Economic Report for the States Session
State Fiscal Situation
Scott Pattison
Executive Director
NASBO
NASACT Annual Conference
August 25, 2015
2
3
Where is the Greek Contagion?
Financial Times
Puerto Rico investors seek
answers in Monday's creditor
meeting
Economic Times
4
Current Economic and Fiscal
Situation for States
5
Overview:
 GDP Projection: 2% ’15, 2.5% ‘16
 States: continued stability and slow growth
 Governors Themes: create jobs, grow the
economy, transportation, education
Fiscal improvements over the last several years
have not returned states to normal patterns of
growth
6
Major Challenges to State Budgets: 2016+
 Revenues and spending have yet to surpass pre-recession highs
after accounting for inflation
▫ Revenue growth projected to be modest in fiscal 2016
 Rising health care costs
 Pensions and retiree health care
 Pent-up demand for infrastructure
 Federal uncertainty
 Good news: Stability, Most states with debt service levels around
5%
7
Current Fiscal Situation:
Indicators
8
Slow Budget Growth Continues
General Fund Expenditure Growth (%)
12
10
8
6
*Average
4
%
2
0
-2
-4
-6
-8
*38-year historical average annual rate of growth is 5.5 percent
Source: NASBO Spring 2015 Fiscal Survey of States
*Fiscal 2015 numbers are estimated; fiscal 2016 are recommended
9
States Direct Most New Spending to K-12 and Medicaid
FY 2016 Recommended General Fund Spending Changes by Category
12
10
$10.2
$9.2
8
$6.4
($ in Billions)
6
4
2
0
-2
$2.6
$1.8
$0.1
-$0.7
Source: NASBO Spring 2015 Fiscal Survey
10
State Balance Levels Declining, Partly Due to Oil Prices
14%
$80
12%
$70
$60
10%
$50
8%
$40
6%
$30
4%
$20
2%
$10
0%
$0
Fiscal Year
Total Balances
* Fiscal 2016 totals are recommended
Source: NASBO Spring 2015 Fiscal Survey
Total Balances as a Percentage of Expenditures
**37-year historical average is 6.2%
(In Billions)
Percentage of Expenditures**
Total Year-End Balances, Fiscal 1980 to Fiscal 2016
11
Midyear Budget Cuts Relatively Minimal in Fiscal 2015 at $2B
Enacted Budget Cuts Made After the Budget Passed
Recession ends
$ In Millions
$35
Recession ends
20
40
30
23
22
$15
$10
39
Recession ends
28
$25
$20
37 37
35
$30
41
50
9 8
$5
16
13
7
2 3 1
18
13
5 2
4
$0
8
11
8
11
10
0
Number of states
Source: NASBO Spring 2015 Fiscal Survey
20
Number of States
$40
Amount of reduction
*Fiscal 2015 midyear cuts are ongoing
12
Critical Challenges
13
Structural Imbalance
9
Medicaid spending forecast
8
7
6
%5
4
state tax revenue
3
2
13
14
15
16
17
Sources: Moody’s Analytics, CMS, Census Bureau
18
19
20
14
Federal Issues
▫
▫
▫
▫
▫
▫
Highway Trust Fund
ESEA (No Child Left Behind)
Few or no appropriation bills by Oct 1
Sequestration
Debt limit
Taxes
15
Background on State
Spending Trends
16
Source: NASBO State Expenditure Report
17
Total State Expenditures by Function
Estimated Fiscal 2014
Medicaid
25.8%
Elementary &
Secondary
Education
19.5%
Higher
Education
10.1%
Public
Assistance
1.4%
Transportation
7.7%
Corrections
3.1%
Source: NASBO State Expenditure Report
All Other
32.4%
18
General Fund Expenditures by Function
Estimated Fiscal 2014
Medicaid
19.1%
Elementary &
Secondary
Education
35.0%
Transportation
0.9%
Corrections
6.8%
All Other
27.4%
Higher Education
9.4%
Public Assistance
1.4%
Source: NASBO State Expenditure Report
19
Federal Funds Expenditures by Function
Estimated Fiscal 2014
K-12
9.9%
Medicaid
51.0%
Higher Education
3.7%
Public Assistance
2.6%
All Other
25.0%
Corrections
Transportation 0.1%
7.7%
Source: NASBO State Expenditure Report
20
Revenue Sources in the General Fund (Percentage)
Estimated Fiscal 2014
Other Taxes &
Fees 20%
Sales 31%
Gaming 1%
Corporate Income
6%
Personal Income
42%
Source: NASBO State Expenditure Report
21
Outlook
22
State Fiscal Outlook
 42 states recommended general fund
spending increases in FY 2016, but growth
still below average
 Revenue growth projected to remain slow in
fiscal 2016
 Uncertainty
 Dealing with infrastructure, long-term
liabilities
23
www.nasbo.org
Scott Pattison
(202) 624-8804
spattison@nasbo.org
Economic Report for the States:
Overview of GAO’s Work on State and Local Fiscal
Conditions and Intergovernmental Issues
Michelle Sager
Director, Strategic Issues
National Association of State Auditors, Comptrollers and Treasurers
Chicago, Illinois
August 25, 2015
GAO’s State and Local Fiscal Model
• Recognition of
importance of fiscal
sustainability for all levels
of government
• GAO simulations of
receipts and expenditures
for the state and local
government sector
• Data from the Bureau of
Economic Analysis,
National Income and
Product Accounts
Page 25
State and Local Governments Face
Increasing Fiscal Challenges
Notes: Historical data for 2005 to 2013 are from BEA’s National Income and Product Accounts. GAO’s simulations are from 2014 to 2063, using many
Congressional Budget Office projections and assumptions, particularly for the next 10 years.
26
Health and Nonhealth Expenditures of
State and Local Governments
Note: Historical data for 2005 to 2013 are from BEA’s National Income and Product Accounts. Our simulations are from 2014 to 2063, using many
Congressional Budget Office projections and assumptions, particularly for the next 10 years.
27
Federal Grants to State and Local
Governments, 1983 and 2013
Federal Grant Revenues, 1983
Other
1%
Income
security
36%
Federal Grant Revenues, 2013
GeneralEconomic
public affairs
service
2%
Housing
1%
and
community
services
Income
4%
security
20%
General
public
serviceEconomic
8%
affairs
9%
Housing
and
community
services
6%
Other
2%
Education
9%
Health
31%
Health
62%
Education
9%
Source: GAO analysis of historical data from the Bureau of Economic Analysis's National Income and Product Accounts.
Note: Medicaid grants comprised approximately 95 percent of health grants in 2013. ‘Other’ includes national defense, public order and safety,
and recreation and culture.
28
Federal Grant Outlays to State and Local
Governments, Medicaid and Non-Medicaid
Fiscal Years 1980 to 2013 (in 2013 Constant Dollars)
Page 29
State and Local Revenues, by Type,
1983 and 2013
Total state and local revenues, 1983 Total state and local revenues, 2013
Interest
receipts
8.7%
Federal
grants-inaid
16.0%
Other taxes
6.4%
Corporate
income
taxes
3.7%
Other
revenue
4.5%
Other
Interest revenue
receipts
6.6%
3.0%
Income
taxes
16.1%
Income
taxes
13.7%
Sales taxes
25.3%
Property
taxes
21.6%
Federal
grants-inaid
21.2%
Other taxes
5.9%
Corporate
income
taxes
2.6%
Sales taxes
23.6%
Property
taxes
21.0%
Source: GAO analysis of historical data from the Bureau of Economic Analysis's National Income and Product Accounts.
Note: Percentages may not sum to 100 because of rounding.
30
State and Local Expenditures, by
Category, 1983 and 2013
State and Local Expenditures, 1983
Income
security
10%
State and Local Expenditures, 2013
Income Other
security 2%
7%
Other
2%
General
public
service
19%
General
public
service
16%
Public order
and safety
10%
Education
36%
Health
(net)
12%
Economic
affairs
11%
Public order
and safety
13%
Education
32%
Health (net)
22%
Economic
affairs
8%
Source: GAO analysis of historical data from the Bureau of Economic Analysis's National Income and Product accounts.
Note: The Other category includes Housing and Community Services and Recreation and Culture. Economic affairs includes transportation, space, agriculture,
and natural resources. Health includes Medicaid. General public services includes interest payments and tax collection and financial management services.
Income security includes disability, welfare, and social services. State and local government pension contributions are considered part of employee
compensation and accounted for within the categories.
31
Budgeting For Disasters in Selected States
• All 10 states provided disaster
funds at the start of the fiscal
year and as needed during the
course of the fiscal year.
• States did not maintain reserves
for future disasters.
•
Some states took steps to
increase the availability and
oversight of disaster funds, but
had not made major changes to
budgeting approaches during the
past 10 years.
Source: GAO-15-424 | Budgeting for Disasters
Page 32
Municipalities in Fiscal Crisis
Page 33
Potential Effects of Puerto Rico Statehood
Source: GAO-14-31 | Fiscal Effects of Puerto Rico Statehood
Page 34
Grant Management Experiences from the
American Recovery and Reinvestment Act
• Recovery Act provided an
opportunity for experimentation
leading to lessons learned as
well as some innovations
• Strong focus on accountability
and transparency
• Short time frames lead both the
audit/oversight community and
federal agencies to adjust their
oversight approaches
Page 35
Grant Process Streamlining
Source: GAO-13-383 | Grants Management
Page 36
Grant Program Consolidations
• Grant consolidations offer the
opportunity to improve grant
administration by:
• expanding the opportunities
of narrowly targeted grants
and
• reducing fragmentation,
overlap, and duplication
• Agencies, the Congress, and
grantees can benefit from
guidance to help identify
consolidation opportunities
Page 37
DATA Act Implementation
• Digital Accountability and
Transparency Act of 2014 aims
to improve data accountability,
transparency, and accessibility
• Requires OMB and Treasury to
transform federal spending
from disconnected documents
to open, standardized publicly
available data
• Ongoing and planned GAO
oversight during
implementation
Page 38
Federal Fiscal Context
• Congress passed Continuing Resolutions (CRs) in all but 3 of
the last 30 years to provide funding for agencies to continue
operating until reaching agreement on final appropriations
• Fiscal Year 2013 Sequestration (budget cuts to most programs,
projects, and activities by uniform percentages) ordered by the
President on March 1, 2013
• Agencies face prospect of further sequestration through 2024
• Lack of appropriations and CRs resulted in 2013 federal
government shutdown (16 days)
Page 39
Related GAO Sources & Products
•
GAO’s Federal Grants Key Issues Page:
http://www.gao.gov/key_issues/management_of_federal_grants_to_state_local/issue_summary
•
GAO’s Fiscal Outlook and Debt Page: http://www.gao.gov/fiscal_outlook/overview
•
GAO’s Sequestration Page: http://www.gao.gov/key_issues/sequestration/issue_summary
•
DATA Act: Progress Made in Initial Implementation but Challenges Must be Addressed as Efforts Proceed. GAO-15752T
•
Budgeting for Disasters: Approaches to Budgeting for Disasters in Selected States. GAO-15-424
•
State and Local Governments' Fiscal Outlook: 2014 Update. GAO-15-224SP
•
Municipalities in Fiscal Crisis: Federal Agencies Monitored Grants and Assisted Grantees, but More Could Be Done
to Share Lessons Learned. GAO-15-222
•
Grant Program Consolidations: Lessons Learned and Implications for Congressional Oversight. GAO-15-125
•
Grants Management: Programs at HHS and HUD Collect Administrative Cost Information but Differences in Cost
Caps and Definitions Create Challenges. GAO-15-118
•
Recovery Act: Grant Implementation Experiences Offer Lessons for Accountability and Transparency. GAO-14-219
•
Puerto Rico: Information on How Statehood Would Potentially Affect Selected Federal Programs and Revenue
Sources. GAO-14-31
•
Budget Issues: Effects of Budget Uncertainty from Continuing Resolutions on Agency Operations. GAO-13-464T
Page 40
Michelle Sager, Director, Strategic Issues, sagerm@gao.gov
GAO on the Web
Web site: http://www.gao.gov/
Intergovernmental site: http://www.gao.gov/key_issues/management_of_federal_grants_to_state_local/issue_summary
Congressional Relations
Katherine Siggerud, Managing Director, siggerudk@gao.gov
(202) 512-4400, U.S. Government Accountability Office
441 G Street, NW, Room 7125, Washington, DC 20548
Public Affairs
Chuck Young, Managing Director, youngc1@gao.gov
(202) 512-4800, U.S. Government Accountability Office
441 G Street, NW, Room 7149, Washington, DC 20548
Copyright
This is a work of the U.S. government and is not subject to copyright protection in the United States. The published
product may be reproduced and distributed in its entirety without further permission from GAO. However, because
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Page 41
Economic Report
For The States
Robin Prunty
National Association of State Auditors,
Comptrollers, and Treasurers
August 25th, 2015
Permission to reprint or distribute any content from this presentation
requires the prior written approval of Standard & Poor’s. Copyright © 2013
by Standard & Poor’s Financial Services LLC. All rights reserved.
S&P’s State Rating Distribution
43
Fiscal 2015 and Fiscal 2016 Gap For States
30
25
20
Yes
15
No
10
5
0
Fiscal 2015 gap
44
Fiscal 2016 gap
No fiscal gap in either
Fiscal gap in both years
State Spending as a share of GDP (%)
45
Annual Percent Change in Inflation-Adjusted State Tax
Revenue Growth
46
State Pension Funded Ratios
47
State Funded Level – Top and Bottom 5
48
State Pension Funding Level Scores
49
National Forecast
Credit Conditions Overview
• Current nationwide economic climate: Second-half economic growth
should be faster than first half, but still subdued overall
• Financial management of state and local governments becomes even
more important in credit profiles absent robust economic growth
• Negative rating consequences can result when management does not
effectively balance:
1. Short-term budget pressures (i.e. slow GDP growth)
2. Immediate and future pressure from pension liabilities
3. Credit quality differentiation due to mismanagement of pension
liabilities is happening now, not just a future concern
51
Current Employment Trends
U.S.
Jobs Lost
in the Great
Recession
Jobs
Recovered
(June 2015)
Recovery %
-8.7 million
12.2 million
140%
129,000
17%
State and
758,000
local
governments
•
•
•
52
In aggregate, state and local governments have done
effective job managing through sustained period of slow
economic growth via embracing degree of austerity
But not universal;
Pockets of outright distress often have two characteristics:
• Sustained or acute economic weakness;
• Weak financial management (i.e., structural budget
imbalance).
Demographic Pressure
• Labor force participation declined to 62.6% as of June 2015 (lowest
in 38 years)
• Two possible explanations:
• Demographics—aging population
• Despite declining unemployment rate, labor market still has slack
(evidenced by low rates of wage growth)
• Annual rate of wage growth in June was 2.0%, down from 2.3% in
May. Just one month, but at 2.0% is consistent with S&P’s
downside scenario
53
Hurdles
Pensions
•
•
•
54
All governments:
Fiscal pressure from
aging workforce and
lower workforce
participation
Credit quality
threatened by
underfunded pension
systems
Immediate rather than
long-term concern
Medicaid
•
•
States: Falling
unemployment rates
normally translate to
lower demand for
social services (thus
fiscal savings);
Medicaid enrollments
are above forecasts—
result is persistent
policy-driven budget
pressure
Remnants of the Recession
States most affected by the
housing bust experienced
a significant drop in
consumer spending
• Housing sector impacts broader measures of economic activity;
recovery is beneficial for state and local governments alike
• Housing is key to economic growth now underway (esp. in light of strong
dollar and low oil prices)
55
Economic Outlook: Indicators for State/Local Governments
56
Recent Articles
U.S. State And Local Government Credit Conditions Forecast: Financial
Management Stands Out In An Age Of Economic Limitations, July 22, 2015
U.S. State Pension Roundup: Recent Court Rulings And Reform Slowdowns
Make Active Management Essential, June 18th 2015
Late State Budgets: Summer Cliffhangers No One Wants To See, June 4th 2015
U.S. State Budgets Face Lean Margins Despite Mature Economic Expansion,
April 27th 2015
Six Years Into The Recovery, Pensions Are A Big Divider Of U.S. State Credit,
March 24th 2015
How Might The Oil Price Plunge Affect U.S. States' Credit Quality?, January 27th,
2015
U.S. State and Local Government Credit Conditions Forecast: For 2015, The
Future Is Now, December 10th 2014
Diverging Trends Underlie Overall Stable U.S. State OPEB Liability, November
17th 2014
2014 U.S. State Debt Review: New Issuance Remains A Lower Priority, October
13th 2014
SIGNIFICANT PUBLIC FINANCE CONTENT IS AVAILABLE AT:
www.standardandpoors.com/uspublicfinance
57
Thank You
Robin Prunty
Managing Director, U.S. Public Finance
T: 212.438.2081
robin.prunty@standardandpoors.com
Permission to reprint or distribute any content from this presentation requires the prior written approval of
Standard & Poor’s. Copyright © 2013 by Standard & Poor’s Financial Services LLC. All rights reserved.
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