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Explanation of FY01 Budget Shortfall

Column A This is the Existing Operating Budget means of financing for FY 00. This represents the revenue that was available for general-purpose expenditures on December 3, 1999. This figure is used in the Governor’s Executive Budget for comparison purposes.

Column B These figures represent the revenue available for general purpose expenditures that the governor used to prepare his FY 01 Executive Budget recommendations. These figures do not include revenue from the renewal of the sales tax on food and utilities because those revenues were not legally available at the time that the budget was submitted to the legislature.

Column C The figures in this column are the net of two things that were incorporated into the revised forecast of the Revenue Estimating Conference when it met on May 11, 2000. One was legislative action during the 2000 1^st Extraordinary Session that reinstated the sales tax on food and utilities. That action generated $327 million. The second was a reduction in the revenue forecast for FY 00 by $39 million mostly as a result of declining Corporate Income and Franchise taxes. The net result was an increase in the forecast of $288 million ($327 - $39).

Column D This column is the total of taxes raised during the Regular Session of 2000. Included in the figure of $211 million are the following:

HB 140 imposes a 1¢ salestax on food and utilities	$110 million
HB 299 eliminates half of the excess itemized deductions for state income tax purposes ($70 million) and eliminates the $25 per child education tax credit ($15 million)	$85 million
HB 117 imposes a 4¢ per pack cigarette tax	$14.7 million
HB 193 adds a 2.5% sales tax on automobile rentals	$4.4 million
HB 271 adds an 8% tax on electronic bingo card dabber devices in lieu of the tax on gaming supplies THE GOVERNOR VETOED THIS ITEM.	-$.28 million
HB 22 extends sales tax exemption for trucks and buses used in interstate commerce	-$1.0 million
HB 44 eliminates sales tax on used mobile homes and on 54% of the value of new mobile homes	-$2 million

Column E This column represents an increase in the forecast of the existing revenue base plus a $962,000 transfer of LEDC funds to the State General Fund. The increase in the revenue forecast was recognized by the Revenue Estimating Conference on June 16, 2000. The increase comes primarily from higher oil and gas prices that have boosted severance taxes and royalties.

Column F This column is the total of columns B, C, and D. The total represents the amount of revenue for general-purpose expenditures that will be available to the legislature for budget purposes in FY 01.

Column G This column is derived by subtracting column B from column E. The difference represents the increase in revenue from FY 00 to FY 01.

The above table shows the revenues would have actually declined in FY 01 without the additional revenue generated during the Second Extraordinary Session of 2000. As can be seen in Column G, revenue growth from the current fiscal year to next fiscal year is $194 million. This is actually less than the $211 million in new taxes raised during the 2000 Regular Session. This decline of roughly $17 million ($211-$194) typifies the revenue problem that has plagued the budget throughout the current fiscal year (the governor issued two executive orders freezing spending in the current year) and appears to be spilling over into next fiscal year as well.

Under normal circumstances $194 million revenue growth would be sufficient to meet the normal increases in the budget that are attributable to inflation, merit pay for employees, and increases in workload such as the additional 2,000 – 2,500 new prisoners that are added to the state’s prison population each year.

Because of two very unusual budget items, one an expense and the other the dedication of tobacco settlement revenues, however, the $194 million increase in revenues is insufficient to cover the normal increases mentioned above.

The unusual expense referred to above is the growth in debt service from FY 01 to FY 02. This unusual expense totals $134 million. This increase in the cost of debt service is not attributable to more bonds being issued; on the contrary, the state did not sell bonds last year at all. This increase is the result of defeasance plans (prepayment of debt) that have run their course.

The defeasance plans began in 1997 using the state general fund surplus from the prior year. There were three years of defeasance plans with terms of three to four years. The budget savings that resulted from these plans were used to fund three successive teacher pay raises in Fiscal Years 97, 98, and 99.

The defeasance procedure involves using a lump sum of cash to prepay interest and premium payments on state debt. When this is done, the cost of debt service in the ensuing years is lower. The defeasance plans were designed to maximize savings in the short term. The thinking at the time that the plans were confected was that revenues would grow sufficiently so that by the time the defeasance plans ran their course, there would be revenue growth to cover the increase in debt service that would occur when the state returned to a normal amortization schedule for its bonded indebtedness. Unfortunately, revenue growth was not sufficient to cover the additional cost, and hence, a major part of this past session’s budget problem was created.

The other unusual budget item occurred when the budget for the current fiscal year was being put together in the spring of 1999. Slower than expected revenue projections for FY 00 would have forced the administration to propose budget cuts to bring its Executive Budget recommendations in line with the lower revenue projections. Those cuts would have fallen more heavily on the Department of Health and Hospitals because that department is one of the largest components of the budget (36.5%) over which the legislature has spending discretion. The other large discretionary piece of the budget is Higher Education and because this area has been a budget priority of the administration since it took office in 1996, it was exempt from budget cuts.

Coincidentally, as the administration contemplated how to deal with the budget shortfall issue, all of the legal agreements necessary for the states to begin receiving payments from the tobacco lawsuit were being finalized. When it became apparent that Louisiana would receive its initial year settlement in the FY 00 fiscal year, the decision was made to use some of these first year tobacco funds to finance the operating budget rather than cut DHH. In addition to using tobacco settlement funds of $63 million, another $22 million from non-recurring sources was also used to finance the Medicaid budget in FY 00, bringing the total from tobacco and non-recurring sources used to finance the Medicaid budget to $85 million.

During the 1999 Regular Session, the legislature passed a constitutional amendment that created a trust fund to capture future tobacco settlement payments. Voters ratified this amendment in the fall of 1999. As a result, the tobacco settlement funds used to finance the FY 00 Medicaid budget in DHH were not available for that same purpose in FY 01.

To take care of the additional costs that the defeasance and the non-recurring were going to have on the FY 01 budget would have required that revenues grow by at least $219 million over the FY 00 budgeted amount ($134 million plus $85 million).

Without the new revenue raised during the 1st Special Session and the Regular Session, revenues would have declined by $17 million from this year to the next (add Columns B, C, and E and subtract that total from Column A). Even with the new revenue that was raised during those sessions, revenue growth over the current fiscal year is only projected to be $194 million.

This growth of $194 million is insufficient to cover the defeasance and non-recurring revenue problems let alone begin to fund the cost of an additional 2,000 to 2,500 inmates in state prisons, the growth in the TOPS program due to increased participation and an increase in college tuition, the continued funding of the Minimum Foundation Program for K-12 education, merit increases for state employees, the normal cost of inflation, or pay for increases in premiums in the state’s self-insurance programs.

Consequently, it was necessary to make cuts in other areas of the budget to free up funds for these and a number of other areas where budget growth was necessary.

The following recap shows how the unusual budget items of defeasance and replacement of non-recurring funds in the Medicaid budget consumed all of the revenue growth from FY 00 to FY 01: