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)

FISCAL YEAR 2011-2012 . . . THE CLIFF YEAR

Bob Ke Septem 2

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 states ability to live within its budget while 3 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?

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
Finally, the revenue and expenditure projections are presented to the Joint Legislative Committee on the Budget for its 6 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
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What does a $1.6 billion shortfall mean in the context of the total state budget?

Since Louisianas Constitution requires a balanced budget, this shortfall must be addressed in the governors FY 11-12 Executive Budget

But, theres some misunderstanding about the significance of a $1.6 billion shortfall because in Louisianas $25.5 billion FY 11 operating budget a shortfall of that amount could be dealt with by a cut of only 6%
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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. Thats a cut of only 6% and who out there couldnt manage to cut their budget by 6%?
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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

FEDERAL FUNDS 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

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

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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

NONDISCRETIONARY AGENCY FEES DEDICATIONS

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Breakdown of Discretionary General Fund Budget

All Other 34%

Higher Ed. 37%

Health Care 29%

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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 =

Projected FY 12 Shortfall
Total FY 11 Budget

6%

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

Most Depts. Could Live With This

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Unfortunately, 90% of the states 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

$1.7 billion $25.5 billion = $1.6 billion

Projected FY 12 Shortfall

could not manage this level of a cut without a significant reduction in services

6% 61%

$2.6 billion =
FY 11 Discretionary Budget

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

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What are the Legislatures 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? Lets take a look at all of the departments that comprise the All Other category
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Whats Included in the All Other Category of Discretionary Spending

Department Executive Veterans Affairs Sec. of State Agriculture Attorney General Economic Dev. Tourism & Rec. Youth Services % of Dept.s Gen. Fund Discretionary Budget 93% Dollars $133,683,908

73%
41%

$5,660,657
$11,748,744

100%
87%

$16,707,363
$6,984,507

82%
91% 98%

$16,167,176
$24,373,438 $129,017,227

Labor
Civil Service TOPS

100%
93% 100%

$8,558,722
$4,342,748 $138,000,000

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

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Option 1: Continue the hiring freeze, dont give merit raises, dont budget new equipment, freeze travel, dont fund MFP increase, defer building and equipment maintenance, and dont budget for inflation
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Option 2: Cut programs in the nondiscretionary budget that are not constitutionally protected

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Whats Included in the Non-Discretionary Budget

Department Executive Sec. of State Corrections DHH DSS Higher Ed. Education $3,092,747,146 HCSD Other Requirements Non. Appropriated Judicial/Legislative $38,212,277 Gen. Fund Dollar Amount $9,912,922 $16,821,573 $358,161,030 $347,069,358 $61,095,969 $91,465,034 Primary Reason for Non-Dis. Classification Court Order/Debt Serv. Constitutional Unavoidable Oblig. Court Ord./Fed. Mandates Unavoidable Oblig Un. Avoid. Ob./Stat Oblig. Const. /Unavoidable obligations. CourtOrder Unavoidable Obligations

$419,255,144
$426,991,041 $201,745,557

Const./Debt/Un. Avoid
Constitutional Legislative Discretion

Whats Left in the Non-Discretionary Budget After Constitutional Items Are Removed?
Department Executive Sec. of State Corrections DHH Gen. Fund Dollar Amount $9,912,922 $16,821,573 $358,161,030 $347,069,358 $61,095,969 $91,465,034 $3,092,747,146 $38,212,277 $419,255,144 $426,991,041 $201,745,557 Primary Reason for Non-Dis. Classification Court Order/Debt Serv. Constitutional Unavoidable Oblig. Court. Ord./Fed. Mand Unavoidable Oblig Un. Avoid. Ob./Stat Oblig. Const. /Avoid. Ct. Order Unavoidable Obligations Const./Debt/Un. Avoid Constitutional Legislative Discretion

DSS
Higher Ed. Education

HCSD
Other Requirements Non. Appropriated Judicial/Legislative

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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 FY 12 Shortfall % Cut Needed

$2.644 B
$4.080 B

$1.601 B
$1.601 B

=
=

61%
39%

+ $1.436 B (non-Const. expenditures)

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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

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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 nondiscretionary 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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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 legislatures 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

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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 legislatures inclination for such actions has been declining as the size of the shortfall grows
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FY 12 Loss to the General Fund as a result of tax cuts and dedication legislation enacted since 2007*
2007 Regular Session 2008 Extra. Session 2008 Regular Session 2009 Regular Session 2010 Regular Session TOTAL FY 12 Impact -$508.8 Million -$283.0 Million

The General Fund loss is at least this much annually going forward

-$101.5 Million** -$ 88.5 Million -$ .1 Million

-$981 .9 Million

* *Additional dedication of $166.3 million was delayed and not included in the revenue loss for this FY 41 * 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 eds 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 years shortfall and create another shortfall in the current fiscal year 43

end of presentation

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