billion dollars.
But there are important reasons why that number should not be confused with the notion of new money. The lottery fund supports K-12 education through an allocation to the state’s Minimum Foundation Program and basically offsets state general fund money that would be needed to sustain the MFP at its required levels. The Medical Assistance Trust Fund – which accounts for more than $500 million in expenditures – is restricted to support services from a health care provider class; a diversion would not alleviate the need for state money to maintain the program. The Conservation Fund uses fees to pay most of the bills to run the Department of Wildlife and Fisheries, which presumably needs operational money from somewhere.
In these cases, the virtue of the new fund structure is not necessarily new money for new priorities. The advantage is the ability of legislators and the governor to tweak and refine programs with greater flexibility and to do so in a statutory environment, albeit at a high bar with the 2/3 vote requirement. In the case of some fee-based agencies, the Legislature might be able to exercise greater oversight of their operations during the appropriations process.
The new structure for the Permanent Trust Funds offers an opportunity to rethink those spending priorities. Although the highly constrained earnings from these trust funds are applied to current state spending programs, their purpose could be re-evaluated and applied differently. They represent about $155 million in annual expenditures. If the funds used a slightly less cautious but still conservative investment plan, they could over time offer two or three times as much annual spending volume. Such an investment reform might also consider ways to keep the funds from slowly disintegrating in real value.
PAR’s recommended reforms would not necessarily change the perception of funding requirements for state programs or the governor’s and Legislature’s consensus about state priorities, which would still be subject to limited resources and political influence. But the bottom line is that reforms for constitutional funds and dedications could increase spending discretion and agency oversight for the Legislature.
*PAR’s count of 28 constitutional funds does not include so-called revenue dedications that are supervised by the Constitution but do not have an actual Department of Treasury fund associated with them. While a general estimate of constitutional funds can be said to be “around 30,” for the purposes of this report PAR counts 28. This number includes only those funds that could be changed or eliminated through an amendment or constitutional convention. It does not, for example, count funds that were established by a previous constitution that still exist for various reasons. Auditors, accountants and legislative budget staff may look at it differently depending upon the standards they wish to apply. Some analysts count a larger number of constitutional funds; for example, they might count sub-funds within larger funds. The 28 funds counted by PAR capture the broad scope of real money in question.