1. FISCAL YEAR 2011-2012 THE “CLIFF YEAR”

2. Fiscal Year 2011-2012 is referred to as the “Cliff Year” because there will be a $1.6 billion mismatch in revenue and continuing expenditure costs that can only be eliminated by budget cuts or the infusion of money that is not contemplated in the Official Revenue Forecast for FY 12

3. Louisiana’s budget in the current year is $25.5 billion and some wonder why cutting $1.6 billion from that budget is such a big deal since an across-the-board cut of 6% would take care of the shortfall

4. The math is simple, right? $1.6 billion ÷ = 6% $25.5 billion

5. So, why do budgeteers use such graphic terms like “cliff year” and why is everyone so concerned about a $1.6 billion shortfall in a $25.5 billion budget?

6. The upcoming slides provide a perspective on Louisiana’s budget that helps answer that question

7. Think of the FY 11 budget as a big pie with slices that represent the various categories of funding used to support expenditures. Federal Funds cannot be cut to deal with the shortfall FEDERAL FUNDS 45% $11.5 B

8. For various reasons, the legislature and in some cases the citizens, have chosen to dedicate certain revenues for specific services. Dedicated funds are not generally considered to be available to offset a shortfall FEDERAL FUNDS 45% $11.5 B DEDICATIONS 18% $4.6 B

9. The legislature allows some agencies to charge a fee to offset some or all of the cost of their operations. These fees are not generally considered to be available to cover a budget shortfall in the General Fund FEDERAL FUNDS 45% $11.5 B AGENCY FEES 7% 1.7 B DEDICATIONS 18% $4.6 B

10. The most versatile funding in the budget is the General Fund which can be used to pay for any expense of government GENERAL FUND 30% $7.7 B FEDERAL FUNDS 45% $11.5 B AGENCY FEES 7% $1.7 B DEDICATIONS 18% $4.6 B

11. Because there are restrictions on the use of the other sources of funding in the budget, the General Fund is where most of the cuts will have to be made to deal with the $1.6 billion shortfall GENERAL FUND 30% $7.7 Billion Cutting $1.6 Billion out of this area of state funding would amount to a 20% across-the-board cut

12. However, there are even restrictions on the General Fund and those restrictions protect $5.1 billion of the total $7.7 billion from cuts. This uncuttable part of the budget is referred to as “non-discretionary” spending $2.6 Billion $5.1Billion

13. This leaves 10% of the total state budget or about $2.6 billion to absorb the $1.6 billion in cuts needed to eliminate the projected FY 12 shortfall $2.6 Billion NON- DISCRETIONARY FEDERAL AGENCY FEES DEDICATIONS

14. Breakdown of Discretionary General Fund Budget

15. If the budget shortfall of $1.6 Billion could be cut from the total budget, the percentage cut to each department would be relatively small $1.6 billion ÷ $25.5 billion = 6% Percent cut to total FY 11 budget to eliminate a $1.6 billion shortfall Projected FY 12 Shortfall Total FY 11 Budget Most Depts. Could Live With This

16. Unfortunately, 90% of the state’s budget is protected from cuts, so the shortfall must be absorbed by those departments that receive discretionary appropriations and the percentage cut is very high Most departments could NOT manage this level of a cut without a significant reduction in services $1.7 billion ÷ $25.5 billion = 6% $2.6 billion = 62% $1.6 billion ÷ Percent cut to FY 11 discretionary budget required to eliminate the $1.6 billion shortfall FY 11 Discretionary Budget Projected FY 12 Shortfall

17. This is a tough problem and we’re almost ready to begin exploring the implications of dealing with it, but there’s a little more background that still needs to be covered. First, there is the issue of how the FY 11 budget was balanced

18. The General Fund revenue forecast for FY 11 was insufficient to support the continuation of programs supported by the General Fund in FY 10 All Other Programs Gen. Fund Econ. Dev. State Parks K-12 Corrections Health Care Higher Ed.

19. So, federal stimulus funding (American Recovery and Reinvestment Act) was added to the budget. This brought the budget closer to balance but there was still a funding gap All Other Programs Econ. Dev. Gen. Fund State Parks K-12 ARRA Corrections Health Care Higher Ed.

20. In order to achieve the mandated balance required by the Constitution, it was necessary to also use “non-recurring” (a.k.a. one-time) funding from a variety of sources All Other Programs K-12 Econ. Dev. State Parks $1.1 Billion Gen. Fund $458 million Corrections ARRA Health Care Higher Ed. One Time

21. But, those ARRA and one-time monies will not be available in FY 12, and even though there is a substantial increase in recurring revenue, there is a funding gap of $1.6 billion in that Fiscal Year All Other Programs Econ. Dev. K-12 State Parks Gen. Fund Corrections Health Care Higher Ed. $ 1.6 B Shortfall

22. The Final Bit Of Background Deals With The Projected Shortfall For FY 12 And What It Portends For Future Fiscal Years $ 1.6 B Shortfall

23. On January 21st, the Division of Administration presented its revised 5-Year Budget Projection to the Joint Budget Committee. The numbers are very instructive about the challenge facing the governor and the legislature (in million $) 4.79% 4.34% 6.18% Rev. Growth Rate 7.47% Notice that very large shortfalls occur in all four years despite strong revenue growth in an economy that’s still recovering from the recession

24. To emphasize just how deep the budget hole is, the revenue growth rates for FY 12, 13, and 14 were changed in the table below to match the growth rates Louisiana experienced in the three years following Katrina to see how a return to the heydays of revenue growth would impact the shortfall (in million $) 16.6% 4.34% 6.18% Rev. Growth Rate At these growth rates, the dedication of the sales tax on motor vehicles to the Transportation Trust Fund would kick in beginning in FY 14 8.8%

25. The preceding couple of slides show that the shortfall that will occur in FY 12 is likely to continue at approximately the same level through FY 15 even with post-Katrina revenue growth rates unless permanent cuts are made to expenditures and/or revenues are increased above the projected growth levels

26. Options for dealing with the FY 12 shortfall Yes No ✔ ▪ New revenue – taxes Governor says No! ✔ ▪ New revenue – user fees High Ed. $130 M ▪ Federal bailout - ✔ Has own problems ▪ Cut constitutional dedications ✔ Trigger not met ▪ Cut statutory dedications ✔ Can do - but political ▪ Become more efficient ✔ Can do – not much $ ▪ Cut non-discretionary exp. ✔ Can do – but political ✔ ▪ Sell Assets Can do – one time $ 26

27. Let’s look at the “yes” checks and see how those options might impact the FY 12 shortfall if utilized ▪ New revenue – user fees Yes No ✔ High Ed. $130 M ▪ Cut statutory dedications ✔ Can do - political ▪ Become more efficient ✔ Can do – not much $ ▪ Cut non-discretionary exp. ✔ Can do - political ✔ ▪ Sell Assets 27 Can do – one time $

28. Option 1: New Revenue – User fees In 1995, the Constitution was changed to require a two-thirds majority of the legislature for the enactment of a fee or the increase of an existing fee. Higher education has developed a proposal that would raise approximately $130 million in FY 12. Other departments of government collect user fees that could be priced to help offset part of the shortfall. Some of the other departments that could benefit by increasing fees would be: Agriculture Recreation and Tourism Corrections Public Safety Health and Hospitals

29. Option 2: Cut Statutory Dedications The FY 11 budget includes $4.6 billion worth of programs funded with statutory dedications. Most of the dedications are made by the Constitution and cannot be cut in FY 12 without a change to the Constitution. However, approximately $860 million of those dedications are made by statute and can be changed during any regular session of the legislature. Adding those dedications to the cuttable expenditure base would reduce the cut from 62% to 46% Across-the Board Cuts Required Budget Shortfall FY 12 $ 1,600,000,000 Disc. Gen. Fund Budget $ 2,600,000,000 62% Add: Statutory Dedications* $ 866,000,000 46% 29

30. Option 3: Cut Non-Discretionary Expenditures That Are Not Constitutionally Mandated The non-discretionary budget for FY 11 is $5.1 billion and all but about $1 billion is constitutionally mandated. There are good reasons (legally and politically) why these funds aren’t normally on the chopping block but tough times call for tough measures so let’s add them to the list. Across-the Board Cuts Required Budget Shortfall FY 12 $ 1,600,000,000 Disc. Gen. Fund Budget $ 2,600,000,000 62% Add: Statutory Dedications $ 866,000,000 46% Add: Non-discretionary $ 1,055,000,000 35% 30

31. The items below are non-constitutionally mandated expenditures in the non-discretionary budget. Many of these expenditures could be cut to help reduce the shortfall but most have a very high political profile and a few are closely monitored by the U.S. Justice Department ▪ Minimum level custody and & care state inmates $343 M ▪ Legislative and Judicial Branch expenditures $201 M ▪ Housing of state prisoners in local jails $179 M ▪ Aid/assistance for the developmentally disabled $169 M ▪ Health insurance premiums for retired employees $110 M ▪ Rent and maintenance in state-owned buildings $ 28 M ▪ Supplemental pay for Assistant District Attorneys $ 25 M ▪ Total $1,055 M

32. Option 4: Become More Efficient State agencies have been under budget pressure for three years running and have picked most of the low hanging “efficiency” fruit. Since there’s always room for improvement, let’s suppose that there is still $100 million in General Fund savings that can be achieved through efficiencies in FY 12. Across-the Board Cuts Required Budget Shortfall FY 12 $ 1,600,000,000 Less: Efficiencies $ (100,000,000) Disc. Gen. Fund Budget $ 2,600,000,000 57% Add: Statutory Dedications $ 866,000,000 43% Add: Non-discretionary $ 1,055,000,000 33%

33. Option 5: Sell State Assets Ideally, funds generated from the sale of assets should be put into non-recurring expenditures or be used to pay down debt that would reduce recurring expenses in future years. However, cuts of at least 32% across the board for agencies funded with discretionary funds, statutorily dedicated funds, and non-discretionary funds not constitutionally mandated would devastate many programs vital to the state’s economic security and the quality of life of its citizens. Using the proceeds from the sale of assets might get the state past an election year and buy some time for a more rational budget plan to be developed.

34. Remember this slide that was covered earlier. It is the most important one of the whole briefing. It says that the $1.6 billion shortfall will continue through at least FY 15 unless there is a PERMANENT INCREASE IN REVENUE above what’s already in the forecast or a PREMANENT REDUCTION IN EXPENDITURES 4.79% 4.34% 6.18% Rev. Growth Rate 7.47%

35. SOME FINAL THOUGHTS

36. The state has faced large budget shortfalls in the past and was able to avoid significant curtailment of services. Why might it be different this time?

37. The state is in its third year of budget cuts and downsizing. Budgets are lean with little slack left to absorb additional cuts without significant reductions in services 2. As cuts shrink the size of the “discretionary” budget, the non-discretionary budget becomes a greater percentage of the General Fund budget. This change exposes departments in the “discretionary budget” to larger cuts

38. 3. The budget shortfall is not the result of a revenue forecast that is declining which would “trigger” access to constitutionally dedicated funds that could help mitigate the shortfall and legislation that would have increased the legislature’s access to those funds did not pass 4. There are fewer options to infuse non-recurring funding into the revenue stream to stave off cuts because many of those options have already been used

39. 5. The 2011 Regular Session precedes a state-wide election year and this makes all decisions more difficult

40. There is no question that tax cuts and dedications enacted over the past four years have contributed to the shortfall. However, the legislature has enacted fewer tax cuts and dedications in each of the recent years leading up to the FY 12 cliff year

41. When you find yourself in a hole, stop digging! 41

42. FY 12 Loss to the General Fund as a result of tax cuts and dedication legislation enacted since 2007* The General Fund loss is at least this much annually going forward 2007 Regular Session -$508.8 Million 2008 Extra. Session -$283.0 Million 2008 Regular Session -$101.5 Million** 2009 Regular Session -$ 88.5 Million 2010 Regular Session -$ .1 Million TOTAL FY 12Impact -$981 .9 Million * *Additional dedication of $166.3 million was delayed and not included in the revenue loss for this FY * Source: Fiscal Notes Legislative Fiscal Office

43. UNMET NEEDS/DEFERRED DEDICATIONS In addition to the projected shortfall, there are unmet needs and deferred dedications that must eventually be addressed • Highways ($14 Billion approx.) - gasoline tax revenue grows at about 2% annually and highway construction and maintenance costs grow at about 6% • UAL on Retiree Group Benefits ($11 Billion approx.) – this liability continues to grow because there are no active plans to deal with it • Deferred maintenance on state buildings and college campuses ($4.3 Billion approx.) • State self-insurance program - R.S. 42:851 ($1.2 Billion approx.)

44. end of presentation

46. $ 1.6 B Shortfall