Louisiana Takes Steps to Improve Revenue Stability

Louisiana Takes Steps to Improve Revenue Stability
Louisiana Takes Steps to Improve Revenue Stability

Robert Zahradnik, director of Pew’s state fiscal health and economic growth project, submitted testimony for Louisiana’s House Committee on Appropriations on May 2 in support of two bills that would create a Revenue Stabilization Trust Fund, dedicating traditionally unstable revenue to a long-term trust fund with the goal of smoothing volatility.

Full text of the testimony is below.

In Support of:
House Bill 696 “Restrict, Restore, Rebuild Act” and
House Bill 603 “Establishes the Revenue Stabilization Trust Fund”

Chairman Henry and members of the House Committee on Appropriations:

Thank you for considering House Bills 603 and 696 (HB 603 and HB 696).  In Louisiana, as in many other states, unpredictable revenue fluctuations hinder policymakers’ ability to effectively craft long-term budgets. Across the country, volatility in state revenues is growing. These swings can confound state officials and policymakers’ best efforts to forecast revenue and keep budgets balanced.  For that reason, it is important for states to design forward-thinking savings strategies that harness revenue uncertainty and build a foundation for structurally sound budgets. The Pew Charitable Trusts supports HB 603 and HB 696 because they dedicate traditionally unsustainable revenues to a long-term trust fund with the goal of smoothing revenue volatility.

By creating the Revenue Stabilization Trust Fund, Louisiana would be joining seven other states that dedicate a portion of severance tax revenues toward a long-term trust fund.  Of the nine states where severance tax typically comprises more than five percent of total tax revenues, only Louisiana and two other states have not established this type of savings account. HB 603 and HB 696 allocate interest income generated from the Trust Fund into the General Fund, which has the potential to provide substantial revenues to the state over time.  For example, Wyoming’s Permanent Mineral Trust Fund’s interest payments generated nine percent of the state’s total revenue portfolio in fiscal year 2014. 

In reviewing credit rating agencies’ guidelines, Pew finds that HB 603 and HB 696 contain multiple recommendations that could improve the state’s creditworthiness. This includes helping to ensure that recurring expenditures are funded at a level sustainable at any point in the revenue cycle. Further, HB 603 and HB 696 follow a Pew-identified best practice of dedicating volatile revenue sources to savings by depositing mineral revenues, as well as corporate income and franchise tax revenues, above a certain threshold into the Revenue Stabilization Trust Fund. Volatile revenue sources experience more booms and busts than other tax streams, meaning that relying on them annually can cause underlying structural problems in the budget. 

By enacting HB 603 and HB 696, Pew believes Louisiana will take a fundamental step toward aligning unreliable revenues with one-time spending, improving the state’s ability to weather times of economic uncertainty in the future.  Please do not hesitate to contact me at rzahradnik@pewtrusts.org if you have questions in the coming days and weeks. Thank you again.