State Fiscal Conditions: Temporary Downturn or New Normal?

MAGNYMarch 15, 2013

New York

Scott PattisonExecutive Director

National 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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Current Fiscal Situation:

Overview

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Major Challenges to State Budgets - Spring 2013

Improved revenue growth, but not enough to go around…

Federal government

Health care changes, implementation

Dealing with long term liabilities

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Federal Overhang…

Sequester

Debt ceiling

Many program authorizations set to expire

“Grand bargain” tax reform?

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National Economic Indicators

4th Quarter GDP grows a modest 0.1% 3rd Quarter GDP increased 3.1% 14th straight quarter of at least some growth

Federal Reserve projects 2.3%-3.0% growth in 2013

Other economic figures: Unemployment rate at 7.7% in February Manufacturing grows for 3rd consecutive month in February New Home Sales rose 15.6% in January

- “… the still-moderate underlying pace of economic growth…”

- Federal Reserve Chairman Ben Bernanke, 2/26/13

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Current Fiscal Situation:

Indicators

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GF Growth

-8

-6

-4

-2

0

2

4

6

8

10

12

%

General Fund Expenditure Growth (%)

*35-year historical average rate of growth is 5.6 percent *Fiscal ‘13 numbers are appropriated Source: NASBO Fall 2012 Fiscal Survey of States

* Average

NASBO

FY 2013 Appropriated Spending Still $5.9 Billion Below FY 2008

8

Source: NASBO Fall 2012 Fiscal Survey of States

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FY 2013 General Fund Revenue is Expected to Surpass FY 2008 by $13B

9

Source: NASBO Fall 2012 Fiscal Survey of States

$655

$680

$626

$610

$650

$667

$693

$560

$580

$600

$620

$640

$660

$680

$700

FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013

General Fund Revenue: FY 2007-FY 2013

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

NASBO

States Continue To Rebuild Budgetary Reserves After Recession

11

NASBO

Budget Cuts Made After the Budget Passed

($ millions)

Source: NASBO Fall 2012 Fiscal Survey

Minimal Midyear Budget Cuts in FY 2012, 8 States Cut $1.7 Billion

NASBO

Strategies Used to Reduce or Eliminate Budget Gaps, FY 2013

Reduce Local Aid: 8 states

Layoffs: 9 states

Furloughs: 3 states

Cuts to Employee Benefits: 9 states

Across-the-Board Cuts: 13 states

Targeted Cuts: 21 states

Rainy Day Fund: 4 states

Reorganize Agencies: 10 statesSource: NASBO Fall 2012 Fiscal Survey of States

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States and Locals Continue to Eliminate Positions

State and local employment has declined 753,000 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

State governments eliminated 8,000 positions in February; local employment declined by 2,000

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

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Outlook

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State Fiscal Outlook

Below average state budgets for at least the next several years

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

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www.nasbo.org

Scott Pattison

(202) 624-8804

spattison@nasbo.org