Revenue Volatility Report - Final 12-9-14le.utah.gov › interim › 2014 › pdf ›...

UTAH STATE LEGISLATURE 2014 INTERIM

OFFICE OF THE LEGISLATIVE FISCAL ANALYST ‐ 1 ‐ DECEMBER 9, 2014, 5:01 AM

LFA LEGISLATIVE FISCAL ANALYST

REVENUE VOLATILITY & REVENUE TREND REPORT

EXECUTIVEAPPROPRIATIONSCOMMITTEESTAFF:THOMASYOUNG,LFA I S SUE BR I E F

SUMMARY

Tomanagelong‐termrevenuefluctuations,avoidcommittingshort‐termgainstolong‐termobligations,andassureUtahhasadequateandjustifiableresourcesinreserve,theUtahLegislaturehasestablishedtwopolicies.ThefirstrequirestheOfficeoftheLegislativeFiscalAnalyst(LFA)andGovernor'sOfficeofManagementandBudget(GOMB)toreportrevenuevolatility,recommendchangestorainydayfund(RDF)depositamountsandtransferlimits,presentoptionsforRDFdepositmechanismslinkedtovolatility,andrecommendprospectiveRDFdepositmechanisms.ThesecondrequiresLFAandGOMBtoannuallycompareconsensusrevenueestimatesto15‐yeartrendsforeachtaxtype.ThisreportfulfillsbothofLFA'srequirementsforcalendaryear2014.

OnceeverythreeyearstheUtahLegislaturereviewstheadequacyofUtah'srainydayfunds.WhenLegislatorslastreviewedthefundsin2011,theyincreasedautomaticdepositthresholdsfrom6%to8%fortheGeneralFundBudgetReserveAccountand7%to9%fortheEducationBudgetReserve.Theydidsotomatchreservedepositswithamountsofrevenueatriskduetoforecasterroroverabout18months.Since2011,anticipatedGeneralandEducationFundforecasterrorshaveincreased,asshowninTable1.Tocovertheincreasedamountatriskforthesame18monthperiod,theAnalystrecommendsincreasingrainydayfundtransferthresholdsto9%fortheGeneralFundBudgetReserveAccountand11%fortheEducationBudgetReserveAccount.

Table1‐DownsideForecastErrors

Theabovementionedrainydayfundthresholdsguideexecutivebranchactionsafterasurplushasoccurred.Thethresholdsdonotlimitthedollaramountscontainedinrainydayfunds.Legislatorscan,andhave,proactivelydepositedamountsinthefundsbyappropriation.InFY2008,GeneralRainyDayFundbalancesexceededexistingthresholdsby$48million.InFY2009,EducationRainyDayFundamountswere$32millionabovethetransfercap.TheLegislaturedepositedadditionalrevenuebyappropriationbasedupona"gut"feelingthatrevenuegrowthestimateswereunsustainable.Newrequirementsfor15‐yearrevenuetrendanalysisandrecommendationsonforward‐lookingdepositrulesprovideamoremethodicalapproach.

Ourreviewofthe15‐yearrevenuetrendsassociatedwithmajortaxtypesfindsthat,ofthe$5.8billionFY2016revenueforecast,$116millionisabovetrend.Wealsofindthat,attheendoffiscalyear2014,Utah'sEducationFundBudgetReserveaccounthittheexisting9%transferthresholdbefore25%oftheFY2014EducationFundrevenuesurpluswasdepositedandwith$48millioninpastwithdrawalsremainingunrepaid.TheGeneralBudgetReserveAccounthas$85millioninpastwithdrawalsunrepaid,evenafter50%oftheFY2014revenuesurplus(afterotherdeductions)wasdeposited.

Werecommendthat,whenrevenueestimatesareabovetrend,legislatorsappropriatetoabudgetitemthefollowingamounts:a.)if25%oftheprioryear'srevenuesurpluswasnotdepositedduetothetransferlimits,theamountnecessarytoreach25%;andb.)ifpreviouswithdrawalsremainunrepaid,anadditional25%oftheprior‐year'ssurplus,outstandingwithdrawals,orremainingabovetrendrevenue,whicheverisless.Thefollowingdecisiontreedetailsourrecommendedapproach.Ifrevenuecollectionsmeetorexceedestimatesatyear‐end,appropriatedamountswouldbedepositedintotherainydayfunds.

Time

Horizon

GFForecastError

EFForecastError

FY2015GF

Amount@Risk

(Millions)

FY2015EF

Amount@Risk

(Millions)

TotalFY2015@Risk

(Millions)

FY2016GF

Amount@Risk

(Millions)

FY2016EF

Amount@Risk

(Millions)

TotalFY2016@Risk

(Millions)ConsensusTimeHorizon(FY2015&FY2016)

6Months 2.2% 2.6% $49 $89 $138 18Months 9% 11% $208 $389 $597

DECEMBER 9, 2014, 5:01 AM ‐ 2 ‐ OFFICE OF THE LEGISLATIVE FISCAL ANALYST

R E V E N U E VO L A T I L I T Y R E PO R T

AboveTrendRainyDayFundDepositsDecisionTree

BACKGROUND

HouseBills49ofthe2008GeneralSession,codifiedinUtahCodeAnnotated63J‐1‐205,requires,beginningincalendaryear2011,atriennialreportregarding:

ThevolatilityofthetaxbasesandrevenuestreamsthatfundtheStatebudget;

BalancesintheGeneralFundBudgetReserveAccountandtheEducationFundBudgetReserveAccount;and

Theadequacyofthebalancesinthebudgetreserveaccountsrelativetothevolatilityoftherevenuestreams.

In2011,policymakersdeterminedthattheDivisionofFinanceshouldautomaticallytransferaportionofrevenuesurplusesintotheRainyDayFundsuntilthebalancesinthefundsaresufficienttoaddressrevenuevolatilityandforecasterror.Atthattime,policymakersdeterminedthattheautomatictransferthresholdfortheGeneralFundshouldbe8%,andtheautomatictransferthresholdfortheEducationFundshouldbe9%.

HouseBill357ofthe2014GeneralSession(UCA63J‐1‐205)furtherrequiredthat,beginningincalendaryear2014,thetriennialreportincludeoptionsfordepositmechanismsbaseduponrevenuevolatilityincluding:

Howthoseoptionswouldhaveperformedhistorically;

Howthoseoptionswillperformbaseduponcurrentestimates;and

Recommendationsonforward‐lookingdepositrulesbaseduponvolatility.

HouseBill311ofthe2014GeneralSession(UCA36‐12‐13and63J‐1‐201)requiresanannualanalysisof15‐yearrevenuetrends.HouseJointResolution11ofthe2014GeneralSessionsuggestslegislatorsconsiderusingabovetrendrevenueforonetimepurposes.

Thisreportrespondstoandmakesrecommendationsbaseduponalloftheaboverequirements.

Is Revenue Above Trend?

Yes: Was 25% of Surplus Deposited

at Year End?

Yes: Have previous withdrawals been

repaid?

Yes: Stop

No: Transfer least of 25% of surplus,

unrepaid withdrawals, or remaining above trend revenue

No: Transfer up to amount necessary to reach 25% of

surplus. Is remaining revenue still above trend?

Yes: Have previous withdrawals been

repaid?

Yes: Stop

No: Transfer least of 25% of surplus,

unrepaid withdrawals, or remaining above trend revenueNo: Stop

No: Stop


R E V E NU E VO L A T I L I T Y R E P O R T

ANALYSIS ON VOLATILITY OF THE TAX BASES AND REVENUE STREAMS

ThissectionaddressesthevolatilityofthetaxbasesandrevenuestreamstotheGeneralFundandEducationFund.

GeneralFundVolatility

GeneralFundrevenuevolatilityisaffectedbysuchthingsasdisposableincome,retailsales,businessinvestment,consumersentiment,householdnetworth,creditmarkets,interestrates,shiftsintaxpayerbehavior,inflation,demandforinsuranceproducts,oilandnaturalgasproduction,metalprices,purchasesofalcoholandtobaccoproducts,professionalfees,andchangestotaxbasesandrates.Althougheachofthesefactorsmatters,thefactorsthatinfluencesalestaxmatterthemost(leftpaneofFigure1below).Overthepastfivefiscalyears,sourcesotherthansalestaxeshavecontributedfrom5%to28%tothepercentagechangeinGeneralFundrevenue(rightpaneofFigure1below).

Figure1‐GeneralFundRevenueStreamsandContributiontoYear‐over‐YearChange

1998 2003 2008 2013

0M

200M

400M

600M

800M

1000M

1200M

1400M

1600M

1800M

2000M

2200M

2400M

Re

venu

e

General Fund Revenue

1999 2004 2009 2014

-250M

-200M

-150M

-100M

-50M

0M

50M

100M

150M

200M

250M

Co

ntr

ibu

tion

to Y

ea

r o

ver

Ye

ar

Re

ven

ue

Ch

an

ge

Contribution to Year over Year Change

Measure NamesNon-Sales Tax General FundSales Tax General Fund

Measure NamesNon-Sales Tax General FundSales Tax General Fund



GeneralFundTaxBase&RevenueVolatility

RevenuesourcestotheGeneralFundincludesalestax(78%),beer,cigarette&tobaccotaxes(5%),severancetaxes(5%),insurancepremiumtaxes(4%)andothertaxesandtransfers(8%).Ofthecategoriesmentioned,onarelativetrendadjustedbasis,thesourceswiththelargestcyclicalmovements(greatestvolatility)are,indescendingorder,theseverancetaxes,salestaxes,cigarette,&tobaccotaxes,andinsurancepremiums(seeFigure2).Althougheconomicfactorsarethelargestcontributorstothevolatilityshowninfigures2and3,theyarenottheonlyreasonfortheobservedvolatility.Policychangesalsocontributetooverallvolatility,bothontheupsideandthedownside.Forinstance,thecigaretteandtobaccotaxesshowhistoricaljumpsanddeclinesaroundtimeperiodswhenthetaxrateonpacksofcigaretteswereincreased.

HasGeneralFundVolatilityIncreased?

Volatilitychangesovertime.Asisshowninfigures2and3,volatilityisincreasing.Thevolatilityincreaseisnotjustadeeprecessionphenomenon,butratherhashistoricalprecedentforlastinglongerthanjustacoupleofyears.

Figure2‐VolatilityofSourcestotheGeneralFund

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

-10M

-5M

0M

5M

10M

15M

20M

25M

Bu

sin

ess

Cyc

le C

om

po

ne

nt o

f Ge

ne

ral F

un

d R

eve

nu

e S

ou

rce

s E

xclu

din

g S

ale

s T

ax

Inflation-Adjusted General Fund Revenue Sources' Cycles

Measure NamesBeer Cigarette Tobacco Tax cycleCable Tax CycleGeneral Fund Other Cycle

Insurance Premium Tax CycleInvestment Income cycleLiquor Profits Cycle

Metal Severance Tax cycleOil Gas Tax CycleProperty Energy Credit Cycle

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

-100M

-80M

-60M

-40M

-20M

0M

20M

40M

60M

80M

100M

120M

140M

Sa

les

Ta

x C

ycle

Inflation-Adjusted Sales Tax Cycle



Figure3‐TrendandYear‐over‐YearChangeinTrendofSelectedGeneralFundRevenueSources(Inflation‐Adjusted)

199

51

996

199

71

998

199

92

000

200

12

002

200

32

004

200

52

006

200

72

008

200

92

010

201

12

012

201

32

014

201

52

016

30M

40M

50M

Be

er

Cig

are

tte

To

bac

co T

ax

Tre

nd

Inflation-Adjusted Beer, Cigarette, and Tobacco Trend

199

6

199

8

200

0

200

2

200

4

200

6

200

8

201

0

201

2

201

4

201

6

0%

2%

4%

6%

% D

iffe

ren

ce in

Be

er

Cig

are

tte

To

ba

cco

Ta

xT

rend

Y/Y % Change in Inflation-Adjusted Beer, Cigarette, and Tobacco TaxTrend

199

51

996

199

71

998

199

92

000

200

12

002

200

32

004

200

52

006

200

72

008

200

92

010

201

12

012

201

32

014

201

52

016

800M

900M

Sa

les

Ta

x T

ren

d

Inflation-Adjusted Sales Tax Trend

199

6

199

8

200

0

200

2

200

4

200

6

200

8

201

0

201

2

201

4

201

6

0%

1%

2%

% D

iffe

ren

ce in

Sa

les

Ta

x T

ren

d

Y/Y % Change in Inflation-Adjusted Sales Tax Trend1

995

199

61

997

199

81

999

200

02

001

200

22

003

200

42

005

200

62

007

200

82

009

201

02

011

201

22

013

201

42

015

201

6

10M

20M

30M

Oil

Ga

s T

ax

Tre

nd

Inflation-Adjusted Oil and Gas Severance Tax Trend

199

6

199

8

200

0

200

2

200

4

200

6

200

8

201

0

201

2

201

4

201

6

5%

10%

15%

% D

iffe

ren

ce in

Oil

Ga

s T

ax

Tre

nd

Y/Y % Change in Inflation-Adjusted Oil and Gas Tax Trend

199

51

996

199

71

998

199

92

000

200

12

002

200

32

004

200

52

006

200

72

008

200

92

010

201

12

012

201

32

014

201

52

016

25M

30M

35M

40M

Insu

ranc

eP

rem

ium

Ta

xT

rend

Inflation-Adjusted Insurance Premium Tax Trend

199

6

199

8

200

0

200

2

200

4

200

6

200

8

201

0

201

2

201

4

201

6

1.5%

2.0%

2.5%

3.0%

% D

iffe

ren

ce in

Insu

ranc

eP

rem

ium

Ta

xT

rend

Y/Y % Change in Inflation-Adjusted Insurance Premium Tax Trend



EducationFundVolatility

EducationFundrevenuevolatilityisaffectedbysuchthingsaswithholdinggrowthordecline,taxablecorporateprofitssourcedtotheState,capitalgains,dividendincome,interestincome,businessincome,andchangestotaxbasesandrates.Althougheachofthesefactorsmatters,thefactorsthatinfluenceincometaxmatterthemost(leftpaneofFigure4below).Overthepastfivefiscalyears,sourcesotherthanincometaxhavecontributedfrom‐21%to34%tothepercentagechangeinEducationFundrevenue(rightpaneofFigure4below).

Figure4‐EducationFundRevenueStreamsandContributiontoYear‐over‐YearChange

EducationFundTaxBase&RevenueVolatility

RevenuesourcestotheEducationFundincludeincometax(88%),corporatetax(10%),andothersources(2%).Thelargestsourceofvolatilityisthebasesuponwhichthevarioustaxesareimposed.Theindividualincometaxrateisimposedupontaxableincome,whichincludesincomefromwages,salaries,dividends,interest,capitalgains,alimony,businesses,IRAs,pensions,annuities,andvariousothersourcesofincome.Incometaxisalsovolatilebecauseofcreditsanddeduction.ThesecondlargestbasetotheEducationFund,corporatetaxableincome,isvolatilebecauseofchangesin,amongotherthings,grossreceiptsorsales,costofgoodssold,dividends,taxcreditsanddeductions,laborcosts,carryforwardlosses,andapportionment.IncomparingthetwolargestsourcesofEducationFundrevenue,corporateincometaxismorevolatilebyaround30%(dependsuponthemeasureused).

1998 2003 2008 2013

0M

500M

1000M

1500M

2000M

2500M

3000M

3500M

Re

ven

ue

to th

e E

du

catio

n F

un

d

Education Fund Revenue

1999 2004 2009 2014

-400M

-300M

-200M

-100M

0M

100M

200M

300M

400M

500M

Co

ntr

ibu

tion

to Y

ea

r o

ver

Ye

ar

Re

ven

ue

Ch

an

ge

Contribution to Year over Year Change

Measure NamesEducation Fund OtherMineral Production WitholdingCorporate TaxIncome Tax

Measure NamesEducation Fund OtherMineral Production WitholdingCorporate TaxIncome Tax



Althougheconomicfactorsarethelargestcontributorstothevolatilityshowninfigures5and6,theyarenottheonlyreasonfortheobservedvolatility.Policychangesalsocontributetotheoverallvolatility,bothontheupsideandthedownside.Forinstance,theincometaxrateincreasein1965increasedtheupsidevolatilityoftheincometaxinFY1966(inFY1967thisgetsbuiltintothetrendcomponentofrevenue).

HasEducationFundVolatilityIncreased?

Volatilitychangesovertime.Asisshowninfigures5and6,volatilityisincreasing.

Figure5–VolatilityofSourcestotheEducationFund

199

51

996

199

71

998

199

92

000

200

12

002

200

32

004

200

52

006

200

72

008

200

92

010

201

12

012

201

32

014

201

52

016

-140M

-120M

-100M

-80M

-60M

-40M

-20M

0M

20M

40M

60M

80M

100M

120M

140M

160M

180M

Inco

me

Ta

x C

ycle

Inflation-Adjusted Income Tax Cycle

199

51

996

199

71

998

199

92

000

200

12

002

200

32

004

200

52

006

200

72

008

200

92

010

201

12

012

201

32

014

201

52

016

-40M

-30M

-20M

-10M

0M

10M

20M

30M

40M

50M

60M

Co

rpo

rate

Ta

x C

ycle

Inflation-Adjusted Corporate Tax Cycle



Figure6‐EducationFundTrendandYearoverYearChangeinTrend(Inflation‐Adjusted)

199

51

996

199

71

998

199

92

000

200

12

002

200

32

004

200

52

006

200

72

008

200

92

010

201

12

012

201

32

014

201

52

016

110M

120M

130M

140M

Co

rpo

rate

Ta

x T

ren

d

Inflation-Adjusted Corporate Tax Trend

199

51

996

199

71

998

199

92

000

200

12

002

200

32

004

200

52

006

200

72

008

200

92

010

201

12

012

201

32

014

201

52

016

0%

2%

4%

6%

% D

iffe

ren

ce in

Co

rpo

rate

Ta

x T

ren

dY/Y % Change in Inflation-Adjusted Corporate Tax Trend

199

51

996

199

71

998

199

92

000

200

12

002

200

32

004

200

52

006

200

72

008

200

92

010

201

12

012

201

32

014

201

52

016

700M

800M

900M

1000M

1100M

1200M

Inco

me

Ta

x T

ren

d

Inflation-Adjusted Income Tax Trend

199

51

996

199

71

998

199

92

000

200

12

002

200

32

004

200

52

006

200

72

008

200

92

010

201

12

012

201

32

014

201

52

016

1%

2%

3%

4%

5%

% D

iffe

ren

ce in

Inco

me

Ta

x T

ren

d

Y/Y % Change in Inflation-Adjusted Income Tax Trend



WhichisMoreVolatile:GeneralFundorEducationFund?

HavingpresentedthevolatilityofthetaxbasesandrevenuesourcesoftheGeneralFundandEducationseparately,thissectioncomparesthevolatilityofthetwoagainsteachother.

AcomparisonofthecyclicalandtrendcomponentsoftherevenuesourcestotheGeneralandEducationfundssuggeststhattheEducationFundismorevolatilebyupto2times(standarddeviation/coefficientofvariationofthecyclicalortrendcomponentsofrevenue).Amongotherfactors,thismaybegenerallyduetothefactthatindividuals’andcorporations’incomeislessstablethanindividuals’andbusinesses’spendingpatterns(individualsandbusinesstendtosmoothspendingratherthanspendinspurts).TherevenuerecessionofFY2009andFY2010continuedthetrendofgreatervolatilityofEducationFundrevenueoverGeneralFundrevenue,withthemagnitudeofthevolatilitydifferencebeingaboutathird.Figure7belowrepresentsarealdollarcomparisonofthevolatilityinEducationFundandGeneralFundrevenue.Thetoppaneshowsthedeclineinthetrendgrowthrateovertimeandthebottompanerepresentsthechangeinthecyclicalportionofrevenue.Asshown,theEducationFundcycleisgreaterinmagnitudethantheGeneralFundis.

Figure7‐GeneralFundandEducationFundVolatility

199

51

996

199

71

998

199

92

000

200

12

002

200

32

004

200

52

006

200

72

008

200

92

010

201

12

012

201

32

014

201

52

016

-1%

0%

1%

2%

3%

4%

5%

% D

iffe

ren

ce in

Ed

uca

tion

Fu

nd

Tre

nd

Inflation-Adjusted Education Fund Growth Rate in Trend

199

51

996

199

71

998

199

92

000

200

12

002

200

32

004

200

52

006

200

72

008

200

92

010

201

12

012

201

32

014

201

52

016

-1%

0%

1%

2%

3%

4%

5%

% D

iffe

ren

ce in

Ge

ne

ral F

un

d T

ren

d

Inflation-Adjusted General Fund Growth Rate in Trend

199

51

996

199

71

998

199

92

000

200

12

002

200

32

004

200

52

006

200

72

008

200

92

010

201

12

012

201

32

014

201

52

016

-100M

0M

100M

200M

Ge

ne

ral F

un

d C

ycle

Inflation-Adjusted General Fund Cycle

199

51

996

199

71

998

199

92

000

200

12

002

200

32

004

200

52

006

200

72

008

200

92

010

201

12

012

201

32

014

201

52

016

-100M

0M

100M

200M

Ed

uca

tion

Fu

nd

Cyc

le

Inflation-Adjusted Education Fund Cycle



Fiscal Year

General

Fund

(millions)

Pctg. of

Appropriations

Education

Fund

(millions)

Pctg. of

Appropriations

2003 $27 1.4% $1 0.0%

2004 $54 3.1% $13 0.7%

2005 $106 5.6% $41 1.9%

2006 $132 6.5% $123 5.6%

2007 $171 8.9% $143 5.1%

2008 $194 8.0% $235 6.7%

2009 $189 8.6% $230 8.2%

2010 $105 5.7% $105 4.0%

2011 $123 5.9% $110 4.1%

2012 $133 6.3% $144 5.3%

2013 $134 6.6% $269 8.7%

2014 $141 6.5% $290 9.0%

Reserves and Share of Appropriations

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

1987

1990

1993

1996

1999

2002

2005

2008

2011

2014

General/Education Fund Budget Reserve Accounts

Education FundBudget ReserveAccount

General Fund BudgetReserve Account

GF/EF Prior toCreation of SeparateAccounts

BALANCES OF THE BUDGET RESERVE ACCOUNTS

GeneralFund

AttheendofFY2014,thebalanceintheGeneralFundBudgetReserveAccount(GFBRA)is$141million.Thisrepresentsanincreaseof$7millionoverFY2013.AsapercentofFY2011appropriations,theGFBRAisat6.5%ofFY2014appropriations,about1.5%awayfromits8.0%cap.ShouldFY2015revenuecomeinabovetarget,theamountthatcouldbetransferredtotheGFBRAinFY2015islimitedto8.0%ofFY2015appropriations,which,asofwriting,wouldlimittheautomatictransferinFY2015to$46million.

EducationFund

EndingFY2014with$290million,theEducationFundBudgetReserveAccount(EFBRA)amountsto9.0%oftotalFY2014appropriations.ShouldFY2015revenuecomeinabovetarget,theamountthatcouldbetransferredtotheEFBRAinFY2015islimitedto9.0%ofFY2015appropriations,which,asofwriting,wouldlimittheautomatictransferinFY2015to$16million.

Table2‐RecentRainyDayFundBalances

GeneralFundRainyDay

Education FundRainyDay

TotalRainyDay

CurrentTransferCap(FY2014) $173,996,000(8%) $290,454,112(9%) $464,450,360

CurrentBalance $141,171,000 $290,454,000 $431,630,000Difference $32,825,000 $0 $32,825,000

Figure 9 ‐ Fund Balances & Share of Appropriations

Figure8‐RainyDayFundBalances



ADEQUACY OF THE BUDGET RESERVE ACCOUNT BALANCES

Inordertocoverunexpecteddeclinesinrevenue,theadequacyoftheGFBRAandtheEFBRAdependsupontheaccuracyoftherevenueforecastersandtheeconomicindicators.Whenaforecastisperformed,confidencelimitsareproducedregardingthelikelyrangeagivenrevenuesourcemakeendupbeing.Theforecasterrorincreasesasthetimeperiodoftheforecastincreases.Forexample,inlookingattheforecastformotorfueltax(Figure10),theconfidencelimits(bluelines)aresmallerintheinitialyears,andthenwidensintothefuture.

Figure10‐ForecastErrorsAssociatedwithaRevenueForecast

GeneralFund

ThecurrentcapfortheGeneralFundis8%.Inreviewingtheprobabilityofarecession,currenteconomicindicators,confidenceintervals,andhistoricalandrecentvolatility,thecurrent8%capwouldcoverabout89%ofanyanticipatedrevenueforecasterror.Assumingcurrentindicatorsarecorrect,inordertocovertheanticipatedforecasterror,thecapwouldneedtobe9%.Theconfidenceinterval(range)isshownbythebluelinesinFigure11.

Figure11‐GeneralFundRevenueForecastRange

2

4

6

8

10

X 1E+008

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Mot

or F

uel T

ax R

even

ue (

$100

,000

)

Year

Motor Fuel Tax Revenue

History Fitted values Forecasts Confidence limits

5

10

15

20

25

X 1E+008

1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Gen

eral

Fun

d T

otal

($1

00 M

)




EducationFund

ThecurrentcapfortheEducationFundis9%.Inreviewingtheprobabilityofarecession,currenteconomicindicators,confidenceintervals,andhistoricalandrecentvolatility,thecurrent9%capwouldcoverabout82%ofanyanticipatedrevenueforecasterror.Assumingcurrentindicatorsarecorrect,inordertocovertheanticipatedforecasterror,thecapwouldneedtobe11%.Theconfidenceinterval(range)isshownbythebluelinesinFigure12.

Figure12‐EducationFundRevenueForecastRange

Recommendation:TheAnalystrecommendsadjustingtheGeneralFundandEducationFundbudgetreserveaccountautomatictransfercapsto9%and11%inordertocovertheamountatriskinthecurrent18‐monthrevenueforecast.

5

10

15

20

25

30

35

X 1E+008

1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Edu

catio

n F

und

Tot

al (

$100

M)




15‐YEARREVENUETRENDSStatuterequiresanannuallookatthe15‐yearrevenuetrendsbymajortaxtype.Thefollowingfigurescontaintheactualorprojectedrevenuebyrevenuetype,theassociatedtrend,andthecyclecomponentoftheprojectedrevenue.Thecycle(bottombargraphs)isthedifferencebetweenthepointestimateandthetrendcomponentofthatpointestimate.AsshowninTable2,weestimateFY2015revenueestimatestobe$58millionabovetrend.andFY2016projectionstobe$116millionabovetrend.

Table2–BusinessCycleComponentoftheRevenueForecast

Business Cycle Components

FY 15 Trend FY 15 Cycle FY 16 Trend FY 16 Cycle General Fund (GF) Sales and Use Tax 1,712,525 12,261 1,722,744 67,685 Cable/Satellite Excise Tax 27,415 (976) 27,681 (1,265) Liquor Profits 90,737 2,208 96,482 27 Insurance Premiums 93,603 509 96,328 111 Beer, Cigarette, and Tobacco 114,996 (6,004) 118,699 (13,854) Oil and Gas Severance Tax 85,690 6,556 90,907 5,561 Metal Severance Tax 19,334 (1,379) 18,640 (55) Inheritance Tax 0 0 0 0 Investment Income 3,545 1,556 146 5,472 Other 82,907 (5,525) 84,499 (5,592) Property and Energy Credit (6,292) 93 (6,288) (46)

Subtotal General Fund 2,224,460 9,299 2,249,838 58,044

Education Fund (EF) Individual Income Tax 2,953,768 32,434 3,067,601 42,392 Corporate Tax 342,836 17,581 352,351 17,738 Mineral Production Withholding 33,457 1,307 34,936 711 Escheats & Other 25,429 (2,792) 25,625 (2,396) Subtotal Education Fund 3,355,490 48,530 3,480,513 58,445

Total GF/EF 5,579,950 57,829 5,730,351 116,489



Figure13showstrends,cycle,andactualcollectionsforGeneralandEducationFundcollectionscombined.ThegrayportionofthetopgraphicrepresentstheactualGeneralFund/EducationFundexperience.Thetopbluelinerepresentsthetrendcomponentoftherevenue.Thedottedlinearrepresentsthelinearcomponentofthetrend.TheorangebarsinthebottomfigurerepresentthebusinesscyclecomponentofGeneralFund/EducationFundrevenue.Onecanseeour$116millionFY2016abovetrendrevenueestimatefromboththegapbetweenthesolidblueandsolidgraylineandthesizeoftheorangebar.

Figure13–GF/EFBusinessCycle

2003 2005 2007 2009 2011 2013 2015

4B

5B

GF

/EF

Act

ual a

nd T

rend

-500M

0M

500M

GF

/EF

Cyc

le

GF/EF Business Cycle

Measure NamesGF/EFGF/EF TrendGF/EF Cycle

Note: dotted line represents the linear trend.



Bytheirverynature,revenueestimateshavebuilt‐inuncertainty.We'vementionedtheforecasterrorassociatedwithactualcollections.Similarly,trendestimatescontainerror.Tostartwith,themethodologybehindtrendestimationhashighandlowpoints.Additionally,differenttrendestimatingmethodologiesadjustforpolicyandtaxrateorbasechangesindifferentways.Bothpointestimatesandtrendsreallyfallwithinarange.Onewaytocommunicatetheuncertaintyistoimposeconfidencebandsaroundboththetrendandtheactualcollections.Figure14doesjustthat.Thenarrower,dottedlightbluebandsareforthetrendcomponentofGeneralFund/EducationFundrevenue.Thewider,dottedlightgraybandsrepresenttheconfidencebandsaroundactualGeneralFund/EducationFundrevenue.ComparingUtah'scurrentGeneralandEducationfundpointestimatetothelowendofthetrendconfidenceinterval,$241millionwouldbeabovetrend.Comparingthepointestimatetothehighendofthetrendconfidenceinterval,$9millionwouldbebelowtrend.

Figure14–GeneralFund/EducationFundBusinessCycleConfidenceBands

Inthegraphicsthatfollow,weexaminethetrends,cycle,andactualcollectionforeachmajortaxtypegoingtoUtah'sGeneralandEducationFunds.

2003 2005 2007 2009 2011 2013 2015

4B

5B

GF

/EF

Act

ual a

nd T

rend

-500M

0M

500M

GF

/EF

Cyc

le

GF/EF Business Cycle

Measure NamesGF/EFGF/EF TrendGF/EF Cycle

Note: in the figure are two confidence bands.



Figure15–SalesTaxTrend

2003 2005 2007 2009 2011 2013 2015

1500M

2000M

Sal

es T

ax A

ctua

l and

Tre

nd

-200M

0M

200M

Sal

es T

ax C

ycle

-212

,560

,123

-162

,497

,544

208,

872,

056

290,

532,

332

140,

212,

251

-95,

171,

063

-62,

161,

427

-10,

681,

130

-27,

838,

804

-92,

887,

832

-84,

484,

392

-16,

586,

702

89,3

21,9

73

43,7

17,4

11

-7,7

87,0

07

Sales Tax, GF+Earmarks

Measure NamesSales Tax TrendSales Tax TotalSales Tax Linear TrendSales Tax Cycle

Note: The sales tax cycle includes GF and Earmarks.



Figure16–CableTaxTrend

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

15M

20M

25M

30M

Cab

le/S

atel

lite

Tax

Act

ual a

nd T

rend

-5M

0M

5M

Cab

le T

ax C

ycle

-5,1

08,2

35

-1,1

35,4

68

-1,2

65,1

51

1,82

0,38

5

2,40

7,92

8

1,98

0,48

6

1,29

1,68

4

-197

,838

-975

,707

640,

154

373,

161

168,

601

Cable/Satellite

Measure NamesCable Tax TrendCable Tax CycleCable Satellite Excise TaxCable Tax Linear Trend



Figure17–LiquorProfitsTrend

2003 2005 2007 2009 2011 2013 2015

40M

60M

80M

100M

Liqu

or P

rofit

s A

ctua

l and

Tre

nd

-10M

0M

10M

Liqu

or P

rofit

s C

ycle

-2,9

50,3

45

-5,2

20,0

83

-6,1

59,4

33

-1,8

54,2

30

-3,7

26,7

10

5,03

5,09

9

2,81

7,01

3

2,97

0,82

0

1,25

7,39

0

2,20

8,46

0

2,05

8,75

4

2,86

6,62

2

656,

799

12,9

78

26,8

66

Liquor Profits

Measure NamesLiquor Profits TrendLiquor Profits CycleLiquor ProfitsLiquor Profits Linear Trend



Figure18–InsurancePremiumsTrend

2003 2005 2007 2009 2011 2013 2015

60M

70M

80M

90M

Insu

ranc

e P

rem

ium

s A

ctua

lan

d T

rend

-10M

0M

10M

Insu

ranc

e P

rem

ium

Tax

Cyc

le

-2,9

50,3

45

-5,2

20,0

83

-6,1

59,4

33

-1,8

54,2

30

-3,7

26,7

10

5,03

5,09

9

2,81

7,01

3

2,97

0,82

0

1,25

7,39

0

2,20

8,46

0

2,05

8,75

4

2,86

6,62

2

656,

799

12,9

78

26,8

66

Insurance Premiums

Measure NamesInsurance Premium Tax TrendInsurance Premium Tax CycleInsurance Premium TaxInsurance Premium Tax Linear Trend



Figure19–Beer,Cigarette,andTobaccoTaxTrend

2003 2005 2007 2009 2011 2013 2015

60M

80M

100M

120M

Bee

r C

igar

ette

Tob

acco

Act

ual a

ndT

rend

-20M

0M

20M

Bee

r C

igar

ette

Tob

acco

Tax

Cyc

le

-10,

429,

995

-18,

803,

847

-27,

748,

293

-13,

853,

824

31,5

95,5

79

24,7

20,4

13

14,4

99,3

57

-3,1

73,3

25

-5,7

47,9

68

-6,0

04,0

70

5,08

9,64

9

7,31

3,99

7

1,32

9,33

2

2,10

8,66

1

-895

,667

Beer Cigarette Tobacco

Measure NamesBeer Cigarette Tobacco TaxBeer Cigarette Tobacco Tax TrendBeer Cigarette Tobacco Tax CycleBeer Cigarette Tobacco Tax Linear Trend



Figure20–OilandGasTaxTrend

2003 2005 2007 2009 2011 2013 2015

20M

40M

60M

80M

100M

Oil

& G

as A

ctua

l and

Tre

nd

-40M

-20M

0M

20M

40M

Oil

& G

as T

ax C

ycle

-22,

667,

565

18,8

13,4

09

-8,7

35,1

86

-6,3

06,1

86

-7,9

55,3

90

-9,6

95,1

80

-4,0

76,9

34

-7,1

26,8

82

4,87

1,04

5

7,57

1,90

5

8,26

9,76

9

6,34

3,75

0

5,56

1,44

4

8,57

5,63

1

6,55

6,37

1

Oil and Gas Severance Tax

Measure NamesOil Gas Tax TrendOil Gas Tax CycleOil Gas TaxOil Gas Tax Linear Trend



Figure21–MetalSeveranceTaxTrend

2003 2005 2007 2009 2011 2013 2015

10M

20M

Met

al S

ever

ance

Act

ual a

nd ..

-10M

0M

10M

Met

al S

ever

ance

Tax

Cyc

le

-4,1

76,6

99

-3,7

49,7

83

-1,3

79,4

86

-4,5

49,3

30

-2,0

38,5

34

-1,7

82,4

64

-5,9

26,6

71

7,12

6,49

8

5,71

4,49

8

1,34

4,09

6

4,18

9,32

6

5,79

3,91

4

-297

,625

-212

,377

-55,

364

Metal Severance Tax

Measure NamesMetal Severance TaxMetal Severance Tax TrendMetal Severance Tax CycleMetal Severance Tax Linear Trend



Figure22–InvestmentIncomeTrend

2003 2005 2007 2009 2011 2013 2015

0M

20M

40M

60M

80M

Inve

stm

ent I

ncom

e A

ctua

l and

Tre

nd

-20M

0M

20M

40M

60M

Inve

stm

ent I

ncom

e C

ycle

-16,

911,

638

-16,

992,

637

-18,

698,

640

-11,

098,

844

-13,

321,

411

31,4

25,9

00

51,3

27,9

92

-2,9

33,5

59

-4,8

05,8

03

-3,2

31,9

76

-2,0

26,2

10

-9,2

96,2

61

9,53

4,86

8

1,55

5,91

9

5,47

2,30

2

Investment Income

Measure NamesInvestment Income TrendInvestment Income CycleInvestment IncomeInvestment Income Linear Trend



Figure23–GeneralFundOtherTrend

2003 2005 2007 2009 2011 2013 2015

40M

60M

80M

GF

Oth

er A

ctua

l and

Tre

nd

-20M

0M

20M

Gen

eral

Fun

d O

ther

Cyc

le

-10,

870,

426

19,3

14,7

97

10,8

20,8

96

-3,8

78,4

39

-1,5

71,6

93

-5,5

24,9

47

-2,7

98,1

36

-7,7

24,3

72

-5,5

91,9

42

1,26

6,19

9

2,33

0,86

4

3,78

2,11

1

-993

,940

825,

015

614,

012

General Fund Other

Measure NamesGeneral Fund OtherGeneral Fund Other TrendGeneral Fund Other CycleGeneral Fund Other Linear Trend



Figure24–IncomeTaxTrend

2003 2005 2007 2009 2011 2013 2015

1500M

2000M

2500M

3000M

Inco

me

Tax

Act

ual a

nd T

rend

-400M

-200M

0M

200M

400M

Inco

me

Tax

Cyc

le

-338

,913

,025

-142

,135

,299

-152

,351

,018

-164

,889

,546

-230

,062

,201

361,

874,

923

309,

459,

660

121,

880,

704

184,

608,

771

-47,

568,

034

-45,

978,

751

20,2

37,5

75

32,4

34,3

95

49,0

09,5

49

42,3

92,2

98

Income Tax

Measure NamesIncome TaxIncome Tax TrendIncome Tax CycleIncome Tax Linear Trend



Figure25–CorporateTaxTrend

2003 2005 2007 2009 2011 2013 2015

200M

300M

400M

Cor

pora

te T

ax A

ctua

l and

Tre

nd

-50M

0M

50M

100M

150M

Cor

pora

te T

ax C

ycle

103,

686,

199

124,

900,

382

-54,

349,

638

-20,

138,

839

-24,

202,

187

-28,

985,

386

-49,

948,

066

-38,

659,

204

-51,

914,

324

-52,

245,

332

-53,

288,

452

97,2

29,0

08

17,7

37,8

28

12,5

97,0

36

17,5

80,9

74

Corporate Tax

Measure NamesCorporate TaxCorporate Tax TrendCorporate Tax CycleCorporate Tax Linear Trend



Figure26–MineralProductionTaxTrend

2003 2005 2007 2009 2011 2013 2015

10M

20M

30M

Min

eral

Pro

duct

ion

Act

ual a

ndT

rend

-10M

0M

10M

Min

eral

Pro

duct

ion

Cyc

le

-1,2

47,1

19

-6,2

57,8

43

-2,2

18,4

80

-1,3

32,7

14

-4,5

05,3

64

7,04

2,92

5

1,53

1,18

9

1,30

7,17

3

2,02

9,00

6

2,60

0,10

0

-930

,461

947,

695

370,

165

710,

719

-46,

993

Mineral Production Witholding

Measure NamesMineral Production TrendMineral Production CycleMineral Production WitholdingMineral Production Linear Trend



Figure27–EducationFundOtherTrend

2003 2005 2007 2009 2011 2013 2015

0M

10M

20M

30M

EF

Oth

er A

ctua

l and

Tre

nd

-10M

0M

10M

Edu

catio

n F

und

Oth

er C

ycle

-2,2

57,0

63

-9,2

51,2

17

-2,7

92,3

37

-2,3

96,3

17

-2,1

98,5

61

-1,9

80,3

81

3,02

5,84

5

1,10

4,41

9

3,47

5,60

7

3,60

6,25

7

3,44

7,17

2

2,79

6,88

2

3,11

2,14

1

-245

,568

553,

121

Education Fund Other

Measure NamesEducation Fund OtherEducation Fund Other TrendEducation Fund Other CycleEducation Fund Other Linear Trend



FEDERALREVENUERISKForthefirsttimesincepassageofthisyearourreportalsoincludesananalysisoffederalfundsandtheliabilitythereof.ThefollowingFigure28representsthebusinesscycleoffederalrevenue.Aswiththeothercharts,thebluelinerepresentsthetrendcomponent,andtheredlinerepresentsalinearcomponentofthattrend.Thegraylinerepresentsactualfederalfunds.Thebottomorangebarsrepresentthecyclecomponentofrevenue.Whencomparedwiththefifteenyeartrend,ourestimateforfederalfundsiswellbelowboththelinearandtrend‐and‐cyclelines.ThisislargelyduetotheeffectsontrendoflargefederalstimuluspaymentsmadeundertheAmericanRecoveryandReinvestmentActandEducationJobsinitiativebetween2009and2012.TheforecasterrorassociatedwithFederalFundsoverthenext18monthsis10%,orabout$358million.Legislatorscouldconsiderhedgingagainstthiserrorbydepositingmoreinreserves.However,coveringalltheestimatingerrorwouldrequirethatGeneralRainyDayFundtransferrulesmorethandouble.

Figure28–FederalRevenueBusinessCycle

2003 2005 2007 2009 2011 2013 2015

2000M

2500M

3000M

3500M

4000M

Sal

es T

ax A

ctua

l and

Tre

nd

-1000M

-500M

0M

500M

1000M

Fed

eral

Rev

enue

Cyc

le

-206

,275

,848

-424

,628

,569

-307

,353

,026

-183

,383

,896

-126

,643

,942

-149

,700

,232

-253

,769

,502

221,

709,

358

771

,456

,463

451,

336,

243

134,

976,

634

-77,

913,

487

-36,

886,

282

48,9

13,2

25

6,67

6,29

2Federal Revenue

Measure NamesFederal Revenue TrendFederal RevenueFederal Revenue CycleFederal Revenue Linear Trend

Note: On-book Federal Revenue



OPTIONSFORPROSPECTIVEDEPOSITMECHANISMSLINKEDTOREVENUEVOLATILITYUtahmakesdepositstorainydayfundsretrospectively‐aftersurpluseshavebeencollected.Severalotheroptionsexistforautomaticdepositstotherainydayfunds‐someofwhichareprospective.AnanalysisdonebythePewCharitableTrustsdetailshowthreeotherstatesdeterminerainydayfunddeposits.We'vesummarizedthosemechanismshere.Virginia:TheCommonwealthofVirginiameasuresayear’srevenuegrowthagainsttheaverageoftheprevioussixyears.Ifgrowthinthecurrentyear’scertifiedtaxcollectionsareabovethesix‐yearaverage,onehalfofthedifferenceisdepositedintoVirginia’srainydayfunds.Idaho:PolicymakersinBoisecompareannualcollectionstothepriorfiscalyear.Ifthedifferenceexceeds4%,Idahodepositstheamountabove4%intoitsrainydayfunds.Depositscannotexceed1%ofGeneralFundcollections.Tennessee:TheGovernoroftheStateofTennesseeincludesinthebudgetarainydaydepositequalto10%ofyear‐over‐yearrevenuegrowth.Thatdepositcontinuesuntilthefundreaches5%ofrevenueallottedtotheGeneralFundandeducationtrust.SeetheattachmenttothisreportformoredetailfromPewonhowthesemechanismsoperate,theirstrengthsandweaknesses,andotherpotentialpolicyconsiderations.TodemonstratehowthesemechanismsmightoperateinUtah,we’veappliedthemtoUtah’srevenuecollectionssince2001.Table3andFigure28comparehypotheticalUtahrainydayfundbalancesusingVirginia,Idaho,andTennesseedepositrules.Inallcases,balancesinUtah'srainydayfundswouldhavebeenhigherhadUtahusedtheseotherdepositmechanisms.

Table3–UtahRainyDayFundBalancesifFollowingOtherStates’Rules

State CalculatedBalancewithUtahFiguresVirginia $1,612,179,798Idaho $479,682,992Tennessee $503,067,412Utahcurrently $431,630,000



Figure29–RainyDayFundBalancesifUtahFollowedIdaho,Tennessee,orVirginia

Utah'scurrentpolicylimitsrainydayfunddepositstovariousproportionsofsurplus‐25%ofsurplusifallpreviouswithdrawalsarerepaid,upto50%ofsurplusotherwise.Tobemoreproactive,Utahmightconsiderapplyingthesesameproportionstoprojectedrevenue,especiallyiftheprojectionisabovetrendandlikelyduetovolatility.Asdiscussedintheprevioussectionofthisreport,webelieveabout$116millionofthecurrentGeneralandEducationFundestimateisabovetrend.

IftheStateweretouseexistingtierstodepositsomeofthis$116millionintorainydayfunds,itwouldadd$52milliontorainydayfundbalancesandstillhave$64millioninabove‐trendrevenue.Depositamountswouldbeasfollows:

1. $9millionfromtheGeneralFund‐equalto25%oftheFY2014GeneralFundrevenuesurplus‐torepayaportionoftheoutstanding$85millioninpreviouswithdrawals;

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

$0M

$200M

$400M

$600M

$800M

$1,000M

$1,200M

$1,400M

$1,600MR

ainy

Day

Fun

d D

epos

its

$432M

If Utah Followed Idaho, Tennessee, or Virginia Rainy Day Fund Models

Measure NamesIdahoTennesseeVirginia

Source: Pew Center on the State, LFA



2. $11millionfromtheEducationFund‐thedifferencebetween25%oftheFY2014EducationFundrevenuesurplusandwhatwasdepositedintotheEducationFundBudgetReserveAccount;and

3. $32millionfromtheEducationFund‐equalto25%oftheFY2014EducationFundrevenuesurplus‐torepayaportionoftheoutstanding$48millioninpreviouswithdrawals.

Recommendation:TheAnalystrecommendslegislatorsuseexistingdepositrulestoappropriateintorainydayfundssomeorallofabove‐trendrevenue.Theamounttobedepositedwouldbe:

1. Anamountsufficienttoreach25%oftheprior‐year'srevenuesurplus,ifthatamountwasnotdepositedduetoexistingtransferlimits;

2. Theleastamountof:

a. Anadditional25%oftheprior‐year'srevenuesurplus;

b. Theamountofunrepaidpreviousrainydayfundwithdrawals;

c. Theamountofrevenueabovetrend.

Toinsulateagainstriskthatestimatesmightnotmaterialize,werecommendlegislatorsassigntheamounttoa"holding"lineiteminthebudget,tobedepositedintherainydayfundsbytheDivisionofFinanceonlyifatyearendrevenuecollectionsmeetorexceedestimates.

CONCLUSIONWhenthe8%and9%thresholdsweresetin2011,anticipatedrevenuevolatilitywaslowerthanitistoday.Baseduponrecentlyobservedforecastingerrors,probabilityofarecession,andmeasuresofvolatility,the8%/9%capswouldcoverabout85%ofanypotentialforecasterror.Tocover100%of18‐monthrevenueforecasterror,werecommendincreasingthestatutorytransferthresholdsto9%fortheGeneralBudgetReserveAccountand11%fortheEducationFundBudgetReserveAccount.Comparingcurrentconsensusrevenueestimatesto15‐yearrevenuetrendsbytaxtype,wefindGeneralandEducationFundestimatescombinedare$116millionabovetrendforFY2016.Combiningthisanalysiswithrequirementstoreportforward‐lookingdepositruleoptions,werecommendlegislatorsappropriatetorainydayfundsanamountofabovetrendrevenuesufficienttofulfillprior‐yeartransfersorrepaypreviousrainydayfundwithdrawals.



AppendixAbove‐TrendRevenueGrowthandRainyDayFundDepositRules

(PewCharitableTrusts)

Above-Trend Revenue Growth and Rainy Day Fund Deposit Rules This research memo is in response to a request we received from the Office of the Legislative Fiscal Analyst (LFA) in late 2013 to review the practices used in other states to estimate above trend revenue growth. Our State Budget Policy research has examined state policies governing rainy day funds, with particular attention to mechanisms that connect rainy day fund deposits to revenue trends. Drawing from that research, this memo presents our analysis of four state approaches to managing revenue volatility with deposit mechanisms that consider growth for your consideration. We present four state policies for your consideration, and have modeled three of these approaches using Census government finance data and Utah’s current tax and fund structure to show how Utah’s two major reserve fund balances would have performed had these types of deposit mechanisms been in place over the past 20 years. For each state practice we describe the deposit mechanism in each state’s current law, apply the approach to Utah’s tax revenue data from Census, and present a scenario of how Utah’s fund balances would have grown under each scenario. We then provide an analysis of the strengths and weaknesses of each deposit mechanism as well as recommendations for how each policy could be improved.

Virginia’s Revenue Stabilization Fund receives mandatory deposits when revenues are above trend, though state leaders can also make additional discretionary deposits to the fund. The fund was developed to account for recurring and nonrecurring revenues. Each year, Virginia makes mandatory deposits based on growth in certified General Fund tax revenues–which include corporate income, personal income, and sales taxes. The Commonwealth takes the difference between the annual percentage increase in the certified tax revenues for the most recently ended fiscal year and the average annual percentage increase in the certified tax revenues (collected in the previous six fiscal years). Then, 50 percent of the above average revenue is set aside. As a formula: Deposit ≥ 0.5 x [(certified tax revenues) x (fiscal year's % increase - average increase over six years)] In practice, if there was an average of 4 percent over the past 6 years, and revenues from those three taxes (CIT, PIT, and Sales) came in at 6 percent higher than the previous year, half of that difference (0.5 X 2% =1% of certified taxes) gets deposited into the fund. In addition, discretionary deposits may be made by appropriation at any time as long as they do not push the fund above its maximum size. Virginia’s Revenue Stabilization Fund was created through an amendment to the Virginia Constitution in 1992 after a study was conducted by Virginia’s Joint Legislative Audit and Review Commission (JLARC). The study findings were presented to the Subcommittee on the

VIRGINIA

pewstates.org/fiscal-health

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Executive Budget Process.i The Revenue Stabilization Fund is “intended to offer a financial cushion in the event of an unexpected downturn in the economy.”ii The intent of the formula was to allow for the maximum fund size to grow over the years to keep pace with inflation and the state’s economic growth. It is based on the subcommittee’s belief that “it is fiscally prudent for the state to promote the accumulation of a revenue reserve during times of above-average growth in the tax base and revenue collections, since such growth is unsustainable over the long term”iii By depositing a fifty percent portion of above-average revenue growth into the fund, the intention was to avoid extraordinary increases in state revenues becoming an automatic part of the state’s expenditure base; therefore, preventing the state from becoming overly dependent on revenue growth that is one-time, unexpected, and/or unsustainable over the long term. STRENGTHS

The six-year moving average approach provides a reasonable proxy for revenue volatility over the course of an economic cycle.

The deposits are a mandatory part of Virginia’s budgetary process. Historically, Virginia has had a well-funded rainy day fund compared to other states.

Prior to the recession, in 2006, Virginia had $2.4 billion in reserve funds, which alone would have funded their operations for 58.5 days. The 50-state median at that same time was 43.1 days.

WEAKNESSES The policy is structured with a 2-year time lag which means that in some years with

strong revenue growth, deposits are not made. Conversely, as revenue growth begins to slow, deposits continue. In FY 2005 and FY 2006 annual revenue growth exceeded 10 percent, but the Virginia policy does not generate a required deposit in those years. In FY 2008 and FY 2009, as revenue slows and the declines, deposits are required.

Recent history shows that a period of significant revenue decline, such as FY 2009 and FY 2010, can lead to large deposits as revenue recovers.

The six-year moving average could yield unusual results during atypical business cycles.

POTENTIAL POLICY IMPROVEMENTS The timing of the deposits can be adjusted by using estimated instead of actual data to

determine the amount of the rainy day fund deposit. For example, a regular deposit could be budgeted based on comparing estimated revenue growth for the current year to the six-year trend. The difference in growth rates could then be applied to actual revenue from the prior year.

Among the policies analyzed, the Virginia policy generated the largest rainy day fund deposits. To address the size of deposits, a maximum annual deposit threshold could be included in the policy.

The number of years included in the moving average could be assessed based on Utah’s own historical experience and periodically re-examined and adjusted.


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To consider: is a six-year moving average the appropriate number years for Utah? Virginia allocates 50 percent of the above trend-line determination to the state’s rainy day fund, if Utah policymakers are interested in establishing a rainy day fund deposit rule, what percentage of above-trend growth would be appropriate?

Figure 1. Virginia Model Growth Trend Calculation Based on Utah General Fund Revenues

Figure 2. Virginia Model Growth Trend Calculation Based on Utah Education Fund Revenues

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In Idaho, at the end of each fiscal year the state deposits funds from the general fund to their Budget Stabilization Fund if the state controller certifies that the receipts to the general fund exceed receipts from the previous fiscal year by more than 4 percent. If so, the controller transfers all general fund collections in excess of 4 percent up to a maximum of 1 percent of general fund collections.iv STRENGTHS

This rule is fairly simple to understand and explain. In recent years, Idaho has had a well-funded rainy day fund compared to other states.

Prior to the recession in 2006, Idaho had $411 million in reserve funds, which alone would have funded their operations for 67.6 days. The 50-state median at that same time was 43.1 days.

WEAKNESSES

This rule arbitrarily limits the deposit amount to one percent of revenue per year, even in years of unusually high growth. For example, a year with ten percent growth results in the same deposit (on a percentage basis), as a year with five percent growth.

There is no empirical rationale for the four percent growth threshold or the one-percent annual cap on deposits, nor is there a mechanism in the law for re-visiting those parameters periodically.

POTENTIAL POLICY IMPROVEMENTS If the threshold growth rate was calculated based on historical trends and revisited on

regular basis, this approach would better connect rainy day fund deposits to volatility.

To consider: what methodology should Utah use to develop a threshold growth rate that triggers a rainy day fund deposit? Should that growth rate be revisited and revised over time? Idaho allocates one percent of revenue to its rainy day fund when revenue growth exceeds four percent—what percentage of revenue would be appropriate in Utah?

IDAHO


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Figure 3. Idaho Model Growth Trend Calculation Based on Utah General Fund Revenues

Figure 4. Idaho Model Growth Trend Calculation Based on Utah Education Fund Revenues

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In Tennessee the governor includes the amount to be allocated to the state’s Reserve for Revenue Fluctuations, the state’s rainy day fund, in the annual budget document and general appropriations bill. The deposit is equal to 10 percent of the estimated growth in the state tax revenue allocated to the general fund and the education trust fund. This process continues yearly until the amount in reserves reaches 5 percent of the state tax revenue allocated. STRENGTHS

There is no timing lag between the estimated amount of the deposit and the transfer of funds.

Prior to the recession in 2007, Tennessee had $1.6 billion in reserve funds, which alone would have funded their operations for 57.9 days. The 50-state median at that same time was 43.3 days.

WEAKNESSES

The Tennessee rule requires a rainy day fund deposit in any year that there is revenue growth, even periods of slow growth.

Conversely, in years of rapid growth, the state takes a relatively small share off the table compared to other rules—in a year where revenues grow by 10 percent, for example, only 1 percent of revenues are transferred and the other 9 percent can be used for recurring purposes.

In effect, the threshold for “exceptional” growth is zero, where any revenue growth at all is considered above-trend.

POTENTIAL POLICY IMPROVEMENTS

Conduct an analysis to determine the appropriate percentage of revenue growth to set aside each year.

Establish a threshold growth rate required for deposits to occur, so that deposits are not required in periods of slow revenue growth.

To consider: Tennessee allocates 10 percent of annual growth to its rainy day fund. Is 10 percent the appropriate percentage in Utah? Is there a threshold revenue growth that would trigger a rainy day fund deposit (not part of Tennessee law)?

TENNESSEE


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Figure 5. Tennessee Model Growth Trend Calculation Based on Utah General Fund Revenues

Figure 6. Tennessee Model Growth Trend Calculation Based on Utah Education Fund Revenues

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Massachusetts’s Commonwealth Stabilization Fund has three main sources of fund deposits: 1) any amounts left as net surplus in budgeted funds at end of fiscal year, 2) inflows from deposits of judgments and settlements in excess of $10 million, and 3) unusually high capital gains tax collections. The two latter components were added in 2010. While the state has a long history of supporting their rainy day fund, these new provisions helped rebuild balances quickly after the downturn. v The rule for depositing capital gains tax revenues may be of particular interest for Utah policymakers interested in identifying above trend revenue growth. Unlike the three states outlined above, Massachusetts specifically examines revenues that they have found to be drivers of fluctuations from year to year. After the executive branch studied past volatility in these tax revenues and found them highly cyclical, the state legislature passed a limit on the use of capital gains taxes above $1 billion in the budget. Anything above this limit is direct to the budget stabilization fund, with a portion passed on to the state retiree benefits trust fund. This determination is made as part of the consensus revenue estimates at the start of the budget year. From year to year, the $1 billion threshold is revised slightly based on growth in the U.S. gross domestic product. Our general assessment of this approach is that, for states in which capital gains revenue is a significant and volatile contributor to overall revenue collections, this can be an effective deposit rule. This approach can be applied to other volatile revenue sources, such as corporate income tax or severance taxes. A state-specific analysis of the volatility of these sources would be necessary to set the ideal parameters for this policy. STRENGTHS

The choice to set aside capital gains tax and legal settlement revenues was based on an analysis of historical state volatility.

Deposits are committed to early in the budget process, ensuring that saving is a top priority.

The threshold for defining above average growth in capital gains tax revenues evolves over time.

Since being implemented, these policies helped the state bring their rainy day fund balance up to the third highest of any state—in absolute terms—by 2012. The policy was also lauded by credit rating agencies.

WEAKNESSES

A policy like this may not be a viable option for all states if the tax code does not differentiate between capital gains and other types of income or if they do not have a capital gains tax—or another similarly volatile tax.

Large swings in other revenue streams, to the extent that they occur, would not be addressed directly under this policy. Large end of year surpluses are set aside, which makes this problem somewhat less acute.

MASSACHUSETTS


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POTENTIAL POLICY IMPROVEMENTS

Recurring, legislated volatility studies—like the reports prepared in Utah—would track whether the capital gains tax is still a primary source of volatility and identify important trends in other revenue sources.

Because state economic trends can vary from national ones, using a measure of the state economy may be more appropriate for determining growth in the $1 billion limit than U.S. GDP.

To consider: which individual revenue sources are the most volatile, and what is an appropriate threshold above which collections from that source would be deposited in the rainy day fund? Due to data limitations, we were not able to model the Massachusetts policy for Utah. We could model this approach if provided with historical actual revenue data from capital gains, if available. Should there be interest, we can provide scenarios to inform Utah policy design around what a deposit mechanism pinned to a specific volatile tax source could look like, such as the personal income tax or various severance taxes. i Report of the Joint Legislative Audit and Revenue Commission on Proposal for a Revenue Stabilization Fund in Virginia, Senate Document No. 24, 1991. http://jlarc.virginia.gov/reports/Rpt127.pdf ii Virginia Division of Legislative Services: DLS Report, Virginia’s Revenue Stabilization Fund. Number 1 – July 1999. http://dls.virginia.gov/pubs/report/report1.htm iii Ibid iv Idaho Code § 57‐814. http://legislature.idaho.gov/idstat/Title57/T57CH8SECT57‐814.htm v Mass. Gen. Laws ch. 29, § 5C and § 5G (2013)

Revenue Volatility Report - Final 12-9-14le.utah.gov › interim › 2014 › pdf ›...

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