State Fiscal Outlook

NAMM

Washington, DC

May 11, 2010

Brian SigritzDirector of State Fiscal Studies

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

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Recent State Fiscal Situation

The “Great Recession” - Extremely difficult fiscal period for states States experiencing significant shortfalls and large revenue

declines Fiscal 2010 revenue projections: For the year, 41 states lower than

projected, 6 on target, 3 higher March and April revenue collections a mixed bag

Widespread budget cuts, layoffs/furloughs continue across the nation

ARRA helping, but does not fully solve shortfalls

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Economics

1st Quarter GDP grows 3.2%

Slow economic growth likely in calendar 2010

Some economic improvement: Stability in many indicators Conference Board LEI up 11 straight months Economy adds 290,000 jobs in April 9 straight monthly increases in manufacturing

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Source: Federal Reserve Bank of Philadelphia State Coincident Index (March 2010)

3-Month Index: Increases in 31 states, decreases in 17, unchanged in 2

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This downturn vs. Post ‘01

Last Time: Housing sector relatively strong in ’01 Primarily income tax decline

This Time: Broad economic decline; Longer recession Localities will be hit this downturn

17 states reduced local aid in ‘09; 20 in ‘10

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State of the State Speeches

Common themes include the need for a smaller and more efficient government, and prioritizing job creation

A number of governors have called for tax hikes, often temporary sales tax increases

Several governors have called for increased federal aid Especially extension of enhanced FMAP

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2010 Governor Races:37 Races, 23 Open Seats

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Negative Spending in Both FY 2009 and FY 2010

*32-year historical average rate of growth is 5.6 percent **Fiscal 10 numbers are appropriated Source: NASBO Fall 2009 Fiscal Survey of States

*

The New Normal?

NASBO

37 States with Negative Growth Budgets in FY 2010

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Source: December 2009 Fiscal Survey of States

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Balances Declining

*32-year historical average is 5.5% Source: NASBO Fall 2009 Fiscal Survey

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Budget Cuts at Record Levels

12

20

28

35

22

9 813

72 3 1

16

37 37

18

5 2 3

13

43

0

10

20

30

40

50

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

Budget Cuts Made After the Budget Passed,Fiscal 1990-Fiscal 2009($ millions)

Number of states Amount of reduction

Recession ends Recession ends

Source: NASBO Fall 2009 Fiscal Survey of States

NASBO

State Revenue Down 4.2% in 4th quarter; 5th Straight Quarter

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

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Job Growth – “The Lag”

Source: Washington Post; Bureau of Labor Statistics

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State Budget Gaps(in millions)

NGA & NASBO State Fiscal Update – February 2010

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Michigan GF Revenue less in 2010 than in 1997

Source: Michigan Office of Revenue and Tax Analysis, Dept. of Treasury, 7/31/09

$8,533$8,844

$9,503$9,788

$8,990$8,427

$7,959 $8,042$8,309 $8,266 $8,319

$9,359

$7,435$6,950

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010May 2009 estimates

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CA general fund spending declining at least $18B in 2 years

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Source: December 2009 Fiscal Survey of States

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American Recovery and Reinvestment Act (ARRA)

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American Recovery and Reinvestment Act – State $

Approximately $246 billion+ going to or through states

State Fiscal Stabilization Fund - $53.6 billion: $39.5 billion to schools and higher ed $5 billion in incentive grants $8.8 billion in flexible funds

Medicaid Funding: $87 billion $48 billion to transportation: highway and bridges

$27.5B; transit $8.4B; passenger rail $8B Also safety net expansions, economic development,

other appropriated programs

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The Cliff…

Source: Stateline.org

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Significant Lag?

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Background on State Spending Trends

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Spending by Funding Source(Percentage)

General Funds45.7%

Federal Funds26.3%

Other State Funds25.7%

Bonds2.4%

Total State Expenditures By Funding Source, Fiscal 2008

Source: NASBO 2008 State Expenditure Report

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General Fund: Medicaid & Education Over 62%

Elementary & Secondary Education

35.1%

Higher Education11.1%

Medicaid16.2%

Public Assistance1.9%

Corrections7.2%

Transportation0.7%

All Other27.8%

General Fund Expenditures by Function, Estimated Fiscal 2009

Source: NASBO 2008 State Expenditure Report

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State Spending from Federal Funds

Elementary & Secondary Education

11.9%

Higher Education3.5%

Medicaid41.7%

Public Assistance2.8%

Corrections0.2%

Transportation8.5%

All Other31.4%

Federal Funds Spending, Estimated Fiscal 2009

Source: NASBO 2008 State Expenditure Report

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Health Care and Medicaid

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Total Expenditures Percentage Growth in Spending Categories Over 10 Years

Sources: NASBO 1999 and 2008 State Expenditure Reports

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Increases in Medicaid Spending and Enrollment

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Outlook

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Slow Fiscal Recovery…

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Long Term Spending Pressures

Medicaid and Health Care

K-12 and Higher Education

Demographic Changes

Corrections Transportation Infrastructure Pensions

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The “New Normal” is Here

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State Fiscal Outlook

Austere state budgets for at least the next several years

Health care reform will have an impact on state finances Already seeing increases in Medicaid spending

& enrollment; 21% of total expenditures Tough competition for general funds Demand for performance and results Opportunity for reform

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www.nasbo.org

Brian Sigritz

Director of State Fiscal Studies

(202) 624-8439

bsigritz@nasbo.org