1 Please refer to the notes that accompany selected slides in this presentation for a more complete explanation of the point that the slide is intended.

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Please refer to the notes that accompany selected slides in this presentation for a more complete explanation of the

point that the slide is intended to make (go to “view” in the

menu and select “notes page”)

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FISCAL YEAR 2011-2012 . . . THE “CLIFF YEAR”

Bob KeatonSeptember 2010

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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 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”?

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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

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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

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Finally, the revenue and expenditure projections are presented to the Joint

Legislative Committee on the Budget for its 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

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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

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What does a $1.6 billion shortfall mean in the context of

the total state budget?

Since Louisiana’s Constitution requires a balanced budget, this

shortfall must be addressed in the governor’s FY 11-12 Executive

Budget

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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

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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

FEDERALFUNDS

45%$11.5 B

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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

FEDERALFUNDS

45%$11.5 B

DEDICATIONS18%

$4.6 B

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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

FEDERALFUNDS

45%$11.5 B

DEDICATIONS18%

$4.6 B

AGENCY FEES7% 1.7 B

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GENERALFUND30%

$7.7 B

The most versatile funding in the budget is the General Fund which can be used to pay for

any expense of government

FEDERALFUNDS

45%$11.5 B

DEDICATIONS18%

$4.6 B

AGENCY FEES7% $1.7 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

GENERALFUND30%

$7.7 Billion

Cutting $1.6 Billion out of this area of state funding would amount to a 20% across-the-board cut

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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

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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

DEDICATIONS

AGENCYFEES

NON-DISCRETIONARY

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Higher Ed.37%

Health Care29%

All Other34%

Breakdown of Discretionary General Fund Budget

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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 = 6%

Percent cut to total FY 11 budget to eliminate a $1.6 billion shortfall

Projected FY 12 Shortfall Total FY 11 Budget

Most Depts.Could Live With This

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$1.7 billion ÷ $25.5 billion = 6%

$1.6 billion $2.6 billion = 61%÷

Percent cut to FY 11 discretionary budget required to eliminate the $1.6 billion shortfall

Projected FY 12 Shortfall FY 11 DiscretionaryBudget

Most departments could not managethis level of a cut without a significant reduction in services

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

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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?

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Let’s take a look at all of the departments that comprise the “All Other” category

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

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With this background we can begin exploring options for dealing with the $1.6 billion

shortfall

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 “non-discretionary” budget that are not constitutionally protected

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What’s Included in the Non-Discretionary Budget

Department Gen. Fund Dollar Amount

Primary Reason for Non-Dis.

Classification

Executive$9,912,922 Court Order/Debt Serv.

Sec. of State$16,821,573 Constitutional

Corrections$358,161,030 Unavoidable Oblig.

DHH$347,069,358

Court Ord./Fed. Mandates

DSS $61,095,969 Unavoidable ObligHigher Ed.

$91,465,034 Un. Avoid. Ob./Stat Oblig.Education

$3,092,747,146Const. /Unavoidable

obligations. CourtOrderHCSD

$38,212,277 Unavoidable ObligationsOther Requirements

$419,255,144 Const./Debt/Un. AvoidNon. Appropriated

$426,991,041 ConstitutionalJudicial/Legislative

$201,745,557 Legislative Discretion28

What’s Left in the Non-Discretionary Budget After Constitutional Items Are Removed?

Department Gen. Fund Dollar

AmountPrimary Reason for

Non-Dis. Classification

Executive$9,912,922 Court Order/Debt Serv.

Sec. of State$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

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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.

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TRIGGER TO CUT CONSTITUTIONALLY PROTECTEDEXPENDITURES AND FUNDS WILL NOT BE MET IN FY 12

What happens if all expenditures in the non-discretionary budget that are NOT

Constitutionally mandated are subjected to the same cuts as the discretionary programs?

+ $1.436 B (non-Const. expenditures)

$2.644 B $1.601 B = 61%

Cuttable FY 12 Shortfall % Cut Needed

$4.080 B $1.601 B = 39%

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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

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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

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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

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?

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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 non-discretionary budget becomes a greater percentage of the General Fund budget. This change exposes departments in the “discretionary budget” to larger cuts

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4. There are fewer options to infuse non-recurring funding into the revenue stream to stave off cuts because many of those options have already been used

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

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5. The 2011 Regular Session precedes a state-wide election year and this makes all decisions more difficult

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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

FY 12 Loss to the General Fund as a result of tax cuts and dedication legislation enacted since 2007*

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 -$ .1 Million

TOTAL FY 12 Impact -$981 .9 Million

* Source: Fiscal Notes Legislative Fiscal Office

* *Additional dedication of $166.3 million was delayed and not included in the revenue loss for this FY

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The GeneralFund loss is at least this much annually going

forward

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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.)

UNMET NEEDS

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Things to watch for in the coming months . . .

• Congressional handling of federal tax cuts set to expire in January 2011

• Certification of FY 10 ending General Fund Balance . . .

• 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

. . . would have a negative impact of approx. $30 M in FY 12 if cuts are not renewed for upper end taxpayers

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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