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Amendment 1 misses the mark

Posted on October 15, 2015

By Steve Spires

Louisiana voters will find four proposed constitutional amendments on their Oct. 24 statewide primary ballot. None are more consequential than Amendment 1. The goal of this amendment is laudable: to address Louisiana’s chronic backlog of transportation needs. Unfortunately, it would do so by weakening the state’s rainy-day savings account, which would hurt the state’s ability to react to future financial downturns and put vital state services at risk for damaging cuts.

Voters should reject this amendment.

As the name suggests, the Rainy Day Fund (formally known as the Budget Stabilization Fund) is an emergency fund that the Legislature can tap when the state is facing a temporary revenue shortfall—for example, one caused by an economic downtown or a drop in oil prices—to avoid deep cuts to critical services like higher education, public safety and health care. As the Public Affairs Research Council notes, ratings agencies consider the strength of a state’s rainy day fund when assessing its overall financial health and stability. That means weakening the fund could lead to lower bond ratings, which, ironically, could raise the state’s cost of borrowing money for things like transportation projects.

Background
All but four states have some type of rainy-day fund to guard against unexpected financial downturns. Having a rainy-day savings account on hand gives the state more budget stability, and prevents critical health-care, education and safety-net programs from being cut too deeply (or taxes from being raised) when times are tough.

Rainy-day funds are especially important in states like Louisiana that depend on revenues from oil and gas extraction, which can fluctuate wildly with changes in the global marketplace and wreak havoc on state budgets.

Louisiana’s first rainy-day fund was created by the Legislature in 1990, and the current fund was established in the state constitution in 1998. Money in the fund can comes from a variety of sources, such as state surplus dollars and money appropriated by the Legislature. But most of it comes from “excess” mineral revenues, which is any revenues that come in above $950 million. The Fund is governed by strict rules:

  • It can only be used if there is a revenue shortfall. The Fund is not used to grow the budget, but to provide a short-term patch during downturns
  • The Legislature can only use one-third of the Fund at a time so that it remains a sustainable tool to protect higher education and health care in the future
  • The Fund can only be tapped with a two-thirds vote of the Legislature, a high bar that ensures it is not used frivolously, but only during times of actual need (and often alongside spending cuts)
  • The Fund is capped at 4 percent of the previous year’s revenue (minus federal disaster relief) – which comes to $811 million this year. The current balance is $517 million.

What would Amendment 1 do?
Amendment 1 would turn the Rainy Day Fund into the “Budget and Transportation Stabilization Trust.” The Trust would consist of two funds – one for the budget and one for transportation projects. The budget fund would have first claim on available dollars, followed by the transportation fund. Each fund would be capped at $500 million. The budget fund would operate under the same rules of the current Rainy Day Fund, while money in the transportation account could be spent on state highways and the intermodal connector program.

The problem
There are two main problems with changing the cap on the Rainy Day Fund from its current limit of 4 percent of state revenues to a flat $500 million:

  • Lowering the cap potentially reduces the amount available to legislators to stabilize the budget. That would mean deeper cuts to higher education and health care
  • Second, changing the cap to a fixed dollar amount from a percentage will cause the fund to lose its purchasing power over time due to inflation, which will erode its effectiveness. For this reason, it is generally a bad idea to put specific dollar amounts in the constitution, instead of in state law where they can be updated as circumstances change

Finally, this amendment would do little or nothing in the short term to address Louisiana’s massive backlog of transportation needs. With oil and gas prices low, most economists don’t expect the state to bring in excess mineral revenue over the next few years. That means it’s unlikely the transportation fund would see any money in the foreseeable future.

With a $12 billion backlog that’s growing, Louisiana’s transportation needs are great. Voters are rightly concerned that roads and bridges have been neglected for too long, and should demand that their elected officials look for new revenue to pay for needed upgrades. But Amendment 1 is not the answer, as it merely rearranges the deck chairs. It represents the kind of short-sighted thinking that led Louisiana into its budget mess in the first place.

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