The Impact of Hurricane Katrina on the State Budgets of Alabama, Louisiana, and Mississippi

CRS Report for Congress
The Impact of Hurricane Katrina on the State
Budgets of Alabama, Louisiana, and Mississippi
November 15, 2005
Steven Maguire
Analyst in Public Finance
Government and Finance Division

Congressional Research Service ˜ The Library of Congress

The Impact of Hurricane Katrina on the State Budgets
of Alabama, Louisiana, and Mississippi
Summary
After major disasters, affected state and local governments face the dual
challenge of responding to the crisis and absorbing the economic losses associated
with the disaster. Typically, tax revenue collections, both state and local, decline
immediately following a disaster. The severity and range of the destruction
determine when and to what level tax revenue will rebound. For states, the revenue
loss is inopportune given both the cost of repairing government infrastructure and
providing assistance to affected local governments and individuals.
Most states have emergency funds to tap into when disaster strikes. For
catastrophic disasters on the scale of Hurricane Katrina, however, the emergency
fund may be insufficient. In cases where the scale of the disaster overwhelms the
fiscal capacity of state governments, the states may borrow to finance emergency
spending. Each of the states most severely affected by Hurricane Katrina —
Alabama, Louisiana, and Mississippi — could be forced to address budget shortfalls
with increased borrowing. This report outlines the budget issues facing each of these
states.
The last section of the report provides a rough approximation of the potential
state tax revenue loss in the month (September 2005) following Hurricane Katrina.
CRS estimates that if the disaster region lost about half of its economic activity in
September 2005, then the state of Alabama would have lost $38.0 million in revenue,
Louisiana $179.6 million, and Mississippi $108.0 million.
This report will be updated as legislative events warrant.

Contents
Introduction and Overview..........................................1
Louisiana ........................................................2
Budget Issues.................................................4
Budget Process............................................4
State Balanced Budget Rules and Debt Limits...................4
Budget Stabilization or “Rainy Day” Fund......................5
State Fiscal Response...........................................6
Mississippi .......................................................6
Budget Issues.................................................8
Budget Process............................................8
State Balanced Budget Rules and Debt Limits...................8
Budget Stabilization or “Rainy Day” Fund......................9
State Fiscal Response...........................................9
Alabama .........................................................9
Budget Issues................................................10
Budget Process...........................................10
State Balanced Budget Rules and Debt Limits..................10
Budget Stabilization or “Rainy Day” Fund.....................11
State Fiscal Response..........................................11
Estimated Revenue Loss by State....................................11
Estimation Methodology.......................................12
List of Tables
Table 1. Tax Source Reliance of the States Affected by Hurricane Katrina,
FY2003 .....................................................2
Table 2. Louisiana Parishes Affected by Hurricane Katrina, Personal Income
and Retail Sales, 2002..........................................3
Table 3. Mississippi Counties Affected by Hurricane Katrina, Personal Income
and Retail Sales, 2002..........................................6
Table 4. Alabama Counties Affected by Hurricane Katrina, Personal Income
and Retail Sales, 2002.........................................10
Table 5. Estimated Tax Revenue Loss in September 2005 Following
Hurricane Katrina.............................................13

The Impact of Hurricane Katrina on the
State Budgets of Alabama, Louisiana, and
Mississippi
Introduction and Overview
The gulf coast region has endured significant disruptions in economic activity
in the aftermath of Hurricane Katrina. State and local governments in the affected
region, along with their citizens, will face considerable financial obstacles during the
recovery period. In the short run, the expected drop in economic activity likely will
be accompanied not only by an increase in public spending on wages of public
employees working overtime, but also the accompanying costs of providing benefits
to the unemployed and sick. In addition, repairing public infrastructure will strain
state budgets. The combination of lower revenues and increased spending will likely
create substantial short term budget problems for state and local jurisdictions. The
anticipated budget problems will be exacerbated by state and local balanced budget
rules which prohibit these entities from funding current expenditures with debt.
Historically, the federal government has provided assistance to state and local
governments following national crises arising from economic downturns, natural
disasters, and large scale terrorist attacks. Most recently, Congress provided states
with $20 billion in fiscal assistance in 2003 and 2004.¹ And, throughout the 1970s
and 1980s, Congress provided state and local governments with direct aid through
a general revenue sharing program. Congress is currently studying the amount and
format of alternative federal response proposals to the Katrina disaster.²
Each county (or parish) in the federally declared disaster area contributes tax
revenue to its state government. Tax revenue may disappear completely in some
jurisdictions; in others, tax payments may be delayed or significantly reduced.
Because the swath of destruction wrought by Hurricane Katrina is so broad — and
in the case of New Orleans, Louisiana has continued for such an extended period —
tax revenue loss to the state may be particularly dramatic.
Displaced economic activity that remains in each state, however, reduces the
potential revenue loss arising from dislocated state sales taxes. The economic
activity would still generate revenue for the state, although it would shift from one
part of the state to another. The loss in personal income taxes may be significant as
many workers in the coastal region may not have jobs to return to and will elect to

¹ See P.L. 108-27, The Jobs and Growth Tax Relief Reconciliation Act of 2003.
² See CRS Report RL33134, Supplemental Appropriations: Trends and Budgetary Impacts
Since 1981, by Thomas L. Hungerford.

migrate out of the gulf region. The relative size of potential state corporate income
tax revenue losses is unclear as corporate profits, the base of state corporate income
taxes, are typically not allocated to individual counties.
Table 1 below reports the relative reliance of each Katrina affected state on
major taxes including sales, personal income, and corporate income taxes. Note that
these three revenue sources represent the majority of total tax revenue in each state.
Table 1. Tax Source Reliance of the States Affected by
Hurricane Katrina, FY2003
Tax Alabama Louisiana Mississippi
Total Tax Revenue (in 000s)$6,416,351$7,447,533$4,947,396
— Sales & Gross Receipts52.21%58.74%65.75%
— Corporation License/Franchise1.17%2.58%1.40%
— Individual Income31.72%25.07%20.62%
— Corporation Net Income3.78%2.67%5.84%
— Documentary & Stock Transfer0.71%n/an/a
— Severance1.63%6.48%0.95%
Subtotal Percentage92.77%96.58%96.07%
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The remainder of this report is divided into sections designated by the affected
state. A budget overview of each affected state is provided; Louisiana is addressed
first because that state was the most broadly affected by Hurricane Katrina.
Mississippi and Alabama are analyzed separately. The report concludes with a rough
estimate of the potential lost revenue arising from the devastation in the gulf area.
Louisiana
Arguably, Hurricane Katrina hit Louisiana the hardest financially. All parishes
in Louisiana were designated disaster areas by the Federal Emergency Management
Agency (FEMA), and residents were declared eligible for individual and public
assistance in 31 parishes (counties). These 31 hardest-hit parishes constitute a
significant portion of state economic activity and, thus, tax revenue. Table 2
presents the amount of personal income and retail sales that can be attributed to the
31 parishes declared disaster areas by FEMA and whose residents are eligible for
individual and public assistance. Almost three-quarters of state personal income and
retail sales (72.8% and 72.2%, respectively) are generated in the declared disaster
parishes.³

³ For this report, the counties whose residents are eligible for individual and public
assistance comprise the “disaster area.” For this reason, no Florida counties are included
(continued...)

Table 2. Louisiana Parishes Affected by Hurricane Katrina,
Personal Income and Retail Sales, 2002
Personal incomePercent ofRetail salesPercent of
Parish($000s)LA total($000s)LA total
Louisiana Total114,457,452100.00%41,885,192100.00%
Louisiana Disaster83,367,60572.84%30,226,45372.17%
Acadia 1,261,480 1.10% 381,589 0.91%
Ascension 2,130,057 1.86% 691,599 1.65%
Assumption 592,911 0.52% 87,762 0.21%
Calcasieu 4,721,704 4.13% 2,032,091 4.85%
Came ron 176,060 0.15% 30,960 0.07%
East Baton Rouge11,902,67410.40%5,031,13712.01%
East Feliciana449,9190.39%49,6200.12%
Iberia 1,689,733 1.48% 728,376 1.74%
Iberville 694,247 0.61% 210,531 0.50%
J e fferson* 13,862,559 12.11% 6,523,229 15.57%
Jefferson Davis586,3780.51%250,1150.60%
Lafaye tte 5,668,821 4.95% 2,666,644 6.37%
Lafourche 2,372,178 2.07% 656,241 1.57%
Livi ngston 2,156,896 1.88% 462,012 1.10%
Orleans* 13,627,645 11.91% 3,158,341 7.54%
Plaquemi nes* 642,862 0.56% 94,776 0.23%
Pointe Coupee499,3570.44%149,5970.36%
St. Bernard*1,594,5491.39%457,9701.09%
St. Charles*1,257,9571.10%251,7500.60%
St. Helena201,1100.18%37,5960.09%
St. James439,8880.38%93,6810.22%
St. John the Baptist*967,3140.85%274,0900.65%
St. Martin936,3100.82%241,2430.58%
St. Mary1,281,1941.12%415,1760.99%
St. Tammany*6,257,6785.47%2,155,4815.15%
T a ngipahoa 2,180,612 1.91% 1,057,339 2.52%
T e rrebonne 2,467,752 2.16% 1,176,348 2.81%
Vermilion 1,100,951 0.96% 370,330 0.88%
Washington 864,655 0.76% 291,967 0.70%
West Baton Rouge522,3360.46%151,9130.36%
West Feliciana259,8180.23%46,9490.11%
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³ (...continued)
in the report.

The parishes of Orleans and Jefferson alone account for almost one-quarter of
personal income and retail sales for the entire state of Louisiana. The city of New
Orleans is in Orleans parish, and Jefferson parish borders Orleans parish to the west.
More broadly, the seven parishes in the U.S. Census defined New Orleans-Matairie-
Kenner metropolitan statistical area (MSA), indicated with an asterisk in Table 2,
represent about one-third of personal income and a little less than one-third of retail
sales.
Budget Issues
The Louisiana budget will be strained by the unexpected jump in expenditures
and fall in revenues arising from the destruction of Hurricane Katrina. One news
report has the cost of environmental cleanup alone tagged at $61.5 billion which
includes “... $35 billion ... to restore wastewater treatment facilities and $25 billion
to clean up hazardous waste.”⁴ Before Katrina, the Louisiana budget was in deficit,⁵
with a FY2004 operating shortfall of $11 million. Clearly, the drop in revenues and
anticipated cost of rebuilding public infrastructure will create a serious strain on the
Louisiana State budget.
The budget process, balanced budget rules, expenditure limitations, and state
budget stabilization funds, will all be critical elements in the state’s response to the
Katrina disaster. Following is a brief review of these elements in Louisiana.
Budget Process. Louisiana employs an annual budget cycle that begins on
July 1. In September, the governor sends budget guidelines to each agency.
Agencies then submit requests to the governor in November. The governor submits
the budget to the legislature in February or March, and the legislature adopts the
budget in June. The timing of Hurricane Katrina will very likely alter that budget
schedule.
When the legislature is not in session, the Louisiana Interim Emergency Board
(IEB) may appropriate up to 0.1% of total state revenue from the previous fiscal year.
According to the Louisiana Executive Budget for FY2006, total general fund revenue⁶
in FY2005 was $6.8 billion. The cost to the state of the response and recovery effort
will substantially exceed the IEB appropriation amount. Consequently, the State
Legislature will likely hold a special session to address the spending needs related to
post-Katrina recovery.
State Balanced Budget Rules and Debt Limits. All states except
Vermont are required to balance the budget for each budget cycle either by state
constitution or by statute. In Louisiana, the rule is both statutory and constitutional.
States like Louisiana have two options to finance spending beyond current revenues:

⁴ Dolores W. Gregory, Susanne Pagano, Maybelle Cagle, and Sherry Jones, “Katrina’s
Impact on Gulf State Revenues Still Being Assessed, As IRS, States Offer Relief to
Taxpayers Affected by Hurricane,” Daily Tax Report, no. 182, Sept. 21, 2005, p. J-1.
⁵ State of Louisiana Annual Report, FY2004.
⁶ State of Louisiana, Executive Budget for FY2006.

additional debt or higher taxes. The latter option, higher taxes, would seem the less
viable following a major disaster after which economic activity has declined and the
state tax base narrowed.
Borrowing to finance response and recovery spending seems the more likely
option for Louisiana. Without legislative action, however, additional borrowing to
finance an operating budget shortfall could violate state balanced budget rules. In
addition, like many states, Louisiana imposes a debt limit that could be constraining
given the magnitude of the Katrina disaster. In Louisiana, for example, the
constitution requires that the debt service cost general obligation debt be no more
than 6% of total revenue (taxes, licenses, and fees) of the same fiscal year.⁷ Total
revenue (by this definition) in Louisiana for FY2004 was just over $8 billion and the
debt service cost was $152 million, or just 1.88%.⁸ The latest available Louisiana
Treasurer report projected that:
... in addition to the State being able to issue $425,000,000 in the 2004-2005
Fiscal Year, the State can issue $425,000,000 each year thereafter and remain⁹
within the State Debt Limit based on the Projection Model.
The restrictions would likely prevent Louisiana from financing reconstruction
on state-backed debt alone. The federal government would be likely more to
augment rather than replace state finance of recovery and reconstruction. What is
unclear, however, is what portion of reconstruction should (and could) be the
responsibility of the federal government.
Budget Stabilization or “Rainy Day” Fund. States typically maintain a
fund to access during unanticipated budget shocks such as natural disasters. In
Louisiana, at the close of fiscal 2004, the “budget stabilization fund” had $239.3
million.¹⁰ According to the National Association of State Budget Officers (NASBO),¹¹
in Louisiana, up to one-third of the fund can be used with legislative approval. The
fund will likely provide temporary liquidity for the state to meet some immediate
spending needs, though the balance is likely insufficient to address the potential long-
term cost of post-Katrina repair and recovery.

⁷ National Association of State Budget Officers, Budget Processes in the States, November

2002, p. 38. (Hereafter cited as NASBO, Budget Processes in the States.)

⁸ John Neely Kennedy, Louisiana State Treasurer, Chair State Bond Commission, Status
Report: Net State Tax Supported Debt, May 20, 2004. (Hereafter cited as Kennedy, Status
Report.)
⁹ Ibid., p. 3.
¹⁰ National Governor’s Association, National Association of State Budget Officers
(NASBO), Fiscal Survey of States, June 2005, Table A-1, p. 18. (Hereafter cited as
NSABO, Fiscal Survey of States.)
¹¹ NASBO, Budget Processes in the States, p. 59.

State Fiscal Response
Louisiana will likely use a combination of stabilization fund revenues and the
issuance of additional debt to finance relief and recovery spending. In FY2004,
Louisiana debt was rated “A+” by the rating firms Fitch and Standard and Poor’s.¹²
The bond rating, though strong, indicates that Louisiana may not be able to withstand
economic shocks as well has higher rated issuers. A news story reported that the debt
for many projects in the gulf coast area are under a “credit watch.”¹³ Issuers and
bonds under a credit watch are thought to be at an elevated risk for default.
Mississippi
Mississippi was almost as hard hit as Louisiana in terms of economic activity
affected by Hurricane Katrina as measured by portion of personal income in the
disaster region. The gulf area most severely affected by the hurricane accounts for
over two-thirds of the personal income and retail sales in the state, (see Table 3).
The cities of Biloxi, Jackson, Hattiesburg, Pascagoula, and Gulfport are all included
in the most severely affected disaster designated counties. The counties comprising
the Gulfport-Biloxi and Jackson MSAs represent over one-third of total retail sales
in Mississippi.
Table 3. Mississippi Counties Affected by Hurricane Katrina,
Personal Income and Retail Sales, 2002
Personal incomePercent ofRetail salesPercent of
County($000s)MS total($000s)MS total
Mississippi Total64,552,413100.00%25,017,531100.00%
Mississippi Disaster44,534,40768.99%16,980,27667.87%
Adams 755,771 1.17% 39,300 0.16%
Amite 256,701 0.40% 27,972 0.11%
Attala 435,498 0.67% 167,792 0.67%
Choctaw 150,571 0.23% 40,404 0.16%
Claiborne 191,109 0.30% 32,441 0.13%
Clarke 344,348 0.53% 38,766 0.15%
Copiah* 533,198 0.83% 123,445 0.49%
Covi ngton 350,902 0.54% 104,639 0.42%
Forrest 1,782,334 2.76% 916,832 3.66%

¹² Louisiana Department of Treasury, Annual Report: Fiscal Year 2004, p. 16. An “A+”
rating indicates that an issuer “... has a strong capacity to meet its financial commitments
but is somewhat more susceptible the adverse effects of changes in circumstances and
economic conditions than obligors in higher-rated categories.” The highest rating would be
“ AAA.”
¹³ Leslie Wayne, “Tax Bases Shattered, Gulf Region Faces Debt Crises,” New York Times,
Sept. 19, 2005, p. C1.

Personal incomePercent ofRetail salesPercent of
County($000s)MS total($000s)MS total
Franklin 142,673 0.22% 14,651 0.06%
George 381,405 0.59% 131,859 0.53%
Greene 198,541 0.31% 29,050 0.12%
Hancock** 1,038,914 1.61% 300,432 1.20%
Harrison** 4,869,046 7.54% 2,139,214 8.55%
Hinds* 6,654,634 10.31% 3,023,634 12.09%
J ackson 3,164,499 4.90% 937,404 3.75%
J a sper 334,391 0.52% 54,775 0.22%
J e fferson 127,538 0.20% 14,186 0.06%
Jefferson Davis227,6800.35%46,3570.19%
J ones 1,501,195 2.33% 559,991 2.24%
K e mper 183,891 0.28% 39,610 0.16%
Lama r 948,351 1.47% 457,599 1.83%
Lauderdale 1,887,668 2.92% 1,028,426 4.11%
Lawrence 277,394 0.43% 37,551 0.15%
Leake 426,269 0.66% 120,672 0.48%
Lincoln 707,958 1.10% 361,527 1.45%
Lowndes 1,359,756 2.11% 678,102 2.71%
Madison* 2,602,104 4.03% 901,868 3.60%
Marion 482,974 0.75% 175,384 0.70%
Neshoba 709,183 1.10% 245,376 0.98%
Newton 460,730 0.71% 119,152 0.48%
Noxubee 209,611 0.32% 55,951 0.22%
Oktibbeha 913,369 1.41% 339,423 1.36%
Pearl River948,4301.47%342,9761.37%
Perry 202,018 0.31% 39,507 0.16%
Pike 771,829 1.20% 397,956 1.59%
Rankin* 3,288,703 5.09% 1,392,855 5.57%
Scott 529,317 0.82% 159,834 0.64%
Simpson* 563,407 0.87% 182,869 0.73%
Smith 327,847 0.51% 41,894 0.17%
Stone** 293,792 0.46% 93,222 0.37%
Walthall 251,145 0.39% 64,677 0.26%
Warren 1,331,898 2.06% 478,729 1.91%
Wayne 382,782 0.59% 137,440 0.55%
Wilkinson 161,637 0.25% 41,268 0.16%
Winston 362,033 0.56% 111,245 0.44%
Yazo o 509,363 0.79% 192,019 0.77%
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Budget Issues
The budget of Mississippi before Hurricane Katrina was relatively sound with
a FY2004 surplus of $3 million.¹⁴ According to the Mississippi Department of
Finance and Administration, for FY2005, sales tax revenue was anticipated to grow
4.4%; income tax revenue 3.6%; and corporate income tax revenue 8.0%.¹⁵ These
three revenue sources comprise approximately 90% of total tax revenue for
Mississippi (see Table 1).
Budget Process. Mississippi employs an annual budget cycle that begins
July 1. Agencies submit requests for the next fiscal year in August and, the governor
submits the budget to the legislature before January. The legislature typically adopts
the budget in March or April. Requests for additional funding for recovery will
likely be included in the 2007 budget, which begins July 1, 2006.
State Balanced Budget Rules and Debt Limits. Mississippi, like 48¹⁶
other states, has a balanced budget rule. In Mississippi, the balanced budget rule
is statutory rather than constitutional. In contrast, the debt limits in Mississippi are
constitutional. Thus, exceeding the debt limits in Mississippi would entail amending
the state constitution.
The debt limits in Mississippi are applied to general obligation (GO) debt and
short-term debt. For GO debt, the limit is 1.5 times total revenue. This type of limit,
based on the relationship between the outstanding debt and total revenue, is unlike
the Louisiana method, which is based on debt servicing costs, not the amount
outstanding. When interest rates are relatively low, the volume based limit is more
constraining than the Louisiana method. Short-term debt in Mississippi is limited to

5% of general fund appropriations.

According to the Mississippi Department of Finance and Administration, total
GO debt outstanding in FY2004 was $2,997,341,000 and the “... State had
established a constitutional debt limit of $8,429,055,000.”¹⁷ Thus, it appears there
is some flexibility for Mississippi to borrow without amending the state constitution.
Nevertheless, using debt to finance current operating expenditures may require
statutory changes.

¹⁴ NASBO, Fiscal Survey of States, p. 18.
¹⁵ Mississippi Department of Finance and Administration, Comprehensive Annual Financial
Report 2004, June 30, 2004, p. 27. The report is available on line at
[http://www.dfa.state.ms .us/resources.html ].
¹⁶ Vermont is the exception.
¹⁷ Mississippi Department of Finance and Administration, Comprehensive Annual Financial
Report 2004, June 30, 2004, p. 27. The report is available on line at
[http://www.dfa.state.ms .us/resources.html ].

Budget Stabilization or “Rainy Day” Fund. Mississippi maintains a
budget stabilization fund that had a balance of $38 million in FY2004. The fund was
established by statute and the funds can be used to:
(1) meet cash flow needs (borrowed funds must be repaid within the same fiscal
year); (2) cover deficits (up to $50 million in any one fiscal year); and (3)
provide funds for disaster assistance. ¹⁸
In the present circumstance, the stabilization fund is likely insufficient to fully
finance the repair and recovery spending needs in the most severely affected part of
Mississippi.
State Fiscal Response
Some observers believe the utilization of existing bond capacity will be the
likely response to Katrina recovery financing in Mississippi. The state’s bond rating
in FY2004 was a relatively strong “AA,” implying that the interest rate on state debt
should be somewhat reasonable.¹⁹ Bond investors, however, may be less willing to
lend to Mississippi if the economic infrastructure is judged permanently impaired.
The increased risk associated with Mississippi debt may, in turn, increase debt
servicing costs. On the other hand, the increased economic activity associated with
rebuilding and recovery could compensate, at least in part, for the likely increase in
debt servicing costs.
Alabama
Of the three hardest hit states, Alabama escaped with the least adverse economic
impact. Nevertheless, Hurricane Katrina inflicted significant damage in the gulf
region of Alabama. Approximately one-sixth of personal income and retail sales in
Alabama is generated in the hardest hit counties (see Table 4). Three counties in the
disaster region, Baldwin, Mobile, and Tuscaloosa, comprise a large portion of the
economic activity in the state (15.3% of state personal income).

¹⁸ National Conference of State Legislatures, Appendix A. Rainy Day Funds, p.4.
¹⁹ According to Standard and Poor’s, a “AA” rating indicates an issuer “... has a very strong
capacity to meet its financial commitments.”

Table 4. Alabama Counties Affected by Hurricane Katrina,
Personal Income and Retail Sales, 2002
Personal incomePercent ofRetail salesPercent of
County($000s)AL total($000s)AL total
Alabama Total114,692,872100.00%43,784,342100.00%
Alabama Disaster19,973,45517.84%8,019,37419.57%
Baldwin 4,044,702 3.53% 1,820,932 4.16%
Choctaw 326,503 0.28% 63,054 0.14%
Clarke 600,210 0.52% 262,080 0.60%
Greene 188,015 0.16% 33,021 0.08%
Hale 320,007 0.28% 67,453 0.15%
Marengo 523,430 0.46% 164,079 0.37%
Mobile 9,070,058 7.91% 4,073,954 9.30%
Pickens 408,731 0.36% 94,127 0.21%
Sumt er 260,169 0.23% 61,224 0.14%
T uscaloosa 4,422,969 3.86% 1,875,902 4.28%
Washington 332,091 0.29% 53,985 0.12%
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Budget Issues
The Alabama budget situation before Hurricane Katrina was improving, with
a reported FY2004 ending balance of $141 million.²⁰ According to a recent bond
rating update prepared by Moody’s investor services, the State of Alabama financial
status has improved, noting that in Alabama a “[f]inancial recovery is underway, with
revenues exceeding estimates and [a] declining reliance on non-recurring [revenue]
m easures.”²¹
Budget Process. Alabama’s annual budget cycle employs a fiscal year that
begins in October. For FY2007 — beginning October 1, 2006 — agency budget
requests were due on November 1, 2005 and the governor would be required to
present the budget(s) to the legislature on February 4, 2006 under normal
circumstances. This schedule may be altered in light of the Katrina disaster.
State Balanced Budget Rules and Debt Limits. Alabama, like 48 other
states, has a balanced budget rule. The Alabama constitution requires that the

²⁰ Bob Riley, State of Alabama Executive Budget: 2005-2006, p. iii.
²¹ Moody’s Investor Services, “Moody’s Upgrades Alabama General Obligation Debt to Aa2
from Aa3,” Aug. 26, 2005. (Hereafter cited as Moody’s.)

Governor submit a balanced budget. The balanced budget rule is reinforced by a
statutory requirement that the legislature pass a balanced budget.
The Alabama constitution does not impose a general obligation debt limit,
though short-term debt is limited by the constitution to $300,000.²² General
obligation bond issues, however, must pass a public referendum (simple majority)
and the legislature must approve the debt by a three-fifths majority. The public and
legislative approval requirements may constrain borrowing in Alabama. According
to the Moody’s report, “[N]et tax-supported debt amounts to 2.0% of personal
income (compared with a national median of 2.4%), and $523 per capita (compared
with a national median of $703).²³ Alabama, thus, has relatively less debt than other
states.
Budget Stabilization or “Rainy Day” Fund. Alabama maintains a budget
stabilization fund that had a balance of $104 million in FY2004 and was estimated
to rise to $140 million for FY2005.²⁴ The stabilization fund in Alabama has two
parts: the state general fund and the education fund. The stabilization fund is
structured to preserve the integrity of the education fund, the largest operating fund.
State Fiscal Response
In connection with the recent hurricanes, Alabama does not appear to face a
serious financial crisis, particularly in comparison with Louisiana and Mississippi.
The ability of Alabama to issue debt seems reasonably strong, though the state
balanced budget rules would likely require revisiting if debt were used to cover
operating expenditures. The Alabama bond rating from Moody’s of “Aa2” is roughly
equivalent to a “AA” rating from Standard and Poor’s or Fitch rating services. Note
that Mississippi also holds a “AA” rating. Again, the constraint for Alabama, as with
the other states, is how to use debt to finance current operating expenditures without
violating state balanced budget rules.
Estimated Revenue Loss by State
If affected states must borrow, a critical first step is determining how much to
borrow. The description of state budgets and the data detailing the relative economic
impact form the basis for the following estimate of the potential revenue loss arising
from Hurricane Katrina. The general assumption is that the hardest hit counties and
parishes will generate significantly less tax revenue from the dislocated economic
activity occurring after Hurricane Katrina. More specifically, the estimates are based
on the revenue that would have been raised in September 2005. The estimate will
overstate the long-term sales tax revenue loss for the following reasons: (1) some
portion of retail sales and accompanying sales tax will shift to another part of the

²² NASBO, Budget Processes in the States, p. 36.
²³ Moody’s (2005).
²⁴ National Governor’s Association, National Association of State Budget Officers, Fiscal
Survey of States, June 2005, Table A-1, p. 18.

state; (2) some retail sales will be delayed, not eliminated; and (3) some parishes and
counties on the outer ring of the affected area may actually realize an increase in
retail sales as relief workers and recovery efforts stimulate economic activity and thus
increase tax revenue.
State personal income tax collections will also decline, although — as with
retail sales — it’s unclear if the loss in tax revenue would be as permanent. Larger
employers could retain employees and continue to make scheduled payroll deposits,
although the tax payments would likely be delayed. The states have granted
employers extensions through January 3, 2006, to comply with individual and
corporate income tax payments. The state will likely receive a significant rise in tax
payments, both personal and corporate, in late 2005 and early 2006, as postponed tax
payments are made before the extension expires. Other taxes, such as the Louisiana
severance tax, though not tied directly to personal income or retail sales, will likely
decline in the short run, but will rise considerably as natural resource extraction
activities rebound.
A recent Congressional Budget Office (CBO) publication estimated the revenue
loss of the state of Louisiana at $3 billion to $6 billion. Local governments in the
affected region of Louisiana generate about $3.1 billion in sales and property taxes;
in Mississippi local governments in the affected region generate about $2.25 billion
to $2.3 billion in sales and property taxes; and in Alabama local governments in the
region generate approximately $510 million in sales and property tax revenue.²⁵ The
CBO report did not provide estimates for state revenue losses in Alabama or
Mississippi.
Estimation Methodology
As noted above, the estimates in Table 5 are based on the assumption that after
Hurricane Katrina, economic activity will slow and tax revenue decline. The amount
of lost sales tax revenue is estimated using the amount of retail sales that occurred
in the affected counties (parishes) relative to the rest of the state. The percentage of
retail sales was then multiplied by the amount of sales and use tax revenue generated
in the entire state in September of 2003 (2004 for Alabama). This approximation
does not adjust for the likely increase in prices and corresponding rise retail sales
amounts since 2003.
The bottom three rows provide estimates of the revenue loss under three
different assumptions on the percentage of lost economic activity. In the most
extreme scenarios, all revenue for the month of September is lost. Though likely in
some areas, its unlikely that all of the counties and parishes designated as eligible for
individual and public assistance would lose 100% of state tax collections.
Nevertheless, the amount does provide an upper limit to the potential revenue loss.
The two other scenarios, 50% and 25% loss, would seem more likely. Because a
smaller portion of Alabama was affected, it is probable that economic activity shifted

²⁵ U.S. Congressional Budget Office, The Macroeconomic and Budgetary Effects of
Hurricanes Katrina and Rita: An Update, Sept. 29, 2005.

to other parts of the state. The result is the state of Alabama would likely be on the
low end of the estimated tax loss assumption.
In the short term, using the 50% loss assumption, Louisiana and Mississippi
could have lost approximately $170.6 million and $108.0 million of tax revenue in
September 2005. Using the 25% loss estimate, Alabama could have lost just over
$18 million of tax revenue in September 2005. The revenue loss in October 2005
will likely decline for many of the disaster designated counties.
The long term prospects for tax revenue loss are exceedingly difficult to assess
given the nature of the disaster and the long term prospects for returning economic
activity to pre-hurricane levels. In addition, the degree to which economic activity
increases as rebuilding begins may actually increase tax revenue above pre-Katrina
levels.
Table 5. Estimated Tax Revenue Loss in September 2005
Following Hurricane Katrina
Revenue sourceAlabamaLouisianaMississippi
September Tax RevenuesFY2004^aFY2003^bFY2003^c
— Sales and Use$155,257,777$180,574,138$133,487,312
— Personal Income183,894,822186,315,631111,978,655
— Corporate Income48,319,45550,703,85554,600,025
— Corporate Franchise*1,718,70612,906,44515,181,300
— Severance Tax**629,81132,149,1050
Estimated September Loss by Tax Source
— Sales$30,388,256$130,311,345$90,602,522
— Personal Income32,810,446135,707,09277,253,549
— Corporate Income8,621,13936,931,26937,668,301
— Corporate Franchise306,6519,400,69310,473,508
— Severance Tax314,90628,934,1950
Total Estimated Loss
— 100% Loss$72,441,399$341,284,593$215,997,880
— 50% Loss36,220,699170,642,297107,998,940
— 25% Loss18,110,35085,321,14853,999,470
^Sources^:^a)^A^l^a^b^am^{a D}^e^part^m^eⁿ^t^of^R^e^v^eⁿ^u^e^{, R}^e^v^eⁿ^u^e^A^b^s^t^ract^{, Mon}^t^h^of^S^e^pt^em^{ber 2004,}^st
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