The global oil surplus is forcing some energy-dependent states such as Alaska, North Dakota and Wyoming to rethink their financial arrangements. But as Governing reports, the financial turmoil in Louisiana runs deeper than fallout from the last 20 months of declining oil prices.
Last week, Moody’s Investors Service slapped Louisiana with its first credit rating downgrade in more than a decade. It’s the only energy state other than Alaska to be downgraded since the oil price slump began, yet Louisiana is far less dependent on oil than the Last Frontier.
Severance taxes—the taxes imposed on the production of oil and minerals—made up nearly three-quarters of Alaska’s tax collections in 2014, compared to about 9%in Louisiana, according to an analysis by the Rockefeller Institute for Government.
What makes Louisiana different is what it was doing before the precipitous decline in oil prices.
“They were building this structural imbalance that was getting bigger and bigger each year,” says Moody’s Investors Service analyst Emily Raimes. “When you put on top of that the very sudden and long decline in oil prices, that’s added to the pressure the state has faced. Oil is not the major driver of their economy or their revenues, but the oil price decline has been the icing on the cake.”
Lawmakers must close a $900 million budget shortfall by June 30 and a more than $2 billion shortfall in the next fiscal year starting July 1. Legislators are currently two weeks into a 25-day special session to resolve the budget gap. Even if they resolve this year’s budget with cuts, they will soon be tasked with passing a structurally balanced budget for fiscal 2017 and will then face the same questions all over again.
“At this point, you’ve cut down to the bone and you’re gnawing into the marrow,” says Sujit CanagaRetna, a fiscal analyst at the Council of State Governments. “Those old budgets were all smoke and mirrors. You have to clean up all that mess and you have to raise taxes to do it.”
