Louisiana Constitutional Reform Part II: An Enduring Fiscal Framework

The Public Affairs Research Council of Louisiana (PAR) is pleased to present PART II of its project on “Louisiana Constitutional Reform.” PART II: An Enduring Fiscal Framework provides critical background information and recommendations for addressing potential reforms of the tax and spending portions of the state Constitution. It challenges common assumptions and does not attempt to satisfy any constituency or sacred cow. PART II is intended to elevate the discussion about the purpose of a revision and to build common ground for the goals to be achieved. 

PAR’s “Louisiana Constitutional Reform” project recommends changes and innovative options in clearly defined terms. It serves an important educational role by presenting a commonly shared base of explanations about the structure and functions of the Constitution. The PAR reports can be used as guidance for a constitutional convention, the revision of a single constitutional article or a slate of reform amendments, whichever strategy works. This PART II report follows PAR’s previously published PART I: Getting the Foundation Right, which examined the best guiding principles in making a state constitution. 

Since its creation in 1974, the Louisiana Constitution has morphed into an unwieldy and restrictive document that governs through narrow rules and restrictions rather than broad grants of authority. As changes begat more changes, it doubled in length and years ago became the fourth largest state constitution in the nation. Of the 293 amendment proposals brought to a statewide vote, 202 have passed, making Louisiana a leader in finding ways to alter its most fundamental body of law. Often, the amendments are complicated affairs delving into a legal realm that other states have wisely left to statutory law. 

Volume and complexity are not the only problems. The restrictive psychology of the Louisiana Constitution, particularly the limitations in its fiscal framework, is a regular target of criticism and represents another example of how the Louisiana way is different from most everywhere else. The reasons for this aberration are both structural and cultural, and nowhere do these reasons combine with more impulse than in the Constitution’s Article VII, the money chapter. This is the section of the Constitution dedicated to taxation and the management and deployment of state funds. This single article has grown from about 6,000 to about 31,000 words, near the length of the entire original 1974 document.

PART II: An Enduring Fiscal Framework contains four chapters. Chapter One broadly covers relevant history and future options for constitutional revisions, with an emphasis on creating a more enduring and foundational document. Chapter Two is about taxation, with an emphasis on constitutional controls. Chapter Three proposes recommendations about state spending and dedicated funds while offering innovative ideas for restructuring the relationship between the Constitution and corresponding fiscal statutes and legislative appropriations. Chapter Four is a detailed breakdown with recommendations for all the trust funds and money pots embedded in the Constitution.

These chapters in PART II contain the most thorough examination to date of how the fiscal components of our state’s fundamental governing document have been convoluted and how they can be fixed. It is PAR’s desire to provide a set of information that will help policy makers make good judgements based on sound facts and long-range perspectives. The report offers an in-depth account of the fiscal contents and impacts of the Constitution while remaining accessible to most readers. One of the purposes of the report is to provide exceptional educational value, even for those who will not embrace all of PAR’s recommendations. 

The report also comes with a host of links to supplemental resources for those seeking reference material or for those who want to venture deeper into the subject matter. The next installment will be PART III, which will cover the relationship between state and local governments and key issues such as pensions and civil service, within the context of the Constitution.

For much of the financial information in PART II, PAR used fiscal year 2019 figures. These were pre-pandemic numbers and may offer a more stable base of making comparisons than 2020 figures. Also, these figures were used to establish comparisons among levels of tax revenues, fund balances and spending during somewhat normal times. 

Chapter One

Culture, Trust and Reform 

A remarkable episode in Louisiana’s history gave us a simpler and more modern Constitution in the 1970s, though by no means a perfect one. Soon enough, our old culture of mistrust caught up with us, along with the powerful allure of constitutional restrictions. But maybe we’re better than this. We examine the methods permitted to change the document and the ways we can make it finer and more enduring. The recommendations:

  • ◆ Create a more foundational constitution that loosens obstacles to reforms rather than containing constraints that are better housed in a statutory environment. Don’t replace one set of constitutional constraints with another.

  • ◆ Require consideration of proposed constitutional amendments in two successive regular legislative sessions before the proposal is put to voters.

  • ◆ Require a higher level of voter engagement to approve constitutional amendments. Practically speaking, this might be achieved by scheduling votes on an amendment only during certain statewide or national elections.

  • ◆ Provide the option to allow a limited constitutional convention in which delegates would be authorized only to address matters and topics specifically included in the legislation calling for the convention.

  • ◆ Do not amend the Constitution to allow voters to place constitutional amendment initiatives on the ballot without legislative approval.

Chapter Two

Serious Money: Taxation in Louisiana

We take an enlightening tour of Louisiana taxes, through the eyes of the Constitution. We see that every sales tax is king, and every collector wears a crown. We visit the ineluctable deductible of the income tax, and learn how the landscape of oil, insurance and gambling revenues have altered over time. Louisiana’s exceptionalism is on full display, and not in a good way. The solutions are easy and straightforward in principle, but reaching agreement is hard. The recommendations:

  • ◆ The Constitution’s requirement of a 2/3 vote to increase taxes or eliminate tax exemptions should be retained. In addition, the creation of any new tax exemption should require a 2/3 vote. Exemptions in this context should be broadly defined to include exclusions, credits, rebates, deductions and other similar provisions.

  • ◆ Remove the existing constitutional caps on income tax rates and brackets. Consistent with the current Constitution, a 2/3 vote of the Legislature would still be required to increase any taxes, including through changes to individual tax brackets.

  • ◆ Transfer the mandatory state income tax deduction for federal income taxes paid to statute to provide the Legislature greater flexibility to adjust or remove the exemption with a 2/3 vote.

  • ◆ Transfer the “Big Three” sales tax exemptions to statute, with a 2/3 vote needed to lower or remove them. The Big Three are food for home consumption, prescription drugs and residential utilities. This change will provide the Legislature greater flexibility to remove or lower the exemptions with a 2/3 vote and lower the tax rate, with appropriate protections for lower income households.

  • ◆ Remove the constitutional barrier to a more centralized sales tax collection system.

Chapter Three

Successful Money: Spending and Dedications

Louisiana likes to use its Constitution to dedicate revenue streams, protect mandated spending mechanisms and create lock boxes of special funds. While some of these uses are in line with best practices, others cause fiscal inefficiency and inflexibility. It is important to make careful judgements about those differences. Also, those who would recommend eliminating constitutional funds or dedications should appreciate when such moves would not really create new general fund revenue for the state. 

PAR proposes a new framework for handling constitutional funds, divided into four categories for separate treatment. The chapter recommends how to implement this reform and explains its benefits. For the purpose of this report, PAR is counting 28 constitutional funds, which is a large number compared to other states. While some funds should remain fully protected, the particular spending mandates of some others were locked in long ago and therefore rank as the highest spending priorities for the state with no second thoughts all these years later. They should be revisited to examine whether the state’s priorities have changed. 

The five recommended Constitutional Funds could be tweaked but are essential and would remain untouchable without a constitutional amendment approved by voters statewide. The corpus of the six Permanent Trust Funds would remain protected in the Constitution while the appropriation of the spending from their investment earnings would be determined by a 2/3 vote of the Legislature. Under current law, those investment earnings were assigned to special interests long ago in the Constitution and are distributed every year without legislative re-evaluation. The nine Program Funds would be subject to change by the Legislature and a periodic sunset but would have a constitutionally protected requirement of a 2/3 vote for alterations. PAR counts seven funds simply to eliminate. The 28th fund is the annual $90 million Revenue Sharing Fund. The recommendations:

  • ◆ Constitutional Funds. The highest and most protected category, Constitutional Funds are those that should remain in the Constitution because they are necessary for important budget mechanisms to function properly and to make sure the state is ensuring its long-term financial and infrastructure needs. The Rainy Day and Revenue Stabilization funds should be kept but streamlined. This category includes the following funds:

• The Bond Security and Redemption Fund 

• The Budget Stabilization (Rainy Day) Fund 

• The Revenue Stabilization Trust Fund 

• The Coastal Protection and Restoration Fund 

• The Transportation Trust Fund 

  • ◆ Permanent Trust Funds. Under PAR’s recommendation for this class of funds, these are pots of money whose principal would be protected by the Constitution while the marginal spending authority for the investment earnings would be subject to a 2/3 vote of the Legislature. This category includes the following funds:

• Health Excellence Fund 

• Education Excellence Fund 

• TOPS Fund 

• Louisiana Fund 

• LEQTF Permanent Trust Fund

• LEQTF Support Fund

  • ◆ Program Funds. These funds would allow a 2/3 vote from both legislative chambers to amend or eliminate any function or dedication. They would be subject to periodic sunsets, in which the Legislature would have to review their performance and renew them if warranted. Currently, any changes to these funds, no matter how small the tweak, would require a constitutional amendment and a statewide vote.

• Conservation Fund 

• Artificial Reef Development Fund 

• Hospital Stabilization Fund 

• Louisiana Medical Assistance Trust Fund 

• Mineral Revenue Audit and Settlement Fund 

• Oil Spill Contingency Fund 

• Oil Site Restoration Fund 

• Lottery Proceeds Fund 

• Patient’s Compensation Fund 

  • ◆ Funds to eliminate. Defunct funds and funds with long-standing zero balances or inactivity should be repealed. This category includes the following funds:

• Millennium Leverage Fund. (Art. VII, § 10.10)

• First Use Fund. (Art. IX, § 9)

• Higher Education Louisiana Partnership (HELP) Fund. (Art. VII, § 10.4)

• Agricultural and Seafood Products Support Fund. (Art. VII, § 10.12)

• Atchafalaya Basin Conservation Fund. (Art. VII, § 4(D))

• Tideland Fund. 

• Louisiana Investment Fund for Enhancement (LIFE). (Art. IX, § 10)

  • ◆ The 28th fund is the Revenue Sharing Fund, which annually distributes $90 million of state general fund money every year to local governments. If retained, the law should require that the annual appropriation be applied to programs of joint state and local interest, such as local matches needed for mental health facilities or early childhood education. The purpose of this requirement is to aim state spending at moving the needle on critical measures of welfare that affect the entire state, while keeping the funds in local hands.

Chapter Four

Stored Money: Fantastic Funds and Where to Find Them 

Anyone who braves to “drill down” into the fiscal morass of the Louisiana Constitution will need to understand the scope and nature of its fantastic variety of “funds.” Unfortunately, an entire chapter is required to review them, even succinctly.

Compared to other states, Louisiana is a national champion at packing away windfalls and dedications to serve specific causes that few even know exist. Built up one by one over the decades, in most cases they lead a sheltered life free of scrutiny or any question about whether their aged priorities match the needs of today. Some don’t live at all, in fact, and are useless corpses in the Constitution that no one has bothered to bury. 

Some instruments – such as the Rainy Day Fund -- are vital and should be maintained in the Constitution. Others need a re-evaluation or, at the very least, a bit of daylight shone on them. 

Chapter Four presents a short description of the purpose and money behind each of the 28 constitutional funds. A PAR recommendation accompanies each entry and fits the structural reforms suggested in Chapter Three.

Impact

PAR measured the advantages and added budget flexibility of implementing the recommended reforms. Here, it is important to manage expectations. The Permanent Trust Funds and Program Funds combined represent about $1.14 billion in annual expenditures. That figure is not the total value of the money in the funds, which would be much greater. It is the amount passed through and drawn from the funds for certain dedicated purposes each year. The new structure therefore would indicate a potential increased state spending flexibility of an amount more than a billion dollars.

As explained in Chapter Three, there are important reasons why that number should not be confused with the notion of new money. The lottery fund supports K-12 education through an allocation to the state’s Minimum Foundation Program and basically offsets state general fund money that would be needed to sustain the MFP at its required levels. The Medical Assistance Trust Fund – which accounts for more than $500 million in expenditures – is restricted to support services from a health care provider class; a diversion would not alleviate the need for state money if the Legislature were to maintain the program. The Conservation Fund uses fees to pay most of the bills to run the Department of Wildlife and Fisheries, which presumably needs operational money from somewhere.

In these cases, the virtue of the new fund structure is not necessarily new money for new priorities. The advantage is the ability of legislators and the governor to tweak and refine programs with greater flexibility and to do so in a statutory environment, albeit at a high bar with the 2/3 vote requirement. In the case of some fee-based agencies, the Legislature might be able to exercise greater oversight of their operations during the appropriations process.

The new structure for the Permanent Trust Funds offers an opportunity to rethink those spending priorities. Although the highly constrained earnings from these trust funds are applied to current state spending programs, their purpose could be re-evaluated and applied differently. They represent about $155 million in annual expenditures. If the funds used a slightly less cautious but still conservative investment plan, they could over time offer two or three times as much annual spending volume. Such an investment reform might also consider ways to keep the funds from slowly disintegrating in real value, which is the current design.

PAR’s recommended reforms would not necessarily change the perception of funding requirements for state programs or the governor’s and Legislature’s consensus about state priorities, which would still be subject to limited resources and political influence. But the bottom line is that reforms for constitutional funds and dedications could increase spending discretion and agency oversight for the Legislature.

Summary

At its current rate of development, Louisiana may never make enough progress to lift itself from the bottom of national economic and social prosperity rankings. And yet the state is bestowed with a generous fortune of natural, human and public revenue resources. The Pelican State has the opportunity to be the architect of its own good fortune. A willingness to change our constitutional ways would open paths to reform. More significantly, it would signal that we in Louisiana are willing to change our culture and our self-image for the better.