The 2005 Session: The Good, The Bad and The Ugly

The 2005 Regular Session of the Legislature was primarily a fiscal session; however, it was also the first meeting of the new, hybrid fiscal and limited-general session that was created by a 2002 constitutional amendment. In addition to fiscal bills, legislators could introduce up to five non-fiscal bills dealing with state concerns and an unlimited number of local bills. While fiscal issues remained the primary focus of the short (60 calendar-day) session, a number of interesting issues were considered that, in the past, would have had to wait for a general or special session.

The new format was an improvement. Subject matter committees met regularly and senators had something to do besides wait for the House to send up the appropriations bills. The bill limit significantly cut the chaff and fluff that typically stuffs the hopper in a general session and concentrated legislators’ attention on a manageable number of issues. These were often issues that the authors felt very strongly about and generated some lively debates. The Stelly Plan, property taxes, a proposed $1-per-pack cigarette tax increase and a hospital provider fee were some of the hot fiscal issues. Non-fiscal issues that created some heat included a ban on cloning, stem cell research, school testing, indigent defense, ethics reform and end-of-life issues, to name a few.

Unfortunately, there were numerous missed opportunities to enact reforms or improvement in healthcare, capital outlay budgeting, ethics, retirement, teacher pay and other policy areas. Ultimately, few significant changes were adopted. It was, in fact, fortunate that many of the proposed changes were turned back including the efforts to undo the Stelly Plan, limit local property tax authority, micro-manage the technical schools and lower the Rainy Day Fund cap. In short, the session results were mediocre. The good legislation could have been better, the bad legislation could have been much worse. A couple of major examples of inaction, however, made the ugly category.

THE FY 2005-06 BUDGET

The main event of the session was the adoption of an $18.7 billion budget for FY 2005-06. This is a $900 million, or 5%, increase over the current spending level and a two-year increase of 11% over actual fiscal year 2004 spending.

The initial proposed $18.1 billion budget was only $311 million over the current year’s spending level – an increase of less than 2%. Faced with the loss of $278 million in one-time federal funding for health programs, a $400 million overall shortfall, an automatic $62 million increase in the MFP and an estimated increase in general fund revenues of only $129 million, the governor’s message characterized the situation as a “looming fiscal crisis.” Most agencies were again asked to absorb inflation and find 3.5% spending cuts. The governor even cut the urban and rural slush funds in half. One of the few significant spending increases proposed was for $20 million in new money for pre-K education.

The initial budget also included a $183 million supplementary spending package tied to some uncertain revenue sources. However, these revenues ultimately were realized including $87 million from a new hospital provider fee, a $65 million bond defeasance and additional federal matching dollars generated by applying the new funding to Medicaid programs. However, even before these revenues were added, the Revenue Estimating Conference met in mid-May and revised its estimates upwards, adding $192 million for the current year and $168 million for next year’s budget.

Two major themes dominated the session’s budget deliberations: funding teachers’ pay raises and funding healthcare.

Teachers’ Pay Raise

With the recognition of additional available revenue, the administration committed the newfound money to closing the shortfall in healthcare services. Legislators also took advantage of the new money to restore funding for the slush funds and to add local projects. The governor, who originally wanted to fund a $1,000 teacher raise, now offered a $3,300 raise over two years for teachers, a 5% raise for higher education faculty and a raise for school employees. This was to be funded by a $1-per-pack increase in the cigarette tax estimated to raise $182 million next year and $300 million the following year.

PAR suggested that the administration had not made its case for a tax increase, considering the amount of money that the Legislature was in the process of allocating to lower priority items. More importantly, the administration refused to disavow a proposal waiting in the wings to lower the Rainy Day Fund cap and pour another several hundred million dollars into the general fund. There were also some questions regarding the appropriate size and nature of the raises, inclusion of school employees and the disposition of the $40 million in extra revenue the tax would raise in the following year.

By realigning its priorities, the Legislature could have produced at least $112 million simply by reclaiming the $16 million for the urban and rural slush funds, $37 million in individual legislator’s projects, $47 million in nursing home payments (not included in the initial budget) and the $12 million to be spent at the discretion of the commissioner of agriculture. A $1,000 raise for teachers alone could have been funded for $70 million. This together with the average $530 raise provided through the MFP would have given teachers a total raise of $1,530, on average.

After the cigarette tax increase was killed, an effort was made in the Senate to cobble together funds from various sources to fund a limited raise for teachers and faculty. However, this proposal didn’t attempt to shift any of the sacrosanct slush funds or local projects. It didn’t even try to reclaim the $12 million in agriculture slush money.

In the end, the only additional money for pay raises came when the Senate shifted $12.5 million to ensure that all teachers got at least a $530 raise. The resolution approving the $2.7 billion MFP funding required that $31.4 million of the $51 million increase be used to fund an average raise of $530. However, teachers in 22 parishes would have received a lesser amount or nothing at all. Giving these teachers the full $530 took most of the $13 million remaining in the supplemental appropriation bill for the current year that had been allocated to help pay down the unfunded accrued liabilities of the state retirement systems. The pay raise bill was amended to recognize that this is one-time funding, and the raise should be considered a one-time bonus.

Hospital Provider Fee

The proposed hospital provider fee was an important funding element for the original supplemental, or “below the line,” portion of next year’s budget. Initially proposed at $75 million, the fee as passed will provide $87 million that, with $203 million in federal Medicaid match and $10.5 million from having hospitals certify expenses, will provide $300 million. About $170 million of the total will go back to hospitals to partially reimburse them for indigent care. The remaining $129 million will go to cover other Medicaid program costs.

The federal government must still approve the funding arrangement, and there is some uncertainty as to if and when such approval might be forthcoming. A negative decision by the federal government partway through the year would be a serious fiscal problem. Additional uncertainty has also been raised by a potential suit to be brought by the specialty or “boutique” hospitals questioning the equity of the fee collection and disbursement.

Capital Outlay Budget

The capital outlay budget ballooned to nearly $4.5 billion. About $2 billion of the total is funded by cash, mainly federal and state highway revenues and self-generated revenues. The remaining $2.46 billion in projects must rely on bond funding, however only $72 million of the self-imposed limit of $313 million in bonds to be issued next year will be available for new projects.

There has been much discussion recently about reforming the capital outlay process and limiting the projects included in the budget to those that might reasonably be expected to be funded. However, the administration took no steps to limit the authorization of projects or to otherwise reform the process. At the same time, the Legislature has abdicated its responsibility by allowing the administration to make the ultimate decisions as to which projects will be funded.

Most legislators, it would appear, have little stomach for cutting someone else’s pet projects and thus jeopardizing their own. It is easier to let the commissioner of administration sort them out later. It is also politically preferable to take credit for getting a local project on the list and then be able to blame the administration for its lack of funding. As a result, the budget is loaded with local projects.

PAR will be addressing the capital outlay budgeting process in an upcoming report.

Supplemental Appropriations for the Current Year (FY 2005)

Most years, the state expects to have some money left over, and the Legislature has an opportunity to spend it before the year ends and it becomes “surplus,” which can only be used for constitutionally defined purposes. This year, the $192 million in added revenue created a major challenge to use the money appropriately for one-time purposes and avoid the temptation to use it to fill shortfalls in next year’s operating budget.

The original supplemental bill provided a net increase of $170 million, including a $33 million surplus carried over from the prior year. With the new revenue estimates, the bill total doubled to about $339 million. The extra money allowed the state to pay some judgments, help school districts with retirement costs, buy education equipment, and make a variety of other one-time expenditures. Current healthcare services also received additional funding. In addition, by using $65 million to pay off bonds early, the same amount of general fund revenue was freed up for other uses next year.

Proposed Constitutional Amendments

The Legislature approved only five of the 50 proposed constitutional amendments introduced this session. The amendments would dedicate certain federal revenues to fighting coastal erosion (SB 187), exempt art held on consignment (SB 200) and rural hospital medical equipment from the property tax (SB 32), allow New Orleans to eliminate property tax on automobiles (HB 187) and provide property tax breaks for certain persons with disabilities (SB 89). However, because there is no statewide election scheduled this year, voters will not make a decision on these proposals until next year.

THE GOOD

Unfortunately, much of the good done in the session resulted from the failure of a number of misguided proposals to attract support.

1. An effort to lower Rainy Day Fund cap was aborted.

A proposal, authored by the Senate President, would have lowered the cap on the Rainy Day Fund by statutorily changing the definition of the phrase “total state revenue receipts.” The phrase has been interpreted to include agency self-generated and federal revenues. The change would apply the 4% constitutional cap only to the state’s general fund revenues, thus lowering the cap from $744 million to about $425 million. Because there is about $465 million now in the account, this would free up $40 million this year and possibly much more in subsequent years if oil and gas prices remain high. The state’s oil-and-gas-related revenues over $800 million per year must go into the Rainy Day Fund until it reaches its cap, then they go into the general fund.

The governor neither supported nor rejected this proposal but did suggest the need for a public discussion regarding the appropriate cap. This leaves the possibility open for this idea to be revisited, perhaps in a special session, as a potential funding source for teacher pay raises.

PAR has strongly supported retaining the current Rainy Day Fund cap.

2. A proposal to make the Tax Commission members elective failed.

HB 790 would have expanded the Louisiana Tax Commission from five to seven members and have them elected from Supreme Court Districts instead of being appointed by the governor. The Tax Commission is responsible for assessing public service property, assuring that parish assessors are following the law in assessing other property and serving as an appeals board for assessments. The bill, which failed final passage in the House, would have further politicized an assessment process that is already far too political. PAR has called this one of the most ill conceived proposals offered this session.

3. The School Accountability Program was not watered down.

Efforts to undermine the state’s school accountability program once again received the cold shoulder they deserved. One particularly egregious proposal would have replaced the uniform statewide criterion testing with locally adopted tests, thus making it possible for school districts to avoid having their results compared.

A more serious effort to weaken the program would have prohibited using failure of a LEAP test as the sole reason for holding a student back or denying a high school graduation certificate. The bill died in committee following a spirited debate.

4. Minor steps were taken to shore up the indigent defender system.

SB 323 will begin to shift responsibility for providing lawyers for poor defendants from local government to the state. The bill allows the state Indigent Defense Assistance Board to collect information about public defenders and their cases, standardizes criminal court fees to help fund local defenders and defines “indigent” and “case” for funding purposes.

The most contentious aspect of the bill focused on the board’s expansion from 9 to 15 members and to include representatives of additional interested groups. The bill is a small step to reform a system that needs major structural changes and an additional $25 million in annual funding to cover the $55 million cost of providing adequate legal representation according to estimates by national experts.

5. A less costly retirement system was created for future state hires.

HB 311 created a new set of retirement rules for state employees hired after July 1, 2006. Savings from the new requirements would total $10 million over the first five years but would grow significantly as more employees were added to the plan.

Under the plan, an employee must reach 60 years of age with 10 years of service to be eligible for unreduced benefits. Benefits would be 2% per year, instead of 2.5%, and based on a five-year average compensation instead of three. The employee contribution rate will be 8% instead of 7.5%. Current employee retirements would not be affected.

PAR has recommended a similar modification of the state’s defined benefit plans for some time.

6. Efforts to limit local property tax authority were defeated or deferred for further study.

Many homeowners faced major tax increases recently as assessors were required to follow the law in bringing appraisals in line with fair market values. In reaction, a number of legislative proposals would have capped property tax assessments, liberalized assessment freezes, increased the homestead exemption and eliminated taxing bodies’ authority to roll up millages following mandatory roll back after reassessment. These proposals would have seriously undercut local governments’ tax authority and created an untenable situation for taxing bodies that rely solely on property taxes. Most of the troublesome bills were defeated, deferred or converted into study resolutions. In the final hours of the session, one bill (SB 89) was passed that would amend the constitution to expand property tax assessment freezes to certain military veterans and their spouses. The constitutional amendment will now be voted on in a 2006 statewide election.

Three other bills will provide taxpayers better and timelier information regarding their assessments, allowing them to challenge values they feel are incorrect. SB 316 expands the state requirement for online posting of the tax rolls from 46 parishes to all 64, with limited exceptions. Additionally, the bill requires that reassessment lists be made available online during the inspection and appeal period. Online publication makes the public more aware of assessment practices and brings additional pressure on the assessors to maintain equity. A proposed requirement that property owners’ names be placed online, however, was amended out of the bill.

SB 108 requires additional public notice prior to hearings by local taxing bodies that will vote on increasing millage rates following a roll back. SB 96 does the same and also adds the requirement that assessors mail notice of reappraisals and assessment increases to taxpayers and exempts Rapides Parish.

7. Movie tax credit program was scaled back, and new economic development incentives were enacted.

HB 731 revised the movie production tax credit program to increase the percentage of the credit while limiting it to production expenditure in the state. It also created a new credit for investors in film studios and other facilities in Louisiana. The changes are estimated to reduce next year’s costs by $9 million. The administration suggests that these savings will cover the cost of several new incentive programs.

The Legislature enacted the governor’s package of economic development incentives including tax breaks for angel investors (HB 627), corporate headquarters (HB 679), research and development (HB 684), firms contemplating leaving the state (HB 795) and sound recording studios (HB 631). However, while the angel credit is limited to $5 million per year, the ultimate cost of expanding the tax equalization program to existing firms with out-of-state offers depends only on the willingness of the administration to grant the tax credits.

8. The Stelly Plan remained intact.

A number of bills were designed to undo the Stelly Plan by restoring the state income tax deduction for excess federal itemized deductions. A proposal to restore the entire deduction would have reduced state revenue by $238 million. A bill to phase the deduction back in over 10 years for individuals with federal adjusted gross incomes of $75,000 and joint filers with income up to $150,000 would have cost the state $15 million the first year and an additional $15 million or more each year thereafter. The latter bill, SB 1, was deferred without a vote after a lengthy Senate committee hearing.

PAR has consistently held that this first step toward fiscal reform should not be undermined.

THE BAD

A large number of promising reform proposals were turned back, in several cases after receiving approval in one house.

1. The central tenet of health care reform – de-institutionalization – was partially abandoned.

Prior to the session, the governor’s healthcare reform panel had recommended moving away from institutional care for the elderly and toward a greater emphasis on community and home based alternatives. While the initial budget proposal called for a $60 million cut in payments to nursing homes, $47 million in payments were subsequently restored when additional revenues were recognized to be available.

2. Statutory authority for the inspector general was refused.

In 1988, the Office of State Inspector General (IG) was created in the governor’s office by executive order. The office has waxed and waned since then, depending on the interest of the governor. To maintain a strong monitoring and auditing presence within the executive branch, PAR has recommended giving the IG office statutory authority and greater independence from the governor. A bill (HB 37) to statutorily create an independent IG office within the governor’s office was killed by a House committee. A major sticking point involved control over IG reports. The bill gave the IG, rather than the governor, the right to release reports. Although it was amended to retain the governor’s control over IG reports, the bill was still defeated 3-5.

3. A proposal to require heavily amended bills to lie over for 24 hours was killed.

House rules generally require conference committee reports to lie over until the next legislative day. However, an exception allows “fast tracking” of such reports on the last two calendar or legislative days. A separate rule governs the general appropriation bill.

HR 31 would have changed the rules to stop the fast tracking of reports on the last day when new, substantive changes to a bill are proposed but have not been heard in a committee or on the floor of either house. The resolution would have prevented “surprise” amendments by making sure that all bills receive some degree of scrutiny before passing the Legislature. Various fiscal bills would have been excluded. The resolution failed on a 50-50 vote.

4. A comprehensive retirement reform proposal was turned back.

SB 7 proposed a comprehensive reform of the retirement systems for state employees and teachers. The bill provided for a major restructuring of the administration of these systems, placing them under a consolidated board that would have replaced the existing member-dominated boards. The new board was to be comprised primarily of representatives of the public.

The bill also spelled out new, less costly plans for new hires that would have had an estimated first 5-year savings of $22.6 million. The bill was left on the Senate calendar.

5. $50 million was allocated to pay UAL, then it was taken back.

Initially, the supplemental appropriations bill for the current year allocated $50 million to help pay down the unfunded accrued liabilities (UAL) of the retirement systems for state employees and teachers. This included $30 million from the increased revenue estimate and another $20 million contingent on the proposed cigarette tax, which failed. The Senate Finance Committee diverted $17 million of the $30 million to healthcare in the FY 2006 budget. The money is to be used for hospital equipment, to shore up mental health clinics and to help rural hospitals. A Senate amendment transferred $12.5 million of the remaining $13 million from the UAL to ensure that all teachers receive a pay increase this year of at least $530. Even the remaining $500,000 was tapped for other purposes.

PAR has recommended using windfall revenues to make additional payments on the states’ UAL in order to save millions in future interest costs.

6. Financial disclosure for legislators was watered down and then killed.

HB 694 was the governor’s attempt to slightly expand the personal financial disclosure information required of legislators. Legislators currently only report income received from public bodies and gaming entities, while the governor and candidates for governor file a much more detailed report. The bill initially required fairly significant disclosure but was abandoned in view of strong opposition. A substitute bill was then offered to require legislators and legislative candidates to report income received from lobbyists and principals of lobbyists. PAR has recommended full financial disclosure from all sources and could not support the stripped down version, as it offered little to identify real or perceived conflicts of interest. However, even this small step on the road to disclosure was rejected by a House committee.

7. A comprehensive plan for the charity hospital system was not provided.

With the deterioration of the charity hospitals, looming accreditation problems and the threat to medical training programs, it is increasingly important to make some decisions about the future of the charity system. The administration did not provide the plan this session.

If the state decides to replace existing facilities, the cost in Baton Rouge and New Orleans alone would run about $400 million and $500 million, respectively. Initial planning and design funding of $24 million was appropriated for Baton Rouge’s Earl K. Long facility. LSU says the remainder of the cost could be financed using self-generated revenues.

The New Orleans charity hospital will not receive anything toward rebuilding in the 2006 budget. The charity hospitals did, however, get some of the new money for equipment and operating costs.

8. Pork barrel politics continues.

The governor’s proposed budget initially cut in half the urban and rural development funds, which have a $16 million appropriation for the current year. With the recognition of additional revenue, the Legislature restored the $8 million cut in the “slush funds,” so-called because the governor can dole them out to legislators for their pet local projects. In addition, individual members added some $37 million in spending for local projects in their districts.

The administration reportedly used its control and influence over the granting of funding for local projects to obtain individual legislators’ support for its tax proposals and to sanction those who broke from the ranks.

9. Flexibility for the higher education boards to set tuition was rejected.

HB 619 would have given the higher education management boards the authority to set tuition and mandatory fees according to an April 2005 Board of Regents’ policy. That policy would allow institutions to raise tuition to 93% of the southern-state average and phase in the increase over six years. The authorization required a two-thirds vote of the Legislature. The bill had unanimous support in the House committee but died on the floor. PAR has recommended providing this type of flexibility for fee setting under general legislative authority. TOPS supporters argued against the bill due to the estimated $9.2 million a year increase in the TOPS costs.

THE UGLY

1. Legislators allowed to keep free tickets.

A bill that would have eliminated an ethics code exception allowing elected officials, including legislators, to receive free tickets to football games, golf outings and other sporting and cultural events received particularly poor treatment in a House committee. SB 82 made it through the Senate to end in a well-choreographed demise.

In the House committee hearing, members’questions focused on what tickets they would have to pay for should the bill pass. No member offered a single reason why legislators and other elected officials should continue to receive special treatment. After a motion recommending the bill be favorably reported, a substitute motion to defer was offered. Because no one objected to the substitute motion, no member had to vote against the measure that had left the Senate 35-0. PAR has a longstanding recommendation to get rid of this exception.

2. Efforts to rein in the agriculture commissioner failed.

Several bills seeking to rein in the commissioner of agriculture failed to even make it out of committee. The bills addressed the commissioner’s constitutional powers; his control over a $12 million annual revenue stream from slot machines at race tracks, and, most importantly, the lack of transparency and competition in his department’s construction contracts.

SB 43 was an unsuccessful attempt to make the Louisiana Agricultural Financing Authority, the entity that finances the department’s construction projects, subject to the public bid law. The public bid law, which applies to all other state entities, is designed to protect the public, ensure that the lowest qualified bidder wins and provide a level playing field for private contractors.