There is no question that for the last three years budget issues have dominated much of the focus of legislators and the governor. Of course, Louisiana is not alone and that’s pretty much been the case in most states as the national recession and uncertain financial markets have triggered budget cuts across the country.
In Louisiana, the best way to get a handle on the budget situation is to look at what’s called “state general fund revenues” and the changes in those revenues in recent years has been fairly dramatic. In fiscal year 2008, state general fund revenues totaled close to $10 billion. By 2010, just two years later, they had plummeted to $7.2 billion – a drop of more than 25%.
While most of us think it was all caused by the national recession, in Louisiana it’s a little more complicated than that. The downturn in the national economy was certainly a part of the situation, but here that collided with three other things that all hit around the same time:
· The normal flattening out in the economy after three years of massive Hurricane Katrina/Rita recovery spending
· The huge drop in oil prices that occurred after hitting highs of around $140 a barrel
· Reductions in a variety of taxes
So after the highs of a few years ago when the state was racking up huge surpluses and spending increased dramatically in areas like education and health care, we’re now in a mode where we have been reducing spending, cutting programs, looking for efficiencies and laying off state workers. That mode is likely to continue for some time.
Two significant budget issues are facing the state for at least the foreseeable future:
- Revenues are no longer declining, but they are only projected to grow on a relatively modest upturn over the next few years. But even those projections are fraught with uncertainty because of the slow economic recovery and ups and downs in the price of oil.
- Even with revenue growth there are increasing pressures on the spending side. The growing cost of funding state retirement systems and ever increasing health care costs are part of that, but not all. There are also pressures building to increase education spending, which has been flat the last couple of years; provide pay raises to teachers and state employees; and deal with increasing costs in the state Medicaid program.
What all that means is that the state will likely be facing rather significant budget shortfalls for some time to come, perhaps more than a billion dollars again next year. Ironically, all this comes at a time when the Legislature opened a major debate this year about eliminating some or all state income taxes. They didn’t do it, but it’s an issue that’s not likely going to go away any time soon, even with the fiscal challenges the state continues to face. In all honestly, eliminating income taxes seems a bit unrealistic and the bite that would take out of the state general fund would be huge, but that doesn’t mean they aren’t some things we should do when it comes to taxes and other major fiscal issues.
Rather than making political speeches about eliminating more taxes, we should look at the issue in a more methodical way. A little more than 20 years ago, CABL helped lead a review of Louisiana’s tax structure that was aimed at providing more stability in terms of state revenues while also making Louisiana more competitive for economic development. Since then, many of CABL’s recommendations have been enacted into law and the state’s tax structure is makes much more sense that it used to. Over the next two years it would be a good idea to go back and look at our tax structure once again, see where it remains uncompetitive and develop ideas to improve it in a revenue neutral fashion.
This would include looking at dedications, which currently tie up about two-thirds of our state general fund budget, as well as tax exemptions and credits. That’s not to say all of those things should be eliminated or changed, but they should be thoroughly reviewed to ensure that what might have made some sense in the past still makes sense in the second decade of the 21st century.
Dedications, exemptions and credits all have their purpose, but if they are not serving the state in strategic ways that help boost our economy or incentivize positive behaviors, they should be eliminated. A healthy, periodic review of all is a sound fiscal policy.
Louisiana is hardly alone when it comes to major issues with its public retirement systems. Many states are literally drowning in liabilities. Together Louisiana’s four retirement systems are carrying more than $18 billion in retirement debt.
That liability has generally occurred for two reasons: 1) in years past the state increased benefits to employees without fully covering the additional cost of those new benefits, and 2) in recent years the various funds have incurred investment losses in their portfolios. In 1987 the Legislature passed a law to address the liability that existed at that time by basically implementing a plan to pay down that debt over four decades.
But for many years, the additional payments were so low they didn’t even cover interest costs and the debt actually grew. Now the state is moving into a period where those debt payments are escalating on a steeper curve – something like a balloon note coming due – and it’s taking more and more dollars out of the state treasury each year to cover those payments. It’s becoming a major budget problem because it reduces the amount of revenues that could be used for other things like education and health care and it’s beginning to cripple local school districts as well as our colleges.
The other thing to note is that these state systems operate under defined benefit plans. That means they provide a lifetime retirement benefit that’s guaranteed based on the employee’s years of service and final salary. That contrasts with the private sector which for the most part moved away from such pensions years ago and replaced them with defined contribution plans. They provide a benefit based only on how much money that employee and employer together have contributed to the plan over the years, plus the investment earnings.
Obviously, the defined contribution plans are much more cost effective for the employer and the costs of the defined benefit plan can often spiral out of control. That’s what’s been happening in many states across the country.
Tackling pension reform is a difficult issue and can be expensive in the short term, but failing to do so is somewhat like allowing a time bomb to continue to tick. Many states have considered, and in a number of cases enacted, significant pension reform in the last few years. Louisiana has done some things to address the issue around the margins, but clearly more is needed.
Around the country, approaches to pensions vary. Some states already have defined contribution plans. Others have been moving more toward hybrid systems that give employees more options. Because of the huge liability in Louisiana’s pension programs it would be unlikely that the state would see any significant short-term savings by converting to other plans, but the long-term reduction in costs could be huge.
But there are other options to consider, as well. Other states have already made changes in their laws such as raising the retirement age for employees, increasing employee contributions, and capping or slowing down cost-of-living-increases. All of these ideas should be considered.
None of these things are politically popular with state workers and attempts to try a number of them have failed in recent years. But the truth is the state’s pension obligations are becoming increasingly unsustainable and helping drive budget shortfalls that take dollars from other important areas. There is no silver bullet when it comes to addressing these thorny issues, but pension reform needs to move off the backburner of issues for state leaders to deal with and into the forefront of serious public discussion and debate.