Update on State Fiscal Conditions 2015-2016 Scott Pattison Executive Director NASBO NSAA June 10, 2015.

Update on State Fiscal Conditions 2015-2016

Scott PattisonExecutive DirectorNASBO

NSAAJune 10, 2015

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13 14 15 16 17 18 19 202

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4

5

6

7

8

9

Avg. state tax growth since 1986

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Structural Imbalances Will Persist

CMS state Medicaid spending forecast

Moody’s Analytics state tax revenue forecast

Sources: Moody’s Analytics, CMS, Census Bureau

%

Year ago % change, calendar year

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Current Economic and Fiscal Situation

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Economy

GDP: 1st Q 0.2% - Flat Federal Reserve projects 2.5% GDP growth in 2015, 2.5% in 2016

Other economic figures: Unemployment rate remains at 5.4% Consumer spending rose 0.4% Consumer price index rose 0.2%

Nearly 650,000 less state and local employees since ‘08

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State Fiscal Overview

Fiscal 2015 marks the 5th year increase in general fund spending and revenues

Signs of fiscal distress have subsided and the fiscal environment for most states is good

Some states are facing difficult budget environments due to various issues

Not post-WWII normal patterns of growth

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Overall

▫Modest Growth (Mirror Economy)

▫ Most States: Good/Decent

▫Tough Decisions

▫Some States Very Difficult (Oil prices, etc.)

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Long Term:

Medicaid and Health Care Pensions Demographic Changes

Not Corrections

Yes, Infrastructure

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Different Reasons for Tight Budgets

▫Energy States (AK, NM)▫Tax Related Issues (CO, IL)▫Federal Cuts (VA, MD)▫Modest Growth (Northeast)▫Limitations (NY, CO)

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Top Issues

▫Infrastructure▫Education ▫Tax Cuts (Ark., ME)▫Liabilities (Pensions)▫Shortfalls (Some States)▫Other Revenue Issues (Tolls, Sin Taxes)▫Health Care (Medicaid Issues)

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MA Aa1/AA+/AA+

MinnesotaAa1/AA+/AA+

Iowa(Aaa)/(AAA)/(AAA)

IllinoisA3/A-/A-

Indiana(Aaa)/(AAA)/(AAA)Missouri

Aaa/AAA/AAA

ArkansasAa1/AA/NR

LouisianaAa2/AA/AA

AlabamaAa1/AA/AA+

GeorgiaAaa/AAA/AAA

South CarolinaAaa/AA+/AAA

North CarolinaAaa/AAA/AAA

TennesseeAaa/AA+/AAA

Kentucky(Aa2)/(AA-)/NR Virginia

Aaa/AAA/AAA

OhioAa1/AA+/AA+

MichiganAa2/AA-/AA

New YorkAa1/AA/AA+

VermontAaa/AA+/AAA

NH Aa1/AA/AA+

CT Aa3/AA/AA/AA

NJ A1/A+/A+

WashingtonAa1/AA+/AA+

OregonAa1/AA+/AA+

NevadaAa2/AA/AA+ Utah

Aaa/AAA/AAA

CaliforniaAa3/A/A

Idaho(Aa1)/(AA+)/(AA+)

MontanaAa1/AA/AA+

WyomingNR/(AAA)/NR

Arizona(Aa3)/(AA-)/NR

Colorado(Aa1)/(AA)/NR

New MexicoAaa/AA+/NR

TexasAaa/AAA/AAA

OklahomaAa2/(AA+)/AA+

Kansas(Aa2)/(AA+)/NR

NebraskaAa2*/(AAA)/NR

South DakotaAa2*/(AA+)/(AA+)

North Dakota(Aa1)/(AAA)/NR

WisconsinAa2/AA/AA/AA

MaineAa2/AA/AA

PennsylvaniaAa2/AA/AA

MD Aaa/AAA/AAA

FloridaAa1/AAA/AAA

RI Aa2/AA/AA

Puerto RicoB2/BB+/BB-

AlaskaAaa/AAA/AAA

HawaiiAa2/AA/AA

DE Aaa/AAA/AAA

West VirginiaAa1/AA/AA+

Aaa/AAA

Aa/AA

One Less than Aa3/AA-

Order of Ratings: Moody’s/S&P/Fitch/Kroll as of July 10, 2014.*Lease revenue and/or Certificate of Participation (“COP”) ratingNR: General Obligation Debt is Not Rated( ) Indicates issuer credit rating which is equivalent to a General Obligation rating

MississippiAa2/AA/AA+

DC Aa2/AA-/AA-

One Aaa/AAA

State General Obligation Ratings – July 2014 (from Citi)

GuamNR/BB-/NR

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Strategies Used to Reduce or Eliminate Budget Gaps,FY 2015 (Enacted)

Targeted Cuts: 16 states

Across the Board Cuts: 6 states

Reorganize Agencies: 3 states

Cuts to Employee Benefits: 3 states

Reduce Local Aid: 2 states

User Fees: 3 states

Higher Education Related Fees: 5 states

Source: NASBO Fall 2014 Fiscal Survey of States

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Changes to Budgeting and Finance Practices in Fiscal 2015

Budgeting and financial management practices (19)

Increase performance budgeting efforts (3)

Rainy day fund (2)

Tax expenditure studies (2)

Capital budgeting and planning processes (3)

New IT budgeting systems (5)

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Current Fiscal Situation:Indicators

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GF Spending Expected to Grow for 5th Straight Year, Although Below Average

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

*-8-6-4-202468

1012

8.7 9.4

4.9

-3.8-5.7

3.8 3.4 4.2 4.93.1

Annual Percent Change in General Fund Expenditures

(Per

cen

tage

Ch

ange

)

37-year historical average rate of growth is 5.5 percent *Fiscal 2015 numbers are enacted Source: NASBO Fall 2014 Fiscal Survey of States

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States Enact $2.3B in Net Tax and Fee Cuts for FY15

19791981

19831985

19871989

19911993

19951997

19992001

20032005

20072009

20112013

2015

-$10

-$5

$0

$5

$10

$15

$20

$25

$30

Enacted State Revenue Changes, Fiscal 1979 to Fiscal 2015

($ In

Bill

ions

)

Fiscal Year

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States Reserves Haven’t Reached Peak Levels

FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY 13 FY 14 FY 150.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

11.5%

10.1%

8.6%

5.7%5.2%

7.1%

8.4%

10.5%

8.9%

7.3%

Balances as a Percent of Expenditures

Balances as a Percent of Expenditures

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Minimal Midyear Budget Cuts So Far in Fiscal 2015

Source: NASBO Fall 2014 Fiscal Survey *Fiscal 2015 midyear cuts are ongoing

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

$0

$5

$10

$15

$20

$25

$30

$35

$40

0

10

20

30

40

50

20

28

35

22

9 813

72 3 1

16

37 37

18

5 2 4

13

41 39

23

811

8 7

Enacted Budget Cuts Made After the Budget Passed ($ In Millions)

Number of states Amount of reduction

$ In

Mill

ions

Num

ber o

f Sta

tes

Recession ends

Recession ends

Recession ends

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State Revenue Grows in 3rd Quarter of 2014 after Declining in 2nd Quarter

Series1

-20

-15

-10

-5

0

5

10

15

Year-Over-Year Real Change inQuarterly State Tax Revenue

%

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

*3rd quarter of 2014 is based on 45 early reporting states

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Fiscal 2015 Enacted Revenue Changes by Major Tax

Sales Taxes (-$248M): 5 states enacted increases,

13 enacted decreases

Personal Income (-$747M): 1 increase, 14 decreases

Corporate Income ($207M): 2 increases, 9 decreases

Cigarettes/Tobacco ($8M): 2 increases

Motor Fuels ($33M): 1 increase

Alcohol (-$0.2M): 1 increase, 1 decrease

Other Taxes (-$698M): 4 increases, 9 decreases

Source: NASBO Fall 2014 Fiscal Survey of States

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Background on State Spending Trends

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Spending by Funding Source(Percentage)

General Funds40.5%

Federal Funds30.3%

Other State Funds27.1%

Bonds2.1%

Total State Expenditures by Funding Source, Estimated Fiscal 2014

Source: NASBO State Expenditure Report

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Total State Expenditures by FunctionEstimated Fiscal 2014

Elementary & Secondary Edu-

cation19.5%

Higher Education10.1%

Public Assistance1.4%

All Other32.4%

Corrections3.1%

Transportation7.7%

Medicaid25.8%

Source: NASBO State Expenditure Report

www.nasbo.org

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General Fund Expenditures by FunctionEstimated Fiscal 2014

Elementary & Secondary Ed-

ucation35.0%

Higher Education9.4%

Public Assistance1.4%

All Other27.4%

Corrections6.8%

Transportation0.9%

Medicaid19.1%

Source: NASBO State Expenditure Report

www.nasbo.org

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Federal Funds Expenditures by FunctionEstimated Fiscal 2014

K-129.9%

Higher Education3.7%

Public Assistance2.6%

All Other25.0%

Corrections0.1%

Transportation7.7%

Medicaid51.0%

Source: NASBO State Expenditure Report

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Revenue Sources in the General Fund (Percentage)

Sales 31%

Personal Income 42%

Corporate Income 6%

Gaming 1%

Other Taxes & Fees 20%

Estimated Fiscal 2014

Source: NASBO State Expenditure Report

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Revenue Sources in GF Relatively Consistent

1998 2014

Sales 34%

Personal Income 39%

Corporate Income

8%

Gaming 1%

Other Taxes &

Fees 18%

Estimated Fiscal 2014

Sales 31%

Personal Income 42%

Corporate Income

6%

Gaming 1%

Other Taxes &

Fees 20%

Estimated Fiscal 2014

Pension Policy Matters

Spanish American War 1898

$16.5 million

World War I 1919

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Outlook

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Trend Continues:Focus on Outcomes

Focus on results

Spend funds for effective programs

Improve management

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State Fiscal Outlook

Growth

Revenue stable in FY 2015

Federal govt uncertainty

Tough competition for general funds

Dealing with infrastructure, long-term liabilities

Painful choices

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PhotosNM car window for ny

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Scott D. PattisonExecutive [email protected]