BP Deal to Boost Gulf Coast State Budgets

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BRADENTON, Fla. — This month's historic settlement with BP p.l.c. positions struggling Gulf coast states to receive needed financial relief.

The 18-year payout of the funds, however, likely won't provide respite in time for Alabama to resolve a dispute over the fiscal 2016 budget. The funding could help in Mississippi, where voters in November may force the state to spend more on public education.

Under the $18.7 billion global agreement-in-principle announced July 2, Alabama, Florida, Louisiana, Mississippi, and Texas would receive a combined $4.9 billion over 18 years for economic damages that can be funneled to their general funds.

Another $12.7 million will be shared between the federal government, each state, and local governments for damages to natural resources and violations of the Clean Water Act.

Regulators say it will take several months to reduce the agreement into a consent decree between BP and the U.S. Attorney General's office that will undergo public comment and final court approval.

"If approved by the court, this settlement would be the largest settlement with a single entity in American history," said Attorney General Loretta Lynch. "It would help repair the damage done to the Gulf economy, fisheries, wetlands and wildlife, and it would bring lasting benefits to the Gulf region for generations to come."

The settlement is designed to end a five-year court battle by the federal government and the affected states over the 2010 Deepwater Horizon explosion, which killed 11 people and pumped more than 200 million gallons of crude into the Gulf of Mexico to become the largest offshore oil spill in U.S. history.

In addition to the global settlement, BP in November 2012 pleaded guilty to 11 felony manslaughter charges, environmental crimes, and obstruction of Congress. The oil company was sentenced to pay $4 billion in criminal fines and penalties, restitution, and community service.

"The settlement is credit positive for Alabama, Florida, Louisiana, Mississippi and Texas," said Moody's Investors Service analyst Anne Cosgrove in a special report last week. "Although the prolonged payout period reduces the effect of the funds, the amounts will be material for Alabama, Louisiana and Mississippi given the awards are large relative to their budgets."

Under the pending deal between BP and the federal government, the states would be paid for economic claims with funds that can be used for any purpose.

Florida, where the economy has nearly bounced back from the recession, stands to reap $2 billion from the agreement in part because of the state's long coastline. Texas, which has more than rebounded from the 2008 recession, would receive $150 million.

In the three other Gulf states named in the agreement, the economy has been hampered by falling energy prices, or the recovery is very slow. Louisiana would receive $1 billion, Alabama would get $1 billion, and Mississippi would receive $750 million.

Mississippi and Louisiana adopted budgets in time for the July 1 start of their fiscal years, though both still struggle with lagging revenues.

In Alabama, where the fiscal year doesn't begin until Oct. 1, adopting a 2016 budget is taking longer.

The regular session ended in early June, but the $1.6 billion general fund budget was vetoed by Gov. Robert Bentley, who said that some $200 million in cuts proposed by the Legislature would reduce essential services too much.

Bentley called a special session, and asked lawmakers to reconsider a package of revenue-raising measures — including some sin tax increases and closing certain loopholes — to fill the $200 million budget gap.

Alabama legislators, who have rejected any proposed tax increases so far, convened for the special session on Monday and promptly adjourned. Leaders of both chambers said they planned to reach a consensus on the budget over the next few weeks before reassembling on Aug. 3.

Even with $1 billion flowing to the general fund from the BP settlement, it is doubtful that Alabama would benefit from the funding in time to address the budget imbalance this year, according to Cosgrove.

"The parties to the BP settlement need to reach a final agreement," she said in a message via email Tuesday. "Therefore, the timing of the settlement payment is still to be determined [and] there is a possibility that the payment for Alabama may not be in 2016."

Cosgrove said that Alabama's economic settlement will be paid in installments of about $55.5 million per year over 18 years.

"In addition, the general fund has an obligation to repay amounts transferred from the Alabama Trust Fund in the amount of about $582 million by 2026," she said.

The trust fund essentially is a state savings account that Alabama has borrowed from in previous years to balance the budget.

In Mississippi, a portion of the $750 million economic payment from BP could come in time to assist the state with additional expenses, depending on the outcome of a November statewide ballot measure.

If Magnolia state voters pass a constitutional amendment on the ballot, the state would be required to fully fund K-12 public education, adding around $200 million to the budget.

The BP settlement would be doled out in an initial payment of $150 million in 2016, and $40 million annually from 2019 to 2033, according to Cosgrove's report.

While the BP funding represents less than 1% of Mississippi's 2014 general fund revenues, the payments would have a stabilizing influence on the state budget, she said.

Last week, state officials ordered agencies to begin planning for spending cuts of 7.8% in the event that Mississippi voters pass the amendment on Nov. 3.

In Louisiana, where lawmakers closed a $1.6 billion gap in June to adopt a $24.4 billion budget for fiscal 2016, the $1 billion settlement from BP will provide "almost no benefit" to the state's general fund, Cosgrove said.

If the BP deal is finalized, the state is expected to receive $200 million in fiscal 2016 and the remainder over the remaining 14 years.

While the $200 million initial payment equals more than 2% of the state's general fund budget, a state law enacted in 2014 requires that the economic damage award be split among the state's rainy day reserve and two health-related funds, according to Cosgrove.

"Although the general fund will receive no direct benefit, the boost to the rainy day fund is a plus at a time when Louisiana is dealing with the effects of low oil and gas prices," she said.

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