If the Bayou State is to feel the pinch of national credit problems, hurricanes and the loss of local residents, leading economists predict it will occur during the next fiscal year " and it could become a major problem during and after 2010.
When that dire forecast was offered up last week to the state Revenue Estimating Conference (the panel that figures out how much money the state has to spend), Commissioner of Administration Angele Davis expressed concern. In her own words, her perspective is the "budget development process." That means she has to make the state's operating budget work within these sobering confines and explain to lawmakers why there won't be enough cash for their pet projects and maybe not even enough for basic needs such as health care and education. As a result, she has spent the last few weeks in staff meetings preparing for what could be a bumpy ride in the coming years.
As Wall Street continues to stumble and Beltway politicians bicker over throwing big bucks at the credit markets to bail them out, Davis and others are wondering how the calamity will play out in Louisiana. If you believe the pundits and commentators on cable news networks, the credit crisis could leave many business owners and other borrowers including state governments in a lurch. By most accounts, Louisiana's economy will 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 tagged as a year to expect trouble. The fact that Louisiana relies heavily upon credit doesn't help the situation. "We will probably suffer simultaneously with the rest of the country," he says.
Even without the Wall Street debacle, Louisiana's tax collections are trending toward a downturn. Consider the following:
Corporate tax collections were expected to decrease by 1.6 percent in 2008, but the drop was more like a precipitous 11 percent plummet. The last decrease of that size came in 2003. Based on historical patterns, Albrecht says Louisiana could see a swing of 30 percent to 50 percent in corporate tax collections in the next couple of years " a swing that could go either way.
Personal income tax collections are expected 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 that would be the first income tax decline the state has seen in possibly 20 or more years.
Sales tax collections are flat-lining in 2008, booking a less than 1 percent increase. This area had boomed in the aftermath of the 2005 storms as families and businesses replaced needed goods and materials. That part of the recovery has run its course, and every point lost or gained in this area equates to $1 million lost or gained for the state, says Albrecht.
When viewed in the context of 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. There are other symptoms. "Just the fact that we're seeing a decline [in personal income tax collections] is a sign we've definitely peaked from the recovery [after 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. Some hold out hope that the federal government will chip in and ease the state's burden. "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 is expected in the wake of Gustav and Ike, but those storms' magnitude of destruction pales in comparison to that of the 2005 storm season. The 2008 "spike" likely will be small. "We do expect the recovery to have a positive impact, but not nearly as much as Katrina and Rita," says Tim Barfield, executive director of the Louisiana Workforce Commission, formerly known as the Department of Labor.
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 state in 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 and meetings are presently being held with representatives from the energy industry and Louisiana's universities. The 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."