Wisdom vs. Expediency

12/08/2008

On December 15, Louisiana Revenue Estimating Conference (REC)
will meet at the state Capitol to certify some very important
fiscal data. The group is charged with giving the official
estimate for state revenues that the governor and the
Legislature must use to limit state spending. In recent years,
the conference has done a commendable job of establishing
conservative revenue estimates. While some in the Legislature
would always like to have higher estimates to grease the skids
for more spending, the members of the conference have resisted
that temptation.

When they meet on the 15th, the REC will also officially
certify the surplus (projected to be approximately $850
million) for the fiscal year that ended June 30. They will
also certify the amount of money in the state's Rainy Day
Trust Fund, which is expected to be in the $800 million range.
As the price of oil and gas plummet and world economies crash,
the status of the Rainy Day Fund is going to get a lot of
attention from legislators very soon.

The findings of the REC on the 15th will be heavily influenced
by several sobering facts. Last February, the REC estimated
oil revenues based on a crude oil price of $73.45 per barrel.
Last May, with oil prices escalating worldwide, the conference
upped the estimate to $84.23 for the current budget and $72.17
for the 2009/2010 fiscal year. Crude oil prices continued to
soar, reaching a peak of $147 per barrel in July. Then the
bottom fell out. Today, crude oil is selling for less than $45
per barrel. The importance of the price decline lies in the
fact that for every dollar the price of a barrel of crude oil
declines, the state loses $13 million in revenue.

The math is ugly. Soaring crude oil prices during the first
half of 2008 were the primary drivers of the surplus. The
precipitous drop in those prices--along with an ailing
national economy--will remove the word "surplus" from
legislative budget discussions for the foreseeable future.
Natural gas prices have also dropped significantly, triggering
an additional revenue problem for both the current and the
following fiscal years. If the REC continues its practice of
conservatively estimating oil and gas revenues, the impact on
the current budget could be a reduction of several hundred
million dollars. That shortfall will have to be addressed once
the revenue estimates are certified by the REC.

Some in the Legislature will want to tap the Rainy Day Fund in
order to avoid making cuts in the current budget. Perhaps as
much as $270 million would be available from the fund to fill
the void, but that would be a very foolish move for the
Legislature to make. Faced with a 2009/2010 budget shortfall
of as much as $1.3 billion, the governor and legislators
should begin to reduce current levels of spending now to start
addressing the problem. If state officials opt to start using
the Rainy Day Fund to cover shortfalls in the current budget,
they are setting themselves--and the taxpayers--up for a
nightmare scenario if revenues plunge even further than
estimated during the next fiscal year (a definite
possibility.)

The actions taken by the REC on the 15th will begin a very
interesting and important series of decision-making events
that will cast light on how fiscally responsible our state
leaders will be in handling our budget problems. A lot is at
stake. Hopefully, they will do a better job of resolving
Louisiana's problems than our "leaders" in Washington have
done in handling the nation's.