Bling Killers

by Jeremy Alford

The nation’s credit crisis, the world’s unstable energy prices, the local strain of recovery and outmigration could annihilate Louisiana’s oil-rich, surplus-charged budgets. Enjoy the next nine months. Because after that, Louisiana’s run of surpluses could come to an end. To be more specific, put a huge red circle around July 1, 2009, on your calendar. That could be the day when the other shoe drops for Louisiana’s oil-rich government, when the rubber meets the road, the you-know-what hits the fan and all other hell-or-high water metaphors run rampant. If the Bayou State is to feel the pinch from national credit problems, hurricanes from the Gulf of Mexico and the loss of local residents, leading economists predict it will occur during the next fiscal year and potentially balloon into a major problem by 2010.

When the forecast was offered up late last month to the Revenue Estimating Conference, the panel that figures out how much money the state has, Commissioner of Administration Angéle Davis expressed concern. After all, in her own words, her “perspective is the budget-development process.” That means she has to force the state’s operating budget to work with these sobering factors and explain to lawmakers why there won’t be enough cash for their favorite projects and maybe even dire needs like health care and education. As such, she’s spent the last few weeks in staff meetings preparing for what could be a bumpy few years.

The recent $700 billion financial bailout approved by Congress and signed by Bush two weeks ago should smooth things along, but Davis and others are wondering how the calamity could play out in Louisiana in coming months. If you believe the pundits and commentators on cable news networks, the credit crisis could leave many business owners, along with other borrowers like the state, in the dark. By most accounts, Louisiana’s economy may not be protected from the national crunch as it usually is on matters involving energy. “Often we lag behind any downturn in the national economy,” Davis says, “but in terms of the credit crisis, that certainly will impact Louisiana.”

Greg Albrecht, chief economist for the Legislative Fiscal Office, says that’s among the many reasons why 2010 has been targeted as a trouble year. The fact that Louisiana relies upon credit heavily doesn’t help the situation. “We will probably suffer simultaneously with the rest of the country,” he says.

Even without the Wall Street controversy, Louisiana’s tax collections are pointing toward a downturn. Just consider the following:

• Corporate taxes were expected to decrease by 1.6 percent in 2008, but that drop has swelled to 11 percent. The last dip of that size was in 2003. Based on historic patterns, Albrecht says there could be a coming swing of 30 percent to 50 percent in corporate tax collection within the next couple of years — a swing that could go either way.

• Personal income tax collections are set to record a 3 percent drop this year. It might be small, but Deborah Vivien, an economist for the governor’s Office of Planning and Budget, says it’s the first decline the state has seen in possibly 20 or more years.

•  Sales tax collections are flat for 2008, booking a less than 1 percent increase. This area had boomed in the aftermath of the 2005 storms due to families and businesses buying the goods and materials that were lost, but it’s since slowed down. Every point lost or gained in this area equates to $1 million lost or gained for the state, says Albrecht.

In concert with other factors such as oil price volatility, sales tax collections indicate that the post-storm surpluses, which Albrecht says were “not the norm,” are coming to an end. But there are other symptoms to note as well. “Just the fact that we’re seeing a decline [in personal income tax collections] is a sign we’ve definitely peaked from the recovery [of hurricanes Katrina and Rita],” says Vivien.

That Louisiana’s hurricane bounce should come to an end on the heels of two other devastating storms this year is a cruel irony. Although estimates are still being cobbled together, Gustav and Ike left behind at least $8 billion in physical damage in Louisiana, and the cost to the state could already be $20 billion. There are hopes that the federal government will cover all of Louisiana’s 25 percent cost share, but so far only a few select parishes have been given shelter. “While state agencies are currently absorbing these expenses, the stress from back-to-back storms placed on their budgets, and more acutely on the budgets of local governments, makes full and timely federal relief all the more essential,” Davis says.

Another bounce in employment and sales taxes are expected from Gustav and Ike, but due to magnitude of destruction — it pales in comparison to the 2005 storm season — that spike will likely barely be felt. “We do expect the recovery to have a positive impact, but not as nearly as much as Katrina and Rita,” says Tim Barfield, executive director of the Louisiana Workforce Commission, formerly known as the labor department.

As for oil, it continues to be the invisible elephant in the room. For instance, activity around the Haynesville Shale area has generated a $175 million bonus for the current fiscal year, which is money the state was not expecting. It’s now part of an $815 million surplus that can be spent early next year. It’s the second such surplus for GOP Gov. Bobby Jindal, who took office earlier this year with a staggering $1 billion surplus. On the other side of the coin, oil prices are uncertain and natural gas prices are low, Louisiana’s economists say, and state government will have to absorb nearly $400 million in additional costs over the next two years, due largely to a new tax break for single filers.

This uncertainty has prompted the Revenue Estimating Conference to request that the state’s economists come up with better ways to forecast the price of oil and gas. As for what that might be, all lips are sealed, with meetings now under way with representatives from the industry and Louisiana’s universities. But the underlying goal is to produce numbers that will better prepare Louisiana for the next few years, which could be rocky at best. “I think in the past that we’ve been smart,” says Jim Richardson, an LSU economist who also serves on the Revenue Estimating Conference. “But we’ve also been lucky.