State Fiscal Outlook NSAA June 12, 2013 California Scott Pattison Executive Director National Association of State Budget Officers 444 North Capitol Street,

State Fiscal Outlook

NSAAJune 12, 2013

California Scott Pattison

Executive DirectorNational Association of State Budget Officers

444 North Capitol Street, NW, Suite 642 • Washington, DC 20001 • (202) 624-5382 • www.nasbo.org

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Economic Outlook

Monday:S&P upgraded U.S. Outlook to

“Stable” from “Negative”

“things people worried might knock [the economy] into recession landed no more than glancing blows.”

Wall Street Journal, June 11, 2013

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Economic Outlook

Monday: Businesses have never been more

profitable Credit/Housing improving State Revenue:

2013: 5.5% 2014: 4.3% 2015: 5%

NASBO

State Revenue Continues to Grow in 4th Quarter

-20

-15

-10

-5

0

5

10

15

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012%

Year-Over-Year Real Change inQuarterly State Tax Revenue

Total

Source: Fiscal Studies Program, Rockefeller Institute of Government; U.S. Census Bureau

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State Fiscal Outlook

Trends positive: Surpluses Back to pre-recession levels soonBut… Spending pressures will continue Federal funds will decline

NASBO

MAJOR CHALLENGES TO STATE BUDGETS: Fiscal 2013+

Spending Demands and Some Revenue Growth

Health Care Costs Dealing with Long Term Liabilities Federal Cuts/Changes

Not enough to go around

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Federal Dysfunction

“Today the country’s main businesses sit on nearly $2 trillion in cash, afraid to invest in part because corporate bosses cannot imagine any of Washington’s feuding partisans fixing anything.”

The Economist, March 16, 2013

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Federal Challenges

Sequester

Uncertainty

Many program authorizations set to expire

“Grand bargain” tax reform?

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Challenges:

Are states prepared?

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NASBO

The Challenges

Tighter Resources for Years Demographic Changes Debt and Pension Liability State Revenue Infrastructure Federal Cuts

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Current Fiscal Situation:

Indicators

NASBO

Slow Budget Growth

-8

-6

-4

-2

0

2

4

6

8

10

12

%

General Fund Expenditure Growth (%)

*36-year historical average annual rate of growth is 5.5 percent *Fiscal 2014 numbers are recommended Source: NASBO Spring 2013 Fiscal Survey of States

*Average

NASBO

FY 2014 GF Spending Estimated to Exceed Pre-Recession Level

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Source: NASBO Spring 2013 Fiscal Survey of States *Fiscal 2014 numbers are recommended

NASBO

FY 2013 GF Revenue Also Expected to Exceed Pre-Recession Peak

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Source: NASBO Spring 2013 Fiscal Survey of States *Fiscal 2014 numbers are recommended

NASBO

Budget Cuts Made After the Budget Passed

($ millions)

Source: NASBO Spring 2013 Fiscal Survey *Fiscal 2013 midyear cuts are ongoing

Minimal Net Midyear Budget Cuts in FY 2013, 11 States Cut $1.3B

NASBO

States Rebuilding Reserves, but Haven’t Reached Peak Levels

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NASBO

Fiscal 2014 Recommended Program Area Cuts

Elementary and Secondary Education: 5 states

Higher Education: 3 states

Public Assistance: 12 states

Medicaid: 7 states

Corrections: 7 states

Transportation: 10 states

Other Cuts: 9 statesSource: NASBO Spring 2013 Fiscal Survey of States

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States and Locals Continue to Eliminate Positions

State and local employment has declined 750,000 from the start of the recession through this February

State employment declined 195,000 from Aug. 2008-Feb. 2013 Local employment declined 558,000 from Aug. 2008-Feb. 2013

Source: Bureau of Labor Statistics

NASBO

Personnel Strategies Used to Reduce or Eliminate Budget Gaps

Fiscal 2010

Layoffs: 26 states

Furloughs: 22 states

Early Retirement: 6 states

Salary Reductions: 12 states

Cuts to Employee Benefits: 9 states

Fiscal 2013 Layoffs: 9 states

Furloughs: 3 states

Early Retirement: 2 states

Salary Reductions: 4 states

Cuts to Employee Benefits: 9 states

Source: NASBO Fiscal Survey of States

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Background on State Spending Trends

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Spending by Funding Source(Percentage)

General Funds39.8%

Federal Funds31.2%

Other State Funds26.5% Bonds

2.5%

Total State Expenditures By Funding Source, Estimated Fiscal 2012

Source: NASBO State Expenditure Report

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Total State Expenditures

K-1219.8%

Higher Education9.9%

Medicaid23.9%

Public Assistance1.4%

Corrections3.2%

Transportation8.1%

All Other33.7%

Total Expenditures by Function, Estimated Fiscal 2012

Source: NASBO State Expenditure Report

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Total Expenditures Percentage Growth in Spending Categories Over 10 Years

-5

31.8 33.9 34.5

44.8 47.7

59.7 60.9

-10

0

10

20

30

40

50

60

70

%

Percentage Growth in Spending CategoriesBetween Fiscal 2003 and Fiscal 2012 (Total Funds)

Public Assist. Higher Ed K-12 Corrections Transport. Total All Other Medicaid

Sources: NASBO State Expenditure Reports

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General Fund: Medicaid & Education 64.3%

Elementary & Secondary Education

34.7%

Higher Education10.0%

Medicaid19.6%

Public Assistance1.5%

Corrections7.0%

Transportation0.5%

All Other26.6%

General Fund Expenditures by Function, Estimated Fiscal 2012

Source: NASBO State Expenditure Report

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General Fund Percentage Growth in Spending Categories Over 10 Years

-10.1

8 11.7

30.6 31.5 34.4

45.853.2

-20

-10

0

10

20

30

40

50

60

%

Percentage Growth in Spending CategoriesBetween Fiscal 2003 and Fiscal 2012 (General Funds)

Public Assist. Higher Ed Transport. K-12 Corrections Total All Other Medicaid

Sources: NASBO State Expenditure Reports

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State Spending from Federal Funds

Elementary & Secondary Education

10.9%

Higher Education3.5%

Medicaid43.9%

Public Assistance2.6%

Corrections0.2%

Transportation8.0%

All Other30.9%

Federal Funds Spending, Estimated Fiscal 2012

Source: NASBO State Expenditure Report

NASBO

Higher Ed Funding More Volatile than Other Program Areas

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Source: Illinois State University, Center for the Study of Education Policy, Grapevine Reports

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Trend continues…A Focus on Outcomes

Focus on results and outcomes

Transparency

Spend funds for effective programs

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Outlook

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State Fiscal Outlook

Below average state budgets

Health care reform implementation

Tough competition for general funds and limited federal funds

Dealing with infrastructure, long-term liabilities

States will continue to make some painful choices

NASBO

Why am I still a optimistic?

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Sticky bun come soon mon!Sticky bun come soon mon!

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www.nasbo.org

Scott Pattison

(202) 624-8804

spattison@nasbo.org