Intergovernmental Dependency and Transparency

Joe KullPwCJanuary, 2012

We have been doing so much

for so long with so little,

that soon we’ll be able to do everything

with nothing forever.

Budget Formulation, Budget Execution, and Financial Management—Per the Constitution (1787)

“No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law;”

—Budget Formulation and Execution

“and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.”

—Financial Management

(Article I, Section 9)

5

Analysis of Federal Liabilities, Intragovernmental Debt, and Social Insurance Obligations

Source of Data: 2010 Financial Report of U.S. Government

$ Billions 2010 2009

Federal Liabilities:Publicly-held Debt $9,060* $7,583**Federal Employee & VA Benefits 5,720 5,284Other 1,576 1,257

Intragovernmental Debt—Owed to Social Security, Medicare/Other Trust Funds

Federal Social Insurance ObligationsSocial Security 7,947 7,677Medicare—Parts A, B & D 22,813 38,107Other 97 94

Total Liabilities, Intragovernmental Debt & SI Obligations $51,790 $64,393

Current-dollar GDP 3rd qtr 2010, 4th qtr 2009 (Source: BEA) $14,750 $14,119 Liabilities and Obligations as % GDP 351% 456%

* 62% of 2010 GDP **53% of 2009 GDP

4,577 4,391

Percentage Composition of Federal Government Outlays

National Defense

Net Interest

All Other

Payments to Individuals

0%

20%

40%

60%

80%

100%

40

44

48

52

56

60

64

68

72

76

80

84

88

92

96

00

04

Fiscal Year 20

07

$1,494 B

$528 B

$247 B

$501 B

1940 1971 2007 Current $ $9.5B $210.2B $2,770B

President proposes;

Congress disposes.

Both sign on.

State Fiscal Situation

• Largest revenue collapse on record

- ARRA replaced about $140B

• Recovery slow and lag times growing

- Shortfalls continue

- Using reserves, taxes hikes, federal funds

- Pressure from education, healthcare, OPEB

• States tend to lag national recovery

• Housing is key

The Cliff: Temporary Federal Aid to States (FY ’11 totals include both ARRA & Education Jobs Funds)

Source: Recovery Act data come from GAO Report to Congress, September 2010

In Billion

s

Fiscal Year

Significant Lag

Housing leverage• Link between housing, values, consumption and taxes•Turnover

‘05: 1.3M new @ $290K = $370B 7.0M exisiting @ $269K = $1.9T ‘08: .3M new @ $244 = $70B existing = $890B• Jobs: 2M on site lost since ‘06; 2:1 off/on site

Translates to ~ $2T and 6M jobs • Unemployment/economic uncertainty, diminished wealth,

fallen values depress consumption, taxes - Property taxes 4% below prior year

Spending Pressure

Medicaid and Health Care

K-12 and Higher Education

Demographic Changes

Corrections

Transportation

Infrastructure

Pensions

Key DependencyMeasurements

VA2008

MA2008

NV2008

NC2008

WV2008

NY2008

FL2008

AL2008

Direct Federal Revenues to State (billions)(VA & NY 2009)

$10.8 $10.5 $2.4 $15 $2.7 $48.9 $24.5 $8.7

Percentage of Total State Revenues—All Sources

26.9% 23% 33% 31.8% 29% 30.6% 28% 31.4%

Direct Federal Grants to Local governments

(millions)$1,075 $758 $475 $1,799 $232 $5,571 $4,033 $900

Federal Purchases from State Businesses (billions)

$53.9 $13.3 $2.7 $5.8 $1.3 $13.7 $16.6 $10.4

Federal Payments to Individuals-wages,

pensions, S.S., Medicare (billions)

$53.9 $36.2 $11.3 $47.6 $12.8 $102.4 $110.7 $33.3

Total Direct and Indirect Federal Flows

(billions)$119.7 $60.8 $16.9 $70.3 $17.1 $165 $155.8 $53.3

KeyMeasurements

VA2008

MA2008

NV2008

NC2008

WV200

8

NY2008

FL2008

AL2008

Real GDP by StateInflation Adjusted to 2000

(billions)$324.5 $312.5 $103.2 $329.4 $46.3 $964.8 $603.5 $137.1

Total Federal FlowsGross State Product

36.9% 19.5% 16.4% 21.3%36.9%

17.1% 25.8% 38.9%

Federal Leased/Owned Buildings (millions sq/ft)

As of March 201050.4 6.9 2.4 4.3 4.0 23.3 14.0 3.9%

Federal Debt Securities Held by State (billions)

$6.3 N/A $6.9 N/A $6.6 N/A $40.1 -

Estimated 2009 Population (millions)

7.8 6.6 2.6 9.4 1.8 19.5 18.5 4.7

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KeyMeasurements

VA2008

MA2008

NV2008

NC2008

WV2008

NY2009

FL2008

AL2008

Military Facilities (9/30/08)

148 63 57 124 47 216 235 96

Military Facilities--Present Replacement Value (9/30/08, billions)

$37.6 $5.0 $10.6 $20.4 $1.1$11.

7$23.4 $10.0

Military Facilities--Military and Civilian Personnel (9/30/08, thousands)

181.8 16.6 15.2 147.2 8.5 60.0 91.2 66.9

What are the Risks Associated with Intergovernmental Financial Dependency

Disruptions to current direct and indirect intergovernmental revenue flows

Impact on investment income, asset values

Build-up of unfunded pensions, post employment benefits

Deferred infrastructure

Volatility

shifting role of federal gov’t

estimated that 1/3 of $1T in cuts would hit states

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What can we do?• Evaluate sustainability and dependency risks

in your environment- States refusing federal funds, cutting

services- Watch the world, and the world economy

•Awareness that something has to give - Don’t raise taxes, don’t cut benefits

- Infrastructure does not last forever

- Catastrophes, conflicts happen

- Spend your way out of debt -

- Compromise by everybody winning

• Show up• Provide simple, clear information-No MEGO

stuff -

“You can always count on Americans to do the right thing-after they’ve tried everything else.”

PM Winston Churchill

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Appendix

Report of the U.S. Government http://www.fms.treas.gov/fr/index.html

The Federal Government's Long-Term Fiscal Outlook www.gao.gov

Intergovernmental Financial Dependency and Related Risks—Proposed Reporting By State and Local Governments

Available at no cost at—www.cbh.com/intergovernmentalreport