Columnist Geoff Daily explores Lafayette’s economy and government, providing critical commentary about what’s working and what’s not.

OPINION: Guillory’s first proposed budget was too bearish, his second is too bullish

Mayor-President Josh Guillory's administration continues to push for a reimbursement from Fiber to LUS, despite a PSC decision to shut down its inquiry into questionable payments between the two affiliated entities, according to multiple sources. Image courtesy The Acadiana Advocate

Last year, Mayor-President Josh Guillory used a dour financial outlook to justify an austere budget for the city of Lafayette. Projecting historically bad drops in sales tax revenue, he championed big cuts to parks and recreation and arts and culture, resulting in dozens of employees losing their jobs in the middle of a pandemic. 

This year, Guillory’s proposed budget flips the script. Projecting historically big increases in sales tax revenue, he is championing a quarter billion dollar increase in the city’s five-year capital outlay plan, including $132 million of new debt. 

Guillory has replaced his pessimism with optimism. Now the City Council has to decide if it’s willing to bet the city’s financial strength on Guillory’s assumption that the city’s unprecedented growth in retail sales will continue. 

Let me make clear that I hope the M-P’s optimism is justified. It’ll be great if Lafayette’s retail sales keep soaring, as that will signal that our economy is going gangbusters. But that’s a big assumption.

In normal years, the city of Lafayette’s sales tax collections increase or decrease by a maximum of 3-4%. This year has been an outlier, with city sales tax collections on track to increase by more than 10% — from $79 million to $87 million. That’s unprecedented growth, but we’re also living in unprecedented times. 

Over the last year, the federal government has dumped billions into our local economy. We got more than a billion in economic impact payments alone to the 500,000 people who live in Lafayette’s retail market. And that’s before we factor in enhanced unemployment benefits to individuals, paycheck protection program loans to small businesses, and all sorts of other recovery funding. 

This firehose of federal money artificially supercharged our local retail. For example, a married couple with four kids making less than $136,000 received more than $16,000 in free money just from the economic impact payments. That’s a lot of extra cash available to spend, especially for folks who aren’t suffering economically through the pandemic. And it’s a ton of money relative to the $4.3 billion of retail sales in the city of Lafayette in a normal year.

The challenge moving forward is that we can’t count on the feds to keep the spigot open. So what’s going to happen next year when our economy is no longer subsidized with billions of dollars? 

Guillory’s projecting that the city’s sales tax revenue is going to grow another 10% to above $96 million. The only justification he gives in his budget is that “many COVID restrictions have been lifted as cases decline and vaccination rates rise” and “our local economy has produced record sales tax revenue” and “energy prices, an important economic and fiscal driver, are stabilizing and rising again” and “we continue to see an important diversification of our overall economy with the technology and medical sectors growing in contribution to our economy health.”

But here’s the thing. COVID cases are on the rise, and even without lockdowns, it will affect consumer behavior. That record sales tax revenue is artificially inflated by federal subsidies. Energy prices are not nearly as significant a bellwether for our economy as they used to be with the decline of our oil and gas industry, which predates the pandemic. And while it’s great that our economy is more diversified, there has not been enough growth in either field over the last two years to suggest they can make up for the loss of federal subsidies, let alone pump enough money into our economy to power an additional 10% of growth on top of that.

Next year, if sales tax revenue holds steady instead of growing another 10%, the city’s revenue will fall $7.6 million short of what’s in Guillory’s proposed budget. If it returns to previous levels, the city will fall $16.6 million short of Guillory’s projections.

These revenue shortfalls would blow massive holes in the city’s budget that would have to be filled either with painful mid-year budget cuts or further erosion of the city’s savings.

Guillory has already overseen cutting the city’s general fund balance in half, from $58 million at the end of last year to a projected $28 million at the end of next year. And his new budget proposes shrinking that down to $25 million over the next three years. 

LCG’s fiscal policy requires the city general fund maintain operating reserves equivalent to at least 20% of its annual general fund expenses. But Guillory’s proposal sets the city on the path to getting close to that minimum, projecting this fund balance ratio will fall to 25.9% next year, and then down to 22.4% over the next three years.

This is a risky move while spending big on bullish revenue projections. If he’s wrong and the city’s retail sales do fall back to pre-pandemic norms, the city could be on a trajectory to sail past this minimum threshold.

And that’s potentially a big problem, not just because it leaves the city more vulnerable to unexpected expenses from things like hurricanes, but also because depleted cash reserves could increase our borrowing costs, as LCG CFO Lorrie Toups has warned for years. It’s a big reason successive administrations have protected the city’s general fund, which also doubles as LCG’s checkbook. 

The cost of borrowing gains a whole lot more significance when we look at Guillory’s proposed five-year capital improvement program for the city. 

Last year he proposed the city sell $48 million in bonds and spend a total of $157 million over the next five years. This year, he’s proposing the city sell $180 million in bonds and spend a total of $406 million. That’s an overall increase of a quarter billion in city spending, including the city taking on more than $130 million in debt. 

In a vacuum, I’d cheer to see the city finally flex its financial muscle and take some big swings, but this dramatic shift in financial philosophy is happening at a moment of fundamental economic uncertainty, not stability.

A regression to Lafayette’s economic norm could cause problematic dominoes to fall.

The stakes couldn’t be higher because overly optimistic revenue projections combined with overly aggressive spending could create a financial burden that takes the city years to recover from. And that’s regardless of the merits of any of the projects Guillory wants to spend all this money on.

While I wish I shared Guillory’s optimism, I don’t think our city government can afford to get caught up in it. Instead, amid all the economic uncertainty our city faces, the prudent thing to do would be to budget conservatively, both in terms of forecasting revenue and in terms of spending.