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1
FISCAL YEAR 2011-2012 . . .
THE
“CLIFF YEAR”
Bob Ke
2Septem
This presentation deals with the projected
budget shortfall for FY 12 and includes a
discussion of the following:
●
the process used to determine the
shortfall
●
what the shortfall means in the context of
the total state budget
●
how it is likely to be dealt with assuming
no increase in taxes or fees
●
and how public policy decisions affect the
state’s ability to live within its budget while
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maintaining vital state services
The 5-Year Base-Line Budget Report that was
presented to the Joint Legislative Committee on
the Budget in August projects a $1.6 billion
shortfall in FY 12.
Since this is such a large number, the first
question that should be asked is, “where did
this number come from and how accurate is it”?
4
In 1992, after Louisiana had just gone
through some of the worst budget cycles in
recent history, the Legislature established the
Five-Year Base-Line Budget Process
(R.S. 39:171 – 175)
The process matches the Official Revenue
Forecast with the Official Expenditure
Forecast to show how well revenues and
expenditures match up in the current and
ensuing four fiscal years
5
The official revenue numbers are provided by
the Constitutionally created Revenue
Estimating Conference
By law, the expenditure projections are
developed by the Commissioner of
Administration, but assisting in this process
are the Legislative Fiscal Office, the Senate
Fiscal Staff, and the House Fiscal staff
Finally, the revenue and expenditure
projections are presented to the Joint
Legislative Committee on the Budget for its
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review and input
The Five-Year Base-Line Budget Report
shows a shortfall of $1.6 billion for the FY
that begins on July 1, 2011
This projected shortfall of $1.6 billion will be
the subject of considerable speculation and
discussion between now and when the
legislature convenes on the third Monday of
April, 2011
The remainder of this presentation lays the
groundwork for those discussions
7
What does a $1.6 billion
shortfall mean in the context of
the total state budget?
8
Since Louisiana’s Constitution
requires a balanced budget, this
shortfall must be addressed in the
governor’s FY 11-12 Executive
Budget
9
But, there’s some
misunderstanding about the
significance of a $1.6 billion
shortfall because in Louisiana’s
$25.5 billion FY 11 operating
budget a shortfall of that amount
could be dealt with by a cut of
only 6%
10
Some radio talk show hosts might
present the situation to their
audiences something like this . . .
“Why is it so hard for the
legislature to cut $1.6 billion out of
a $25.5 billion budget. That’s a
cut of only 6% and who out there
couldn’t manage to cut their
budget by 6%?”
11
The upcoming slides answer that
question
12
Think of the FY 11 budget as a big pie with
slices that represent the various categories of
funding used to support expenditures. Federal
Funds cannot be cut to deal with the shortfall
FEDERAL
FUNDS
45%
$11.5 B
13
For various reasons, the legislature and in some
cases the citizens, have chosen to dedicate
certain revenues for specific services. Dedicated
funds are not generally considered to be available
to offset a shortfall
FEDERAL
FUNDS
45%
$11.5 B
DEDICATIONS
18%
$4.6 B
14
The legislature allows some agencies to
charge a fee to offset some or all of the cost
of their operations. These fees are not
generally considered to be available to cover
a budget shortfall in the General Fund
FEDERAL
FUNDS
45%
$11.5 B
DEDICATIONS
18%
$4.6 B
15
The most versatile funding in the budget is the
General Fund which can be used to pay for
any expense of government
FEDERAL
FUNDS
45%
$11.5 B
GENERAL
FUND
30%
$7.7 B
DEDICATIONS
18%
$4.6 B
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Because there are restrictions on the use of the other
sources of funding in the budget, the General Fund is
where most of the cuts will have to be made to deal with
the $1.6 billion shortfall
GENERAL
FUND
30%
$7.7 Billion
Cutting $1.6 Billion out of this area
of state funding would amount to a
20% across-the-board cut
17
However, there are even restrictions on the
General Fund and those restrictions protect $5.1
billion of the total $7.7 billion from cuts. This
uncuttable part of the budget is referred to as
“non-discretionary” spending
$2.6 Billion
$5.1Billion
18
This leaves 10% of the total state budget or
about $2.6 billion to absorb the $1.6 billion in
cuts needed to eliminate the $1.6 billion
projected FY 12 shortfall
$2.6 Billion
FEDERAL
NONDISCRETIONARY
AGENCY
FEES
DEDICATIONS
19
Breakdown of Discretionary
General Fund Budget
All Other
34%
Higher Ed.
37%
Health Care
29%
20
If the budget shortfall of $1.6 Billion could be cut
from the total budget, the percentage cut to
each department would be relatively small
$1.6 billion ÷ $25.5 billion =
Projected FY 12 Shortfall
Total FY 11 Budget
Most Depts.
Could Live
With This
6%
Percent cut to total FY
11 budget to eliminate
a $1.6 billion shortfall
21
Unfortunately, 90% of the state’s budget is
protected from cuts, so the shortfall must be
absorbed by those departments that receive
discretionary appropriations and the percentage
cut is very high
Most departments
could not manage
this level of a cut
without a significant
reduction in
services
$1.7 billion ÷ $25.5 billion =
$1.6 billion
Projected FY 12 Shortfall
÷ $2.6 billion =
FY 11 Discretionary
Budget
6%
61%
Percent cut to FY 11
discretionary budget
required to eliminate
the $1.6 billion shortfall
22
What are the Legislature’s options for not cutting
61% of the FY 11 budgets of higher education,
health care, and a host of other important
programs like Veterans Affairs, Elderly Affairs,
Economic Development, School Accountability,
Ethics Administration, the Military, State Parks,
TOPS, and whole host of other programs that
are lumped into the “all other” category?
Let’s take a look at all of the departments that
comprise the “All Other” category
23
What’s Included in the “All Other” Category of
Discretionary Spending
Department
% of Dept.’s Gen.
Fund Discretionary
Budget
Dollars
Executive
93%
$133,683,908
Veterans Affairs
73%
$5,660,657
Sec. of State
41%
$11,748,744
Agriculture
100%
$16,707,363
Attorney General
87%
$6,984,507
Economic Dev.
82%
$16,167,176
Tourism & Rec.
91%
$24,373,438
Youth Services
98%
$129,017,227
Labor
100%
$8,558,722
Civil Service
93%
$4,342,748
TOPS
100%
$138,000,000
24
With this background we can
begin exploring options for
dealing with the $1.6 billion
shortfall
25
Option 1: Continue the hiring
freeze, don’t give merit raises, don’t
budget new equipment, freeze
travel, don’t fund MFP increase,
defer building and equipment
maintenance, and don’t budget for
inflation
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Option 2: Cut programs in the “nondiscretionary” budget that are not
constitutionally protected
27
What’s Included in the Non-Discretionary Budget
Department
Executive
Gen. Fund Dollar
Amount
Primary Reason for
Non-Dis.
Classification
$9,912,922
Court Order/Debt Serv.
$16,821,573
Constitutional
Corrections
$358,161,030
Unavoidable Oblig.
DHH
$347,069,358
Court Ord./Fed. Mandates
DSS
$61,095,969
Unavoidable Oblig
Higher Ed.
$91,465,034
$3,092,747,146
Un. Avoid. Ob./Stat Oblig.
Const. /Unavoidable
obligations. CourtOrder
HCSD
$38,212,277
Unavoidable Obligations
Other Requirements
$419,255,144
Const./Debt/Un. Avoid
Non. Appropriated
$426,991,041
Constitutional
Judicial/Legislative
$201,745,557
Legislative Discretion
Sec. of State
Education
What’s Left in the Non-Discretionary Budget After
Constitutional Items Are Removed?
Department
Executive
Gen. Fund Dollar
Amount
Primary Reason for
Non-Dis. Classification
$9,912,922
Court Order/Debt Serv.
$16,821,573
Constitutional
Corrections
$358,161,030
Unavoidable Oblig.
DHH
$347,069,358
Court. Ord./Fed. Mand
DSS
$61,095,969
Unavoidable Oblig
Higher Ed.
$91,465,034
Un. Avoid. Ob./Stat Oblig.
Education
$3,092,747,146
Const. /Avoid. Ct. Order
HCSD
$38,212,277
Unavoidable Obligations
Other Requirements
$419,255,144
Const./Debt/Un. Avoid
Non. Appropriated
$426,991,041
Constitutional
Judicial/Legislative
$201,745,557
Legislative Discretion
Sec. of State
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TRIGGER TO CUT CONSTITUTIONALLY PROTECTED
EXPENDITURES AND FUNDS WILL NOT BE MET IN FY 12
Revenue is projected to grow From FY 11 through FY 14
(Official Forecast in Million $’s)
This is pretty decent revenue growth given the current
economy. Maybe too good.
30
What happens if all expenditures in the nondiscretionary budget that are NOT
Constitutionally mandated are subjected to the
same cuts as the discretionary programs?
Cuttable
$2.644 B
FY 12 Shortfall
$1.601 B
% Cut Needed
=
61%
+ $1.436 B (non-Const. expenditures)
$4.080 B
$1.601 B
=
39%
31
Option 3: Implement Options 1 and 2,
but also put selected programs funded
with statutory dedications in the mix of
programs to be cut to deal with the
shortfall
32
Dedications account for $4.6 Billion of
the FY 11 State Budget. Some of these
funds are constitutional, some are from
federal sources, and some represent
one-time money. But some portion of
the $4.6 Billion is from statutorily
created funds and those monies can be
redirected by the Legislature. Any
redirection should be done for multiple
years to avoid pushing the FY 12
shortfall into the future
33
Option 4: Refinance debt, change
amortization schedules for the
unfunded accrued liability of the
retirement systems, and push any
other expense for FY 12 as far out into
the future as possible. This creates
some short term savings but in some
cases increases future years costs.
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SOME FINAL THOUGHTS
35
The state has faced large
budget shortfalls in the past
and was able to avoid
significant curtailment of
services. Why might it be
different this time?
36
1. The state is in its third year of
budget cuts and downsizing. Budgets
are lean with little slack left to absorb
additional cuts without significant
reductions in services
2. As cuts shrink the size of the
“discretionary” budget, the nondiscretionary budget becomes a
greater percentage of the General
Fund budget. This change exposes
departments in the “discretionary
budget” to larger cuts
37
3. The budget shortfall is not the result of
a revenue forecast that is declining
which would “trigger” access to
constitutionally dedicated funds that
could help mitigate the shortfall and
legislation that would have increased
the legislature’s access to those funds
did not pass
4. There are fewer options to infuse nonrecurring funding into the revenue
stream to stave off cuts because many of
those options have already been used
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5. The 2011 Regular Session precedes a
state-wide election year and this makes
all decisions more difficult
39
Tax cuts and dedications enacted
over the past four years were
major contributors to the FY 12
shortfall but the trend shows that
the legislature’s inclination for
such actions has been declining
as the size of the shortfall grows
40
FY 12 Loss to the General Fund as a
result of tax cuts and dedication
legislation enacted since 2007*
The General
Fund loss is at
least this much
annually going
forward
2007 Regular Session
-$508.8 Million
2008 Extra. Session
-$283.0 Million
2008 Regular Session
-$101.5 Million**
2009 Regular Session
-$ 88.5 Million
2010 Regular Session
-$
TOTAL FY 12 Impact
-$981 .9 Million
.1 Million
* *Additional dedication of $166.3 million was delayed and
not included in the revenue loss for this FY
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* Source: Fiscal Notes Legislative Fiscal Office
UNMET NEEDS
In addition to the projected shortfall, there is a
growing backlog of important projects that cannot be
addressed with currently available resources. The
cost of this backlog increases daily
•
Highways ($14 Billion approx.) - gasoline tax revenue
grows at about 2% annually and highway construction
and maintenance costs grow at about 6%
•
UAL on Retiree Group Benefits ($11 Billion
approx.) – this liability continues to grow because
there are no active plans to deal with it
•
Deferred maintenance on state buildings and
college campuses ($4.3 Billion approx.)
•
State self-insurance program - R.S. 42:851 ($1.2
Billion approx.)
42
Things to watch for in the coming months . . .
• Amendment No. 2 on the November 2nd ballot
. . . could have a negative impact of up to $35 million in FY 12 and as
much as $65 million in following years
• Congressional handling of federal tax cuts set
to expire in January 2011 . . . would have a negative impact of
approx. $30 M in FY 12 if cuts are not renewed for upper end taxpayers
• Certification of FY 10 ending General Fund Balance . . .
This event has already occurred and the balance for FY 10 was a deficit of
$106 million. The governor issued an executive order cutting the current
year budget to cover the deficit and higher ed’s share was $34.8 million
• Next meeting of the Revenue Estimating Conference . . .
the FY 12 shortfall of $1.6 billion is based on a revenue forecast made in
April of 2010. A revision of the current forecast is always possible and a
downward revision could increase next year’s shortfall and create another
shortfall in the current fiscal year
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end of presentation
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