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Commentary: Don’t blame the weatherman for the rain

Posted on June 12, 2017

The Legislature begins another special session this week – the fourth in 18 months under Gov. John Bel Edwards. The only job for legislators is to pass a budget for the 2017-18 fiscal year – a task that eluded them during the 60-day regular session when negotiations between the House and Senate broke down in the final hours.

On the surface, the budget debate is about differences over spending, with the House preferring to allocate $100 million to $200 million less than the Senate would prefer. That’s not an enormous amount in a $29 billion budget, though it would affect areas such as higher education and social services that already have suffered years of financial neglect.

But the heart of the debate is whether next year’s budget should be based on a consensus revenue forecast developed by state economists and endorsed unanimously by the Revenue Estimating Conference, or whether lawmakers should adopt a lower target favored by House leaders. And this is what makes the current budget debate different than any in recent years. For it’s not just about spending, but whether short-term political considerations or nonpartisan advice should guide what the state spends each year.

Why the REC?
Before 1989, the state budget was based on revenue projections developed by the governor’s budget office. This setup invited abuse, as the governor could dial up or dial down the official forecast to suit his political needs. After the 1980s “oil bust” wreaked havoc on the state’s finances, the Legislature decided, wisely, to take politics out of the process as much as possible.

The answer to this was the Revenue Estimating Conference, which consists of four members: The governor (or his designee), the House Speaker, the Senate President and an economist with experience in revenue forecasting (LSU economist James Richardson has held the job since its inception).

The panel meets periodically to review two revenue forecasts – one from the Legislative Fiscal Office and one from the governor’s Office of Planning and Budget – and adopt one of them as the official state forecast. The vote must be unanimous.   

While no process is perfect, former LSU public policy professor Boris Morozov explained the rationale in a 2013 research paper (bold added):

The creation of REC addressed the core root of Louisiana fiscal crisis in 1980s. It eliminated the existing practice of tweaking the state’s revenue expectations so that the governor and the legislative body could spend whatever they wished. Additionally, creation of the REC positively contributed to government’s accountability towards its constituents. Specifically, the non-political nature of the revenue estimating conference and its processes ensures the economic adequacy of funding for public institutions. This, in turn, adds certainty to the operating environment of these institutions. Such added certainty is absolutely required for effective and efficient financial management and budgeting practices.

The revenue forecast is exactly that – a prediction, based on the best available evidence, of how much money the state can expect to collect from sales taxes, income taxes, mineral revenues and other sources. It’s never perfect, as some revenue sources – mineral revenues and corporate income taxes in particular – are notoriously tough to predict. But for almost 30 years, there has been bipartisan consensus that the budget should be based on the REC estimate.

Until now.

Boom and bust
In the last few years, as the state economy has stalled amid low energy prices, the national recession and the end of post-hurricane reconstruction, state revenues have often come in below the official forecast. But for most of its history, the opposite was true. In October 2011 the Legislative Fiscal Office reviewed the first 23 years of REC forecasts and found that 78 percent (19 of 23) of the forecasts issued before the session (i.e., the ones used to build the budget) ended up being lower than the actual revenues. From the report:

In the early years of the REC process this tendency to under-forecast was likely due to the recent memories of the oil-bust years of 1982 – 1986. In fact, the REC process was implemented, in large part, as a response to the large deficits and budget disruptions of those years. Persistence of an under-forecast bias in later years of the REC process is probably better understood in terms of the different costs imposed by different forecast errors. An under-forecast does not preclude actual receipt and expenditure of state revenues, and is thus a less costly forecast error.

Put another way: While recent forecasts have tended to be too optimistic, over time the state is more likely than not to take in more revenue than the experts predict.

But a group of House members are apparently convinced that the recent string of mid-year shortfalls should be blamed on the REC, not the underlying state economy that continues to suffer from job losses in the energy sector similar (but not as severe) as during the oil bust. Their solution is to simply disregard the consensus forecast and instead spend $206 million less – or 97.4 percent of the available dollars. The reason given for this approach is to “hedge” against a potential mid-year shortfall.

There are two problems with this:

  1. Leaving $206 million (or some lesser amount) on the table does not mean that money can be easily plugged into the budget later in the year. The Legislature would need to come into session to pass a supplemental budget bill in order to spend the money.
  2. If the mid-year shortfall does not materialize – as history suggests it won’t – then the Legislature will have caused unnecessary hardship for state universities, corrections officials and medically fragile people whose services are in danger of being cut.  

But a more serious problem is that it would undermine one of the important, long-lived structural reforms that emerged from the last major oil bust to score short-term political points. And yes, if the governor and Legislature decide to go along with this plan, it’s almost certain to be short-lived. For next year Louisiana will be faced with a $1 billion-plus “fiscal cliff” as temporary taxes expire. When the time comes to plug that budget hole, you can be pretty sure lawmakers will want to spend every available dollar.

 –Jan Moller

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