1. 1 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”)

2. 2 FISCAL YEAR 2011-2012... THE “CLIFF YEAR” Bob Keaton September 2010

3. 3 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 state’s ability to live within its budget while maintaining vital state services

4. 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”? 4

5. 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 5

6. 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 6 Finally, the revenue and expenditure projections are presented to the Joint Legislative Committee on the Budget for its review and input

7. The Five-Year Base-Line Budget Report shows a shortfall of $1.6 billion for the FY that begins on July 1, 2011 7 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

8. 8 What does a $1.6 billion shortfall mean in the context of the total state budget?

9. Since Louisiana’s Constitution requires a balanced budget, this shortfall must be addressed in the governor’s FY 11-12 Executive Budget 9

10. But, there’s some misunderstanding about the significance of a $1.6 billion shortfall because in Louisiana’s $25.5 billion FY 11 operating budget a shortfall of that amount could be dealt with by a cut of only 6% 10

11. 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. That’s a cut of only 6% and who out there couldn’t manage to cut their budget by 6%?” 11

12. The upcoming slides answer that question 12

13. 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 13

14. 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

15. 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 AGENCY FEES 7% 1.7 B 15

16. GENERAL FUND 30% $7.7 B 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 DEDICATIONS 18% $4.6 B AGENCY FEES 7% $1.7 B 16

17. 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

18. 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 18

19. 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 DEDICATIONS AGENCY FEES NON- DISCRETIONARY 19

20. Breakdown of Discretionary General Fund Budget 20

21. 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 = 6% Percent cut to total FY 11 budget to eliminate a $1.6 billion shortfall Projected FY 12 Shortfall Total FY 11 Budget Most Depts. Could Live With This 21

22. $1.7 billion ÷ $25.5 billion = 6% $1.6 billion$2.6 billion = 61% ÷ Percent cut to FY 11 discretionary budget required to eliminate the $1.6 billion shortfall Projected FY 12 Shortfall FY 11 Discretionary Budget Most departments could not manage this level of a cut without a significant reduction in services Unfortunately, 90% of the state’s 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 22

23. What are the Legislature’s 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? 23 Let’s take a look at all of the departments that comprise the “All Other” category

24. What’s Included in the “All Other” Category of Discretionary Spending Department % of Dept.’s Gen. Fund Discretionary Budget Dollars Executive 93%$133,683,908 Veterans Affairs 73%$5,660,657 Sec. of State 41%$11,748,744 Agriculture 100%$16,707,363 Attorney General 87%$6,984,507 Economic Dev. 82%$16,167,176 Tourism & Rec. 91%$24,373,438 Youth Services 98%$129,017,227 Labor 100%$8,558,722 Civil Service 93%$4,342,748 TOPS 100%$138,000,000 24

25. 25 With this background we can begin exploring options for dealing with the $1.6 billion shortfall

26. Option 1: Continue the hiring freeze, don’t give merit raises, don’t budget new equipment, freeze travel, don’t fund MFP increase, defer building and equipment maintenance, and don’t budget for inflation 26

27. Option 2: Cut programs in the “non- discretionary” budget that are not constitutionally protected 27

28. What’s Included in the Non-Discretionary Budget Department Gen. Fund Dollar Amount Primary Reason for Non-Dis. Classification Executive $9,912,922Court Order/Debt Serv. Sec. of State $16,821,573Constitutional Corrections $358,161,030Unavoidable Oblig. DHH $347,069,358Court Ord./Fed. Mandates DSS $61,095,969Unavoidable Oblig Higher Ed. $91,465,034Un. Avoid. Ob./Stat Oblig. Education $3,092,747,146 Const. /Unavoidable obligations. CourtOrder HCSD $38,212,277Unavoidable Obligations Other Requirements $419,255,144Const./Debt/Un. Avoid Non. Appropriated $426,991,041Constitutional Judicial/Legislative $201,745,557Legislative Discretion 28

29. What’s Left in the Non-Discretionary Budget After Constitutional Items Are Removed? Department Gen. Fund Dollar Amount Primary Reason for Non-Dis. Classification Executive $9,912,922Court Order/Debt Serv. Sec. of State $16,821,573Constitutional Corrections $358,161,030Unavoidable Oblig. DHH $347,069,358Court. Ord./Fed. Mand DSS $61,095,969Unavoidable Oblig Higher Ed. $91,465,034Un. Avoid. Ob./Stat Oblig. Education $3,092,747,146Const. /Avoid. Ct. Order HCSD $38,212,277Unavoidable Obligations Other Requirements $419,255,144Const./Debt/Un. Avoid Non. Appropriated $426,991,041Constitutional Judicial/Legislative $201,745,557Legislative Discretion 29

30. 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 TRIGGER TO CUT CONSTITUTIONALLY PROTECTED EXPENDITURES AND FUNDS WILL NOT BE MET IN FY 12

31. What happens if all expenditures in the non- discretionary budget that are NOT Constitutionally mandated are subjected to the same cuts as the discretionary programs? + $1.436 B (non-Const. expenditures) $2.644 B $1.601 B = 61% CuttableFY 12 Shortfall % Cut Needed $4.080 B $1.601 B = 39% 31

32. 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 32

33. 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 33

34. 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. 34

35. 35 SOME FINAL THOUGHTS

36. 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? 36

37. 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 non- discretionary budget becomes a greater percentage of the General Fund budget. This change exposes departments in the “discretionary budget” to larger cuts 37

38. 4. There are fewer options to infuse non- recurring funding into the revenue stream to stave off cuts because many of those options have already been used 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 legislature’s access to those funds did not pass 38

39. 5. The 2011 Regular Session precedes a state-wide election year and this makes all decisions more difficult 39

40. 40 Tax cuts and dedications enacted over the past four years were major contributors to the FY 12 shortfall but the trend shows that the legislature’s inclination for such actions has been declining as the size of the shortfall grows

41. FY 12 Loss to the General Fund as a result of tax cuts and dedication legislation enacted since 2007* 2007 Regular Session -$508.8 Million 2008 Extra. Session -$283.0 Million 2008 Regular Session -$101.5 Million** 2009 Regular Session -$ 88.5 Million 2010 Regular Session -$.1 Million TOTAL FY 12Impact -$981.9 Million * Source: Fiscal Notes Legislative Fiscal Office * *Additional dedication of $166.3 million was delayed and not included in the revenue loss for this FY 41 The General Fund loss is at least this much annually going forward

42. 42 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.) UNMET NEEDS

43. 43 Things to watch for in the coming months... Congressional handling of federal tax cuts set to expire in January 2011 Certification of FY 10 ending General Fund Balance... Amendment No. 2 on the November 2 nd ballot... could have a negative impact of up to $35 million in FY 12 and as much as $65 million in following years... would have a negative impact of approx. $30 M in FY 12 if cuts are not renewed for upper end taxpayers 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 ed’s 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 year’s shortfall and create another shortfall in the current fiscal year

44. 44 end of presentation

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