Capital Outlay: Status Update and Funding Outlook

The week of May 8th will mark the midpoint of the Legislative Session. Capital Outlay HB 2 is currently in House Ways and Means Committee, but their posted agenda for next week does not include HB 2. Before the Legislative Session ends on June 8th, HB 2 will have to travel through the Legislature in the following steps:

House Ways and Means Committee for potential consideration of General Obligation Bond funding amendments.
House Appropriations Committee for potential consideration of Cash funding amendments.
House Floor for potential consideration of General Obligation Bond and Cash amendments.
Senate Revenue and Fiscal Affairs Committee for potential consideration of General Obligation Bond funding amendments.
Senate Finance Committee for potential consideration of Cash funding amendments.
Senate Floor for potential consideration of General Obligation Bond and Cash amendments.
Back to House Floor for the House to consider accepting or rejecting Senate amendments.
Conference Committee to work out a compromise Bill if the House rejects Senate amendments.
Then to the Governor for signature and/or line item veto consideration.

Since the primary source of discretionary funding for Capital Outlay is General Obligation Bond funding, the most likely places for your Legislators or the Administration to offer amendments, affecting your projects, would be in House Ways and Means Committee or in Senate Revenue and Fiscal Affairs Committee. House and Senate Floor amendments are possible; however the Administration and Legislative leadership typically try to avoid opening up HB 2 for Floor amendments.

Holding Capital Outlay HB 2 until the last few weeks of a Legislative Session is pretty much standard practice for most years because Capital Outlay is typically used as a negotiation tool in discussions as the Administration and Legislative leadership seek support for other Bills. These negotiations can include discussions about adding new funding or taking away existing funding that is not yet under contract.

In spite of the current State Revenue issues that you are no doubt reading and hearing about, the State Bond Commission’s most recent Net State Tax Supported Debt Report projected that the State will be able to issue new Capital Outlay Bond debt in the amount of at least $235 Million for fiscal year 2017-2018. In recent prior years, the capacity has been in the $350 Million range, so the State Revenue situation is definitely having an impact on Capital Outlay Bond capacity; but there is still a significant amount of Capital Outlay funding left to compete for. Therefore, you should continue to advocate for your requests to be funded in the Capital Outlay Budget.

The above information is what you need to know in regards to the advocating for your projects in the current Legislative Session. If you have time and would like to read more about the Capital Outlay process I offer the following comments.

When Capital Outlay HB 2 is scheduled and discussed in Committee, there will probably be discussion/explanation about the State’s General Obligation Bond Capacity to fund projects, and Capital Outlay philosophy/tradition. If you are not already familiar with these issues, I hope the following sheds a little light on this.

Bond Capacity for HB 2 Capital Outlay is primarily determined by three things:

1. The traditional calculated inflation adjusted limit based on a construction inflation factor:

In 1993, the Governor and Legislature decided to limit annual new Capital Outlay Bond funding to $200 Million per year in order to reduce and maintain better control over, outstanding debt of the State. Over the years this $200 Million has been adjusted by a construction inflation factor. In recent years, this inflation adjustment has resulted in a Bond Capacity in the $350 Million range. The $235 Million Bond Debt Capacity indicated in the above paragraph is less than the $350 Million range due to the debt service limit explained below.

2. The debt service limit:

Annual debt service payment on outstanding State General Obligation Debt is limited by State Law to 6% of annual State Revenue. In view of the 6% limit, the State Bond Commission calculates the allowed new Bond Capacity in the annual Net State Tax Supported Debt Report based on State Revenue projections from the State Revenue Estimating Conference. In a typical year, the calculated inflation adjusted limit, referenced in the first bullet point, would be used to determine Bond Capacity as long as it did not exceed the amount associated with the 6% limit on outstanding debt service. As indicated above, based on the debt limit calculation, the new Bond Capacity for fiscal year 2017-2018 will be $235 Million.

When debt service gets too close to the 6% limit there are basically two ways to deal with it.

1. Increase State Revenue so that existing debt service becomes a smaller percentage of State Revenue.

2. Reduce the amount of new debt by funding less than the projected new Bond Capacity. If this is done for a few years, then the problem of being too close to the limit will fix itself without increasing State Revenue. State Bonds are issues with 20 year terms, so theoretically, every year the outstanding State Debt should be decreasing when final debt service payments are made on Bonds that were issued 20 years ago. Without increased State Revenue, the key hear is to add new debt in an amount that is less than the old debt that is dropping off each year.

3. Politics and Capital Outlay Philosophy/Tradition:

Regardless of the amount of new Capital Outlay Bond Capacity in any given year, traditionally the Legislature passes a Capital Outlay Bill that includes some Non-State Entity/Local Projects every year and the Governor submits Line of Credit Recommendations to the Bond Commission for some Non-State/Local Projects every year. The moral of this story is that if you ask and advocate for funding, and if your Legislators find something to negotiate with the Governor on, your project has a chance of ending up in the group that gets funding.

Some of the current decision makers in the Capital Outlay process are relatively new to the process and have questioned the tradition of including appropriations in the Capital Outlay Budget that exceed what can be funded in a single year. A response, which I don’t believe has gotten enough public discussion, is as follows:

The Louisiana Constitution Article VII,11.(C) states that “The governor shall submit to the legislature, at each regular session, a proposed five year capital outlay program and request implementation of the first year of the program” Since the State does not produce a separate document to comply with the Constitutional requirement for a 5 year capital outlay program, HB 2 has in effect been both the implementation of the first y.ear of the program and a 5 year plan by indicating future year intent through Priority 5 appropriations.

Let me know if you have any questions. I will continue to monitor the process and keep you updated.

James

James Purpera Governmental Consulting

Phone: (225) 316-1346

Email: jpurpera@bellsouth.net

Fax: (815) 346-2334