Yesterday, Today and Tomorrow from a State Budget Standpoint

The biggest issue facing Governor Jindal and the Legislature in 2010 will be the state budget. No other issue will come remotely close to capturing the same amount of attention and scrutiny in the run-up to the legislative session next March. Considering the fact that the governor must submit an executive budget outline in February, the countdown is on.

The budgeting process is going to be anything but fun in 2010. Soaring revenues fueled by incredibly high oil and gas prices and billions of dollars of hurricane recovery money are a thing of the past. Slower revenue growth is likely to meet a huge loss of federal Medicaid money in the budgeting process next year, and the result will not be pleasant.

To better understand the future direction of the state budget, a look at the two most recent budgets helps to put things in perspective.

In 2008 when the governor and the Legislature fashioned the 2008-2009 budget, state government was still rolling in high cotton. Money was pouring into the treasury so fast it was hard to spend it all—but Lord knows we tried. The total state budget increased by $1 billion and the state general fund portion of it (the part funded only by state generated revenue) went up by a whopping $1.24 billion. That budget also contained an increase of 1,000 state job positions. This significant expansion of the state budget came after a similar sizeable increase in the 2007-2008 budget fashioned in the last year of the Blanco administration. But what goes up must come down—and our governor and Legislature began to learn that lesson last spring when they wrote the 2009-2010 budget.

The budget debate last spring and early summer contained a lot of wailing and gnashing of teeth. The House members wanted to bring spending back in line with existing revenues. A majority of the Senate wanted to increase taxes and lessen the amount of cuts.

Governor Jindal did not support tax increases, so the House version of the budget became the basic blueprint. The result was that the total state budget decreased by $1.5 billion from the previous year and the state general fund portion dropped by $1.21 billion.

That budget also called for a reduction of 1,200 authorized (but probably not filled) job positions in state government. In essence, the governor and the Legislature simply reverted back to 2007-2008 spending levels when they crafted the current budget. But remember, those spending levels were a huge increase in and of themselves due to higher oil and gas prices and hurricane recovery money.

Now the road gets bumpier for the governor and the Legislature. Unless the federal government changes the formula for determining the state match for Medicaid funding (or carves out a temporary exemption for Louisiana), there will be $1 billion less revenue to use to come up with the same spending levels as exists in the current budget.

Several cost savings panels are meeting to come up with recommendations for reducing expenditures and identifying efficiencies in state government operations. Unfortunately, most of the potentially low hanging fruit in the cost savings arena has already been harvested.

To come up with a billion dollars of spending reductions, some sacred cows are going to have to be sacrificed—things like the multiplicity of institutions in post-secondary education and the large amount of state funding provided for local government services and construction projects.
How the governor and Legislature handle the budget next spring will impact the fiscal future of Louisiana for years to come. Let’s hope they do better than Congress.

Keeping Manufacturing Alive

Some of the highest paying jobs in America are created by companies that make things. Manufacturing has been a mainstay in the U.S. economy since the beginning of the industrial revolution. Some say that manufacturing is passé, that technology is the future, and that it doesn’t matter if manufacturing dries up and blows away.

The flaw in those arguments (actually there are numerous flaws) is that one of the biggest users of technology today is manufacturers.

Modern manufacturing operations are the showcase for innovative technology. Gone are the days, for instance, when hundreds of laborers engaged in the back-breaking activity of wrestling with logs in a forest products plant. A typical worker in those facilities today is more of a technician than a log wrestler.

State-of-the-art machinery moves the logs, determines the best possible value that can be extracted from them, and turns them into profitable products. The same is true of many industries, such as steel, durable goods, petroleum refining, and chemical manufacturing. Technology is the driving force that has increased productivity in American manufacturing, which has kept us a global leader in manufacturing output.

As noted above, advancements in technology have led directly to a diminution of manufacturing employment in the U.S. Many Americans believe that most of the manufacturing job losses—and there have been millions in the last few decades—are due to plants closing in the U.S. and moving to less-developed countries.

Certainly there has been some of that phenomenon occurring, particularly with low-technology industries. But, until this point, the majority of manufacturing job losses has been due more to productivity advances through technology than out-sourcing manufacturing jobs to foreign countries.

That may change soon. Government policies can have a major impact on any industry, and manufacturing is no exception.

Several issues pending in Congress could accelerate the departure of manufacturing industries and jobs from the U.S. Enactment of “cap and trade” legislation tops the list.

If energy costs rise exponentially for manufacturers in the U.S., companies will undoubtedly look more favorably at countries that do not artificially raise their cost of doing business by raising their energy costs.

Another federal issue that will impact the future of American manufacturing is the “card check” legislation pending in Congress. Some manufacturers work with a union agreement. Others do not. Manufacturers are not generally concerned about the wages involved with a collective bargaining agreement. They already have some of the highest wage scales in the private sector.

What troubles them are the voluminous work rules that come with a union contract. These contract requirements inhibit the productivity advancements necessary for manufacturing to survive in the modern world.

The current health care debate also has the full attention of U.S. manufacturers. The vast majority of our domestic manufacturers provide quality health insurance coverage for their workers. Proposals in Congress would mandate that coverage and possibly tax manufacturers for providing it.

The manufacturing community is very wary of government-imposed mandates from past experience involving many issues. Limiting their ability to design quality, affordable insurance plans for their workers—and possibly making them pay taxes to provide it—will not make them more likely to keep or expand their operations in the U.S.

If America is to remain a world leader in making things, government officials should step lightly when considering policies that could make more of our best jobs leave our shores.

Improving the quality of education, encouraging more research and development, and maintaining job-friendly tax policies will help keep manufacturing jobs in America. Passing some of the proposals pending in Congress will definitely have the opposite effect.

Where Do We Go From Here?

The Legislature has adjourned, but the dust from this session probably will not settle before next year's session begins. Louisiana, like many other states, is at a critical crossroads. Two governors and two different Legislatures significantly overspent volatile oil and gas revenues in the two years prior to the current one. That was the major cause of the budget crisis state government faced this year. The problem is easy to identify. Simply go back to the decision made under the Blanco administration to fully fund the Rainy Day Trust Fund and allow skyrocketing oil and gas revenues to flow into the state general fund where they could be spent on recurring expenditures. That is exactly what the Legislature did in Governor Blanco's last year and again in Governor Jindal's first year in office. This year, the chickens came home to roost. Unfortunately, even more chickens will be looking for roosting space in the next few years.

Last Thursday, the head of the Congressional Budget Office told Congress that the federal budget is unsustainable going forward with current spending levels-much less the increases being proposed. Some well-credentialed fiscal guru needs to give our governor and Legislature the same message.

In addition to Louisiana's declining revenue problem, the federal government has informed us that, due to a temporary upward blip in personal income, we will be paid $1 billion less in Medicaid money next year. Our state leaders are on their knees begging for mercy from that decision, but there is a strong likelihood that their pleas will go unanswered. Compounding the problem is the fact that in two years, hundreds of millions in "stimulus" dollars will no longer be coming from Washington. The time to plan for that is now, not two years from now.

Another ominous sign on the horizon is the very negative attitude the Obama administration and the majority in Congress is showing toward the oil and gas industry. The industry is facing a drastic increase in taxes and more restrictions on domestic exploration and production. If domestic oil and gas activity is curtailed by new federal laws and regulations, our state revenue picture will become even bleaker.

Governor Jindal is first up at bat in addressing these problems since he must submit an executive budget proposal to the Legislature early next year. What the governor submits in his annual executive budget usually provides the basic blueprint for what comes out of the process. Certainly, the governor can't expect any increase in revenues coming from natural growth in the foreseeable future. That being the case, he will supply the early vision as to how state government must be reconfigured to match appropriate spending levels with real-world revenue projections. His executive budget should also clearly indicate what his spending priorities will be.

The executive and legislative branches should not wait for next year to begin reshaping the delivery of state services to match new revenue realities. Close scrutiny should be given to state funding of local government services, consolidation of functions in post-secondary education, civil service reforms that would enhance state government's ability to consolidate its workforce, and other spending reforms that would reduce the expense side of the state fiscal ledger.

It was fun to be governor or a legislator in the revenue-boom years after the hurricanes when recovery money was flowing and oil and gas prices were setting records. The party is now over. It is time to clean up the excesses and make government work as best as possible with the revenues that are available. That is what families are doing all across Louisiana. Their elected leaders should follow suit.

Action Picks Up In Washington

By Dan Juneau


Major committees in Congress are moving quickly—some would say too quickly—on legislation that will have a great impact on our health and our pocketbooks. The bills that are advancing are quite momentous. If they were being shaped by sound, well-researched analysis, perhaps the proposals wouldn’t be as scary. Unfortunately, much of the health care and energy legislation is being developed more by deal-cutting than by what works in the real world.

The health care legislation is a prime example. The cost estimates for the bills being shaped in various committees range from $1 trillion to $3.5 trillion over a 10-year period. With the budget deficit for next year already slated to be almost $2 trillion, even the spend-happy Congress is under pressure to pay for whatever is proposed and not simply add the cost to the ever-increasing federal deficit.

One of the major taxes being discussed to pay for the health care bills is a tax on employer-provided health insurance. Such a tax could raise almost $500 billion to offset the cost of covering more of the uninsured and underinsured. The problem is it could blow a hole in the foundation of our health care system that is based on coverage paid for all or in part by employers.

Some of the loudest critics of this tax proposal are the labor unions that have negotiated labor contracts with Cadillac benefits largely paid for by their employers. The staunch opposition of the unions is leaving its mark. One of the major Senate proposals now calls for creating an exemption from this tax for—you guessed it!—labor unions. If such a plan passes, non-union workers could be subject to having their employer-provided health insurance premium payments taxed as ordinary income.

That means that, in addition to the regular income tax rate they are subject to applying to this benefit, they would have to pay Medicare and Medicaid taxes on the amount as well. Their employers would also have to pay their share of the Medicare and Medicaid taxes. Non-union employers and employees would have to pay the tax while their union counterparts would escape the burden.

Substituting politics for sound policy decisions is very much at play with the energy legislation under consideration in Congress as well. Speaker of the House Nancy Pelosi is determined to have “cap and trade” legislation—that would limit carbon dioxide emissions and drive up energy costs—enacted by the end of summer.

But Pelosi and Company ran into a wall of opposition from many members of their own Democratic Caucus who are concerned about the economic impact of the legislation on their constituents. Particularly upset are farm state Democrats who believe the legislation could jeopardize their re-elections. The Waxman-Markey bill cannot pass without those key votes. So what happened? Deals were cut to placate the concerns of some but left the constituents of other congressmen (many in “Red States”) on the hook for paying potentially huge increases in energy costs.

This is no way to run a railroad. If a complete revamp of the nation’s health care system is a necessity, then everyone—union members included—should have to pick up the huge cost of paying for it. If significantly increased energy costs are the price that must be paid for reducing carbon dioxide emissions, then everyone in every region of the nation should have to bear those costs. There are sound reasons for opposing both the “cap and trade” legislation and the health care bills. Playing politics with who gets the bill for them only adds fuel to the fire.

The Games People Play

Dan Juneau

A recent ruckus in the state legislature has created a lot of anger and garnered national media attention. The incident involved a sneak attack amendment that Representative Avon Honey managed to get tacked onto one of his bills. The result was a 99-0 vote in the House of Representatives for a bill that, as amended, would enact changes in Louisiana’s unemployment compensation law to be eligible for unemployment compensation stimulus money approved by Congress.

There is more than meets the eye in this maneuver. The bill that was amended was on the “consent calendar” of the House agenda. That part of the agenda is reserved for bills that are totally non-controversial and can be considered quickly in order to speed up the legislative process. The original bill pertained to changes in the workers’ compensation law—not unemployment compensation.

Placing an unemployment compensation amendment on the bill violates the “dual object” provision in the Louisiana Constitution. That provision is designed to maintain order in the legislative process by preventing bills from being hijacked willy-nilly by amending them to have more than one objective.

Essentially, Representative Honey’s last second, unconstitutional amendment to his bill on a calendar reserved for totally non-controversial bills violated the legislative process on several levels, but that was just the opening act. When the bill arrived in the Senate, another game was played when it was referred to committee.

Under the Senate’s rules, the bill should have either not been referred due to its dual object flaw or, if referred, it should have gone to the Senate Labor and Industrial Relations Committee. Instead, the bill was referred to the Senate Finance Committee, presumably under the pretext that it has an impact on state finances.

Senate rules do provide for the dual referral of bills that have a significant fiscal impact. However, the rules clearly state that those bills must first go to the substantive committee (in this case, Labor and Industrial Relations), and only if they advance from that committee should they go to the Finance Committee for the fiscal impact review. The rules of procedure were abused and violated in both the House and the Senate on Rep. Honey’s bill.

Why?

Unfortunately, it has a lot to do with game-playing and message-sending. The unemployment compensation stimulus issue has devolved, to a significant degree, into a Republican versus Democrat and Jindal versus Obama spat. Other bills were filed to do exactly what Rep. Honey’s unconstitutional amendment attempts to do.

However, each time those bills were scheduled for hearing in the House committee, the authors declined to have them considered in a free and open debate on their merits. Instead, the route of subterfuge and abuse of legislative rules was taken.

Governor Jindal’s opposition to taking this portion of the stimulus money has to do with future tax increases on struggling employers to pay for the added benefits once the federal money is gone. His objection is a valid one. Some claim that the stimulus money in question is needed to delay tax increases and benefit cuts that will occur as unemployment claims climb in the future.

That is a bogus argument. Those tax increases and benefit cuts will occur next January regardless of the stimulus money. What the changes in our unemployment compensation law will do is bring us closer to additional employer tax increases and unemployment benefit cuts in the future as the unemployment trust fund has to continue to pay for the new benefits once the stimulus money is used up.

There is room for honest debate about the unemployment compensation stimulus money. There shouldn’t be any tolerance for abuse of the process so that some folks can play games and send messages.

Focus on the Millages

Dan Juneau

There is a lot of debate going on at the State Capitol on the issue of property taxation. Some of it centers on raising the homestead exemption, some on freezing or capping tax assessments, and some on carving out special property tax safe harbors for relatively small groups of people. The property tax issue is a complex one and few understand exactly how their property tax bills work.

Individuals with concerns about property taxes should focus on one main aspect: millages. The millage amount is applied to the assessed valuation of taxpayers’ property to determine the amount of taxes owed: the higher the millages, the higher the tax bill.

How do millages go up? Taxpayers can vote to increase the millages in a tax election. If the tax proposition passes, the new millages are added to the next tax bill. Perhaps the most common way millages go up relates to something called roll-forwards. Every four years, residential property is reappraised by the local assessors. If values rise (which is common), the state constitution requires that millages must automatically be rolled back to a level that collects the same amount of tax revenue on the books before the reassessment of property. However, the constitution also gives local governing authorities the option to roll the millages forward to their previous levels—without a vote of the people—in order to collect more revenue. Millages also will rise significantly if the homestead exemption is increased. An increase in the exemption narrows the tax base and millages then automatically roll forward (with no vote required on anyone’s part) to higher levels.

Some of the proponents of raising the homestead exemption say it would result in a reduction of property taxes. That isn’t correct. It would simply result in a transfer of property taxes from some taxpayers to others. It would become a tax increase to many homeowners whose homes are valued higher than the exempted levels, to businesses that already pay almost 80 percent of the property taxes, and to renters whose landlords would pass on their tax increases in the form of higher rents.

According to the Tax Foundation, Louisiana ranks dead last (51st among the 50 states and the District of Columbia) in residential property taxes paid. At the same time, Louisiana has the highest homestead exemption in the nation ($75,000 of home value). The taxpayers who have seen their property tax bills go up a noticeable amount are looking at the wrong element of relief if they think raising the homestead exemption is the answer. Most of the increases are coming from the roll-forward of millages by local governments after reassessments are done.
Everyone benefits from public education, public safety, roads, water, and sewerage infrastructure improvements, libraries, and other public services. The individuals who are pushing for a higher homestead exemption think only a small group of taxpayers—primarily business owners and homeowners who are already paying more than their fair share of property taxes—should be the exclusive source for funding those necessary services. Others in the Legislature are carving out property tax exclusions for small groups of homeowners, not by giving them a direct credit for lower taxes on their tax bills, but by having someone else pay their taxes.

Some members of the Legislature appear hell-bent on making a bad situation worse when it comes to our property tax system. Unfortunately, our Governor is voicing his support for some of the legislation that would be the antithesis of the fiscal reform needed to improve tax fairness and the business climate of Louisiana.