BRADENTON, Fla. – Sweeping changes to Louisiana's budgeting practices recommended by a legislative panel could put the state on a more sustainable fiscal path, S&P Global Ratings said.
A 13-member task force on Nov. 1 recommended 18 changes in budget and tax policies that "if adopted as a comprehensive set of reforms will help to establish a long-term, stable foundation for Louisiana's finances," task force co-chairs Kimberly Robinson and James Richardson said in the cover letter of the final report.
On the whole, the recommendations are favorable, said S&P.
The task force's suggested changes for budgeting included establishing formal multi-year spending forecasting for several departments, including Medicaid and the Department of Corrections, and examining the pension system's assumed rate of return.
"We view the first recommendation as positive for credit quality because Medicaid and Corrections expenditures soak up considerable resources and potentially crowd out other spending requirements such as education and pension contributions," said analyst Nora Wittstruck.
With a multi-year forecast containing reasonable assumptions, she said, officials could determine earlier where spending cuts or revenue enhancements are necessary to meet out-year projections for Medicaid and Corrections, and maintain structural budget balance.
Louisiana's pension plans use a 7.5% assumed rate of return, though S&P said several states have reconsidered or lowered their rates to better match recent investment experience and to ensure prudent management of long-term liabilities.
"We would view as conservative a decision by Louisiana to lower its assumed rate of return in accordance with improved actuarial practice, although a change to the assumed rate of return may initially result in higher actuarially determined contributions," Wittstruck said.
The task force also recommended rolling back by 1 cent the state's sales tax rate to 4% in conjunction with broadening the collection base tax services such as satellite television and repairs to nonresidential, commercial property.
Other proposals call for eliminating or closely regulating existing state tax exemptions, deductions, and credits that currently cost about $7.7 billion in lost annual revenue; reducing individual income tax rates and eliminating the federal income tax deduction; allowing local governments to impose a local sales tax without legislative approval; and gradually eliminating local and state taxes on business inventories.
"In sum, we believe these recommendations would put Louisiana on a more sustainable fiscal path and improve taxpayer compliance," Wittstruck said. "Additionally, several of the other suggestions recommended by the task force would likely improve long-term fiscal planning and management of liabilities."
The fact that Louisiana has experienced budget deficits annually for the past eight years led the Legislature to empanel the Task Force on Structural Changes in Budget and Tax Policy amid special sessions earlier this year to deal with budget gaps anticipated in fiscal years 2016-17.
Louisiana recently disclosed that the state uncovered a new, $313 million deficit as it closed the books on fiscal 2016 - a stark reminder that the state's budget remains in flux even as temporary revenue raising measures are boosting collections, though not as much as predicted.
The latest shortfall must be absorbed in the current budget, and a process to close the gap will begin in the months ahead.
Lawmakers dealt with much of the last budget gap by implementing temporary revenue raising measures, including a 1-cent state sales tax increase, but those will roll off the books in fiscal 2018.
The Legislatures is expected to consider the task force's recommendations during next year's session.
