Economist says key to Balancing the Budget is Investment

May 16, 2012

The senate finance committee has yet to reach a decision on the proposed state budget, which currently includes major cuts to health care and education.

WRKF's Tegan Wendland had a conversation with LSU Professor of Finance, Rajesh Narayanan, who says year after year the state has faced major deficits and the future doesn't look too bright - unless there are major changes in the way the state makes investments.

WENDLAND: How does the budget this year compare to last?

NARAYANAN: It's going from bad to worse. I would imagine, given the kind of situation we're in - revenue projections are down, we have a deficit that needs to be funded and as a result there are some very tough choices that the legislature has to make.

WENDLAND: So does it make sense to close the gaps and deficit that you just mentioned with the $268 million in cuts proposed by the house on Friday? What's your opinion on that?

NARAYANAN: There really is no one good answer to that question. The problem here is you have a situation where the revenues are highly variable but the costs, the spending part, is not that variable. So, whenever you have a mismatch between revenues and spending you need to dip into a checking account or some liquidity facility, so there are only two ways a state can do it - it can borrow money to meet its current shortfalls and currently we have borrowed a fair amount; alternatively, if you will, it can borrow from its past, so the surpluses that were generated have to be held in store and then drawn down upon when you have these mismatches that are not in your favor.

WENDLAND: So would you say that they're doing everything that they can right now to solve this problem, or do you think it's sort of just become a political issue?

NARAYANAN: Well, which budget isn't political? My larger concern are that much of spending cut is in discretionary part, which is health care and education, and these spending elements are essentially investments for the longer-term, so if you don't invest, if your spending doesn't invest in these kinds of items then you don't have sustained long term growth. So the electoral cycle permits two-year windows by which legislatures and the executive branch probably look at it, but in the larger scheme of thing the timelines are a lot longer.

WENDLAND: There's been a lot of outcry over the decision to make these big cuts to the health care system and to higher education, and in some ways the discussion over the budget has really been bipartisan - do you think it's possible to restore the funding that was taken away by the house in their proposal on Friday as requested by the Jindal administration and the democrats who have allied with him over this issue?

NARAYANAN: I suppose it is possible. Because I don't know what else there is in the operating budget that they could potentially cut out and still keep it balanced. So they will have to agree to some sort of a compromise. So I'm optimistic that they will find some kind of compromise there.

WENDLAND: I just feel like the average citizen might not really have an idea of what these budget cuts might potentially mean until they hit home. So right now maybe folks aren't paying as close of attention to the budget discussion until something happens at their hospital or their university...

NARAYANAN: That's very true, I mean, LSU is a classic case-in-point. We've had a lot of the top administration leave - it's not just the president and now potentially the chancellor, deans have left and many of them have said that it's because they're "resource-constrained," and with this retirement issue looming there is the potential that we might really lose many of our senior, experienced faculty.