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Revenue stalemate undermines reform

Posted on February 22, 2019

Gov. John Bel Edwards’ administration is scheduled to present its 2019-20 executive budget to the Legislature on Friday. It should be a triumphant moment for state policymakers. After a decade of chronic financial instability in state government, Louisiana’s budget is now stable and revenues are growing at a slow, if steady pace.

But the start of the annual budget debate is marred this year by the months-long political stalemate at the Revenue Estimating Conference, caused by House Speaker Taylor Barras’ refusal to adopt an updated financial forecast. As a result, the budget blueprint that’s presented to lawmakers will give an incomplete and inaccurate picture of what the state can afford to spend in the next fiscal year. It could contain proposed cuts to health care services, education and other programs even though Louisiana has the money available to pay for those needs.

This is an unnecessary and counterproductive action that can only undermine the public’s confidence in state government and the budget process that lays out the state’s priorities. Worse, it has brought partisan politics into an area where it doesn’t belong, and where Louisiana was setting a good example for other states to follow.

Revenue Forecasting Basics
Unlike the president and the U.S. Congress, state governments are required to have a balanced budget each year. But it’s impossible to know exactly how much tax revenue the state will collect in the future. That depends on hundreds of factors, including the price of energy, the overall health of the economy, changes to federal tax policy and even the weather. So the governor’s budget budget plan has to be based on an estimate of how much the state can expect to collect from various taxes –  everything from personal income and sales taxes to mineral revenues and “sin” taxes from alcohol, tobacco and gambling.

Until the late 1980s, the job of forecasting state revenues fell to economists in the governor’s office, where estimates were occasionally subject to the political whims of the day.  To get away from that practice, the Legislature created the Revenue Estimating Conference in 1987 and enshrined it in the state constitution three years later. The REC was designed to be a as transparent and nonpolitical as possible, to ensure that policymakers had the most reliable and up-to-date forecast on which to build the state budget.

The REC consists of four members – the governor or his designee (typically the Commissioner of Administration), the House Speaker, the Senate President and an independent economist. The group meets at least twice a year – usually more – where they receive forecasts prepared by the chief economist of the Legislative Fiscal Office (LFO) and the Office of Planning and Budget (OPB). The REC will adopt one of the forecasts, but must do so by unanimous vote. Otherwise, the previous forecast stays in place.

Louisiana’s model – shared decision-making between the governor and Legislature, the use of outside experts, forecasts that are regularly updated and presented in public forums – are in line with the best practices from around the country. As the Center on Budget and Policy Priorities reported in 2014, there is no perfect model, but a few basic principles that make for good forecasting. Louisiana is one of just 15 states that adhere to all five of the “best practices.”

While there is no one right way to forecast revenues, research and experience suggest that states benefit from including both the legislature, the governor, and independent experts in the process from the start, giving the public, media, and advocates access to the deliberations and the data that go into the estimates, and regularly revisiting estimates during the budget session.

These components together create a strong, reliable revenue estimate.  For example, a professional and open revenue estimating process makes revenue forecasts more transparent and accessible to the public and a broader group of legislators, which can lead to a healthier and more democratic debate and greater fiscal discipline.

What went wrong?
A budget forecast is just that – a forecast. It’s not meant to be exact. But just as it’s easier to predict the winner of a baseball game in the seventh inning than in pregame warmups, forecasting gets more precise the closer we get to the fiscal year being forecasted. Chief economist Greg Albrecht of the Legislative Fiscal Office confirmed this recently when he looked back at 30 years of forecasts and compared them to actual revenue collections.

Three things are clear from this research: First, forecasts get considerably more accurate as time goes on. Second, the forecast is more likely to err on the side of caution – predicting less revenue than eventually comes in – than the other way around. Third, the forecasts have become much more accurate over time. As Albrecht writes, the initial forecast was off by an average of 9.7 percent from actual collections over the first 16 years of the REC (1989-2005). But since 2008, the error rate for the initial forecast has averaged 4.2 percent.

As Albrecht explains, a built-in bias for “under-forecasts” is a good thing, since it’s better to collect too much money than not having as much on hand as anticipated to pay the bills:

An under-forecast does not preclude actual receipt and expenditure of state revenues, and is thus a less costly forecast error. A delay may occur in the ability to utilize excess collections or an ultimate surplus, but actual revenue collections occur regardless of the forecast and are ultimately available for expenditure. However, an overforecast cannot make revenue available that is not collected. Once budgets are established on the basis of the forecast in place, a shortfall in forecasted collections must be addressed, typically by substituting other means-of-finance to support planned expenditures as well as absolutely reducing planned expenditures.

Which brings us to the current situation. Because of Barras’ refusal to update the revenue forecast, Louisiana is operating on a revenue forecast developed June 26 – a few days before the start of the current fiscal year. Since then nearly eight months of additional data has accumulated to improve the accuracy of the forecast, and the news is encouraging. According to the most conservative forecast, from the Legislative Fiscal Office, Louisiana has an extra $122 million available this year, and $90 million more than anticipated in the fiscal year that starts July 1. The Office of Planning and Budget is even more optimistic, predicting nearly $149 million more for this year and $134 million for FY 20.

Barras has failed to produce a plausible explanation for refusing to update the forecast, beyond claiming “heartburn” over uncertainty in the state’s economy. But economic conditions are always uncertain. And while policymakers still have time to resolve the dispute – the new fiscal year doesn’t start until July 1 – this unprecedented gambit has already caused real damage by undermining one of the most important and time-tested reforms to Louisiana’s budget process.

The annual tax and budget debate that gets underway this week with the unveiling of the executive budget is the appropriate place to debate Louisiana’s spending priorities. But the revenue forecasts that underpin those debates are supposed to be insulated from partisan politics. The public should have confidence that the forecast, while imperfect, represents the best estimates of professional economists, not the whims or wishes of an elected official. That’s why the REC was created in the first place, and Speaker Barras should join his colleagues in adopting an updated forecast as soon as possible.

 

  • Jan Moller

 

 

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