Economic Report for the States SessionState Fiscal Situation

Scott PattisonExecutive DirectorNASBO

NASACT Annual ConferenceAugust 25, 2015

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Where is the Greek Contagion?Financial Times

Puerto Rico investors seek answers in Monday's creditor

meetingEconomic Times

Current Economic and Fiscal Situation for States

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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

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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%

Current Fiscal Situation:Indicators

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Slow Budget Growth Continues

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

-8

-6

-4

-2

0

2

4

6

8

10

12

General Fund Expenditure Growth (%)

%

*Average

*38-year historical average annual rate of growth is 5.5 percent *Fiscal 2015 numbers are estimated; fiscal 2016 are recommended Source: NASBO Spring 2015 Fiscal Survey of States

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States Direct Most New Spending to K-12 and Medicaid

K-12

Higher Ed

Public Ass

ist.

Medica

id

Correcti

ons

Transp

ortatio

n

All Other

-2

0

2

4

6

8

10

12$10.2

$2.6

$0.1

$9.2

$1.8

-$0.7

$6.4

FY 2016 Recommended General Fund Spending Changes by Category

($ in

Bill

ions

)

Source: NASBO Spring 2015 Fiscal Survey

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

0%

2%

4%

6%

8%

10%

12%

14%

$0

$10

$20

$30

$40

$50

$60

$70

$80

Total Year-End Balances, Fiscal 1980 to Fiscal 2016

Total Balances Total Balances as a Percentage of ExpendituresFiscal Year

Perc

enta

ge o

f Exp

endi

ture

s**

(In B

illio

ns)

State Balance Levels Declining, Partly Due to Oil Prices

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* Fiscal 2016 totals are recommended **37-year historical average is 6.2%

Source: NASBO Spring 2015 Fiscal Survey

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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

811

Enacted Budget Cuts Made After the Budget Passed

Number of states Amount of reduction

$ In

Mill

ions

Num

ber o

f Sta

tes

Recession ends

Recession ends

Recession ends

Midyear Budget Cuts Relatively Minimal in Fiscal 2015 at $2B

Source: NASBO Spring 2015 Fiscal Survey *Fiscal 2015 midyear cuts are ongoing

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Critical Challenges

13 14 15 16 17 18 19 202

3

4

5

6

7

8

9

13

Structural Imbalance

Medicaid spending forecast

state tax revenue

Sources: Moody’s Analytics, CMS, Census Bureau

%

Federal Issues

▫Highway Trust Fund▫ESEA (No Child Left Behind)▫Few or no appropriation bills by Oct 1▫Sequestration▫Debt limit ▫Taxes

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Background on State Spending Trends

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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

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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

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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

Outlook

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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

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www.nasbo.org

Scott Pattison

(202) 624-8804

spattison@nasbo.org

Michelle Sager Director, Strategic Issues

National Association of State Auditors, Comptrollers and TreasurersChicago, IllinoisAugust 25, 2015

Economic Report for the States: Overview of GAO’s Work on State and Local Fiscal

Conditions and Intergovernmental Issues

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

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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.

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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 .

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Federal Grants to State and Local Governments, 1983 and 2013

Federal Grant Revenues, 1983 Federal Grant Revenues, 2013

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General public service

8%Economic af-

fairs9%

Housing and community

services6%

Health31%

Education9%

Income secu-rity36%

Other1%

General public service

1%

Economic affairs3% Housing and

community ser-vices

4%

Health62%

Education9%

Income security

20%

Other2%

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.

Federal Grant Outlays to State and Local Governments, Medicaid and Non-MedicaidFiscal Years 1980 to 2013 (in 2013 Constant Dollars)

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State and Local Revenues, by Type, 1983 and 2013

Total state and local revenues, 1983 Total state and local revenues, 2013

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Income taxes13.7%

Sales taxes25.3%

Property taxes21.6%

Corporate income taxes3.7%

Other taxes6.4%

Federal grants-in-aid

16.0%

Interest receipts

8.7%

Other revenue4.5% Income taxes

16.1%

Sales taxes23.6%

Property taxes21.0%

Corporate income taxes

2.6%

Other taxes5.9%

Federal grants-in-aid

21.2%

Interest receipts

3.0%

Other revenue6.6%

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.

State and Local Expenditures, by Category, 1983 and 2013

State and Local Expenditures, 1983 State and Local Expenditures, 2013

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General public service

19%

Public order and safety

11%

Economic af-fairs11%

Health (net)12%

Education36%

Income se-curity10%

Other2%

General public service

16%Public order and safety

13%

Economic af-fairs8%

Health (net)22%

Education32%

Income security7%

Other2%

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.

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.

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Source: GAO-15-424 | Budgeting for Disasters

Municipalities in Fiscal Crisis

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Potential Effects of Puerto Rico Statehood

Page 34Source: GAO-14-31 | Fiscal Effects of Puerto Rico Statehood

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

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Grant Process Streamlining

Page 36Source: GAO-13-383 | Grants Management

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

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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

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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)

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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-15-752T

• 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

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Michelle Sager, Director, Strategic Issues, sagerm@gao.gov

GAO on the WebWeb site: http://www.gao.gov/ Intergovernmental site: http://www.gao.gov/key_issues/management_of_federal_grants_to_state_local/issue_summary

Congressional RelationsKatherine Siggerud, Managing Director, siggerudk@gao.gov(202) 512-4400, U.S. Government Accountability Office 441 G Street, NW, Room 7125, Washington, DC 20548

Public AffairsChuck Young, Managing Director, youngc1@gao.gov(202) 512-4800, U.S. Government Accountability Office441 G Street, NW, Room 7149, Washington, DC 20548

CopyrightThis 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 this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

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.

Economic Report For The States

Robin PruntyNational Association of State Auditors, Comptrollers, and TreasurersAugust 25th, 2015

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S&P’s State Rating Distribution

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Fiscal 2015 and Fiscal 2016 Gap For States

Fiscal 2015 gap Fiscal 2016 gap No fiscal gap in either Fiscal gap in both years0

5

10

15

20

25

30

Yes

No

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State Spending as a share of GDP (%)

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Annual Percent Change in Inflation-Adjusted State Tax Revenue Growth

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State Pension Funded Ratios

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State Funded Level – Top and Bottom 5

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State Pension Funding Level Scores

National Forecast

• 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 liabilities3. Credit quality differentiation due to mismanagement of pension liabilities is happening now, not just a future concern

Credit Conditions Overview

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Current Employment Trends

Jobs Lost in the Great Recession

Jobs Recovered (June 2015) Recovery %

U.S. -8.7 million 12.2 million 140%

State and local governments

758,000 129,000 17%

• 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).

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• 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

Demographic Pressure

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Hurdles

• All governments: Fiscal pressure from aging workforce and lower workforce participation

• Credit quality threatened by underfunded pension systems

• Immediate rather than long-term concern

• 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

Pensions Medicaid

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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)

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Economic Outlook: Indicators for State/Local Governments

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Recent Articles

U.S. State And Local Government Credit Conditions Forecast: Financial Management Stands Out In An Age Of Economic Limitations, July 22, 2015U.S. State Pension Roundup: Recent Court Rulings And Reform Slowdowns Make Active Management Essential, June 18th 2015Late State Budgets: Summer Cliffhangers No One Wants To See, June 4th 2015U.S. State Budgets Face Lean Margins Despite Mature Economic Expansion, April 27th 2015Six Years Into The Recovery, Pensions Are A Big Divider Of U.S. State Credit, March 24th 2015How Might The Oil Price Plunge Affect U.S. States' Credit Quality?, January 27th, 2015U.S. State and Local Government Credit Conditions Forecast: For 2015, The Future Is Now, December 10th 2014Diverging Trends Underlie Overall Stable U.S. State OPEB Liability, November 17th 20142014 U.S. State Debt Review: New Issuance Remains A Lower Priority, October 13th 2014SIGNIFICANT PUBLIC FINANCE CONTENT IS AVAILABLE AT: www.standardandpoors.com/uspublicfinance

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Permission to reprint or distribute any content from this presentation requires the prior written approval ofStandard & Poor’s. Copyright © 2013 by Standard & Poor’s Financial Services LLC. All rights reserved.

Thank You

Robin PruntyManaging Director, U.S. Public FinanceT: 212.438.2081robin.prunty@standardandpoors.com

Copyright © 2014 by Standard & Poor’s Financial Services LLC. All rights reserved.

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