Latest session tests Louisiana's ability to bridge divide on budget

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With just over a week until fiscal 2019 begins, Louisiana lawmakers are back in special session for a third time this year trying to break a political impasse over funding the state’s budget priorities.

Gov. John Bel Edwards has already signed the budget in House Bill 1 into law.

The spending plan is short $526.3 million because new revenue measures to prop up the budget contemplated during the first and second special sessions earlier this year failed to pass.

“The time for politics and partisanship is over,” Edwards told both chambers in joint session Monday. “We’ve been teetering on the brink of the fiscal cliff for too long, and the clock is winding down.”

Louisiana will begin the next fiscal year July 1, “whether or not we fix the cliff,” Edwards said, referring to funding measures in place for two years, such as a 1% state sales tax, that expire June 30.

Lawmakers by law could not address revenue measures during their regular session, which is why Edwards has called three special sessions in an attempt to negotiate an agreement.

The Republican-led Legislature is scheduled to adjourn June 27, three days before the new budget year starts. If lawmakers can’t agree on new funding, the state will see steep budget cuts to primary services and education.

Lawmakers in the House, where revenue bills must be considered first, are considering competing bills that would allow different amounts of the expiring 1% state sales tax to remain in effect with various new expiration dates.

A Republican proposal would set the sales tax rate at 4.4%, while Democrats support a 4.5% rate.

Edwards, a Democrat, has argued that lowering the state sales tax to 4.5% from the current rate of 5% would essentially be a tax cut for residents and businesses.

Republicans argue that would amount to a tax increase since 1% of the state sales tax was scheduled to fall off the books at the end of next week.

Republicans hold 61 of 105 House seats and 25 of 39 Senate seats. Bills to establish or increase taxes require 70 votes to pass the House, which means only 36 opponents are needed to block such legislation.

On Tuesday, the Louisiana House Appropriations Committee chaired by Rep. Cameron Henry, R-Metairie reviewed funding proposals in the state health department budget, which has already been approved in HB 1.

Henry has also suggested reopening the entire state budget for reconsideration, a move that could slow deliberations or bring the session to an end just like two other sessions ended this year - without an agreement.

The partisan divide has made it difficult for the Legislature to agree on funding issues since Edwards became governor in January 2016.

That divide could worsen prospects for budget negotiations in the future as spending for healthcare programs and retirement costs rise across the country, according to a June 13 report by Fitch Ratings.

By 2025, Fitch said state and local healthcare and pension spending around the nation could increase by 800 basis points, which could result in lower spending on education, transportation, public safety, housing and environmental programs.

“Lower-rated states and local governments have lower financial flexibilities, making their budgets more sensitive to these pressures,” analysts said.

Louisiana and six other states – California, Connecticut, Illinois, Kentucky, New Jersey and Pennsylvania – have Fitch’s lowest issuer-default ratings of AA-minus or lower.

Fitch assigns an AA-minus issuer default rating to Louisiana and to its general obligation bonds, with a stable outlook.

California, Kentucky and Pennsylvania also have issuer-default ratings of AA-minus, while Fitch assigns an A-plus default rating to Connecticut, an A rating to New Jersey, and a BBB rating to Illinois.

As those seven states experience higher pension and healthcare cost pressures, analysts said they will also confront the budgetary shift from a position of lower fiscal flexibility, above average-spending pressures, and in some cases tax rates well above national averages.

“Given the political difficulty of raising tax rates further, remaining areas of spending, such as education and transportation, could be cut to fill the gap created by rising healthcare and pension costs,” analysts said. “Fitch expects the effects on public healthcare and higher education issuers to become a more important factor in those sectors’ ratings over time.”

Fitch says Louisiana’s ratings reflect the state’s broad though somewhat concentrated economic base, strong revenue and spending controls, and above average liability burden. Its analysts said Tuesday that the ratings also reflect the state’s “persistently challenged financial operations that have resulted in the need for successive years of mid-year budget corrections.”

“Louisiana’s financial operations have faced near continuous stress in the last decade, with recurring budget gaps that the state has closed through both structural and non-recurring actions,” analysts said. “The fiscal 2018 budget was enacted without one-time measures but Fitch believes developing a fiscal 2019 budget that addresses the upcoming revenue expirations will be challenging.”

Fitch said its stable outlook incorporates the expectation that the state will proactively respond to its fiscal challenges in a sustainable manner.

Louisiana’s GOs are rated AA-minus by S&P Global Ratings and Aa2 by Moody's Investors Service.

Both have negative outlooks, and have cited the state budget’s continuing structural imbalance and related risks.

If lawmakers don’t agree on additional funding for fiscal 2019 during the current special session, severe budget cuts will be imposed through contingent spending language in HB 1.

As the budget stands, the Legislature appropriated an additional $79.7 million of revenues to be doled out on a pro-rata basis if no new funding is made available. That provision allocated most of the additional funding to the budgets of the Legislature and the judiciary, leaving little left for other budgets to share.

“As a result, there are significant funding shortfalls in HB 1,” said a report by Legislative Fiscal Officer John D. Carpenter.

If no new revenue is approved, $265.5 million in reductions will take effect through across-the board spending cuts of 24.2% in the general fund for all agencies except health services and higher education.

Some of the largest funding shortfalls include: $88.4 million to the state college scholarship program; $70.9 million for state inmate housing, district attorneys, and justices of the peace; $25.5 million for youth services; $25.4 million for corrections; and $14.6 million for school lunches and related programs.

Louisiana could also become the first state in the country to eliminate its Supplemental Nutrition Assistance Program, according to the Department of Children & Family Services. Although the food program is federally funded, DCFS said it would not have the required funds to administer it.

State colleges and universities, which have taken significant funding cuts in the past decade, stand to lose even more in fiscal 2019.

Most of the higher education budget will be reduced by 10.8% and without new revenue there will be an additional shortfall of $101.7 million in the higher education funding formula, Carpenter’s report said.

In a joint letter Monday, leaders of Louisiana’s four public post-secondary systems – the Louisiana Community and Technical College System, the Louisiana State University, the Southern University System, and the University of Louisiana System, along with the Board of Regents - urged lawmakers to adequately fund higher education to end years of uncertainty.

“Despite the countless benefits of a sound public post-secondary educational system, the cycle of declining state funding leaves our institutions under-resourced and hinders our mission to fully support talent development,” the higher education leaders said. “We need your support and are asking for your help.”

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State budgets State tax revenues General obligation bonds John Bel Edwards State of Louisiana Fitch Louisiana