State Fiscal Outlook for 2008

NASCIO

January 16, 2008

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

2NASBO

Current Fiscal Situation

3NASBO

Recent State Fiscal Trends

Slowing revenue in FY 2008 Some states experiencing significant

shortfalls Increased attention towards

infrastructure and transportation Health care Property tax relief

4NASBO

Examples: Current Announced Budget Shortfalls

Arizona, facing a shortfall of $870 million, is considering using the rainy day fund, bonding for school construction, and spending cuts.

California is facing a $14.5 billion shortfall for fiscal 2009. Gov. Schwarzenegger has ordered agencies to cut budgets by 10%.

Florida held a special session in October to address shortfall. Since then, revenue estimates have been lowered again.

Kentucky, facing a $289 million shortfall for fiscal 2008, has requested that state agencies cut budgets by 5%.

Nevada is facing a shortfall of $440 million for fiscal 2008. Gov. Gibbons has proposed 4.5% cuts.

Rhode Island is facing a possible $450 million fiscal 2009 shortfall. Gov. Carcieri announced plans to eliminate 1,200 positions.

5NASBO

Examples: States Showing Positive Growth

Arkansas’ revenue is 4.0% above projections so far in fiscal 2008.

Georgia’s November tax revenue increased 10.3% from fiscal 2007 levels.

Iowa increased its revenue estimates by $100 million in December.

Louisiana increased projections by $657 million for fiscal 2008 and $477 million for fiscal 2009.

Missouri’s revenue through November is 4.5% higher than expected.

North Carolina’s first quarter revenue exceed projections by $75 million.

6NASBO

Slowing Fiscal ‘08 Expenditure Growth, but Still Overall Growth

General Fund Expenditure Growth (%)

-4

-2

0

2

4

6

8

10

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

**

%

Actual Inflation Adjusted

*30-year historical average rate of growth is 6.4 percent **Fiscal 08 numbers are estimated

Source: NASBO December 2007 Fiscal Survey of States

*

7NASBO

Balances Declining but Remain Healthy

Total Year-End Balances and Total Year-End Balances as a Percentage of Expenditures, Fiscal 1979-Fiscal 2008 (Estimated)

0

10

20

30

40

50

60

70

80

1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

Total Balances as a Percentage of Expenditures Total Balance

*30-year historical average is 5.7% Source: NASBO December 2007 Fiscal Survey of States

8NASBO

Some States Likely will Face Mid-Year Fiscal ’08 Budget Cuts

Budget Cuts Made After the Budget Passed,Fiscal 1986-Fiscal 2007 ($ millions)

18

23

11 12

20

35

22

9 8

13

7

2 31

16

37

18

52 3

28

37

$0

$1,500

$3,000

$4,500

$6,000

$7,500

$9,000

$10,500

$12,000

$13,500

$15,000

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

0

10

20

30

40

Number of states (right) Amount of reduction (left)

Recession ends

Recession ends

Source: December 2007 Fiscal Survey of States

9NASBO

State Tax Revenue Growth

Year-Over-Year Real Change inQuarterly State Tax Revenue

-25

-20

-15

-10

-5

0

5

10

15

20

25

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

%

Total PIT

Source: Fiscal Studies Program, Rockefeller Institute of Government

10NASBO

Trends

11NASBO

Long Term Spending Pressures

Medicaid and Health Care

K-12 Higher Education Demographic

Changes Infrastructure Pensions

12NASBO

Spending Pressures in the News…

“state pension issue looms for legislature”

- Kentucky, The Courier-Journal, 1/1/08

“State’s Prison Budget Soars”- California, Los Angeles Times, 12/26/07

“Petition to ask Michigan Voters to Pass Universal Health Care”

- Michigan, The Detroit Free Press, 12/19/07

“Corzine proposes preschool expansion” - New Jersey, Philadelphia Inquirer, 12/14/07

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FY 2008 Budgetary Issues Medicaid

Economic Woes Housing Downturn Impacting Revenue

Health Care SCHIP, Universal Health Care

Infrastructure/Transportation

Property Tax Relief

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Other FY 2008 Issues

Transparency/Accountability

School Funding Pre-K expansion Examining Higher Ed Spending

Search for Alternative Revenue Sources Gaming Leases/Privatization

15NASBO

Background on State Spending Trends

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Long Term:State Expenditures Increasing

Total State Spending By Fund Source, Fiscal 1987-2007 ($ millions)

General Fund

Federal Funds

Other State Funds

Bonds

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

*

$

*2007 numbers are estimates Source: NASBO State Expenditure Report

17NASBO

Less Discretion - General Fund Spending

General Fund Spending, Fiscal 2006

All Other27.4%

Transportation0.8%

Corrections6.8%

Public Assistance2.0%

Medicaid16.8%

Higher Education11.3%

Elementary & Secondary Education

34.8%

Source: NASBO 2006 State Expenditure Report

18NASBO

Spending by Funding Source: General Funds Decreasing

Total State Expenditures by Funding Source, Fiscal 2000 and Fiscal 2006

48.1 44.726 27.824 25.31.9 2.2

0

10

20

30

40

50

60

2000 2006

%

General Funds Federal Funds Other State Funds Bonds

Source: NASBO, 2000 and 2006 State Expenditure Reports

19NASBO

Total Expenditures Percentage Growth in Spending Categories Over 10 Years

Percentage Growth in Spending Categories Between Fiscal 1996 and Fiscal 2006 (Total Funds)

-7.3

59.7 63.274.6 77.2 78.5

87.6 92.3

-20

0

20

40

60

80

100

Fiscal 1996 - Fiscal 2006

%

Public Assist. Corrections Transport. Higher Ed K-12 Total All Other Medicaid

Sources: NASBO 1997 and 2006 State Expenditure Reports

20NASBO

General Fund Percentage Growth in Spending Categories Over 10 Years

Percentage Growth in Spending Categories Between Fiscal 1996 and Fiscal 2006 (General Fund)

-13.8

46.5

63.7 67 68.9 73.4

90.1 90.8

-20

0

20

40

60

80

100

Fiscal 1996 - Fiscal 2006

%

Public Assist. Higher Ed. Corrections Total K-12 All Other Transport. Medicaid

Sources: NASBO 1997 and 2006 State Expenditure Reports

21NASBO

Medicaid

22NASBO

Medicaid Spending

Total Medicaid Spending as Percentage of Total State Expenditures

0

5

10

15

20

25

30

1990 1995 2000 2005 2010*

%

Medicaid as % of Total State Expenditures

*2010 percentage projected by Health Management Associates Source: NASBO State Expenditure Report

23NASBO

Medicaid Growth Rates

Medicaid Growth Rate from Year-to-Year (Total Funds)

0

2

4

6

8

10

12

14

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

%

Medicaid Growth Rates

*2007 numbers are estimated Source: NASBO 2006 State Expenditure Report

24NASBO

Enrollees Expenditures

68% of Medicaid Spending on Benefits in 2007 is for Elderly and Disabled

Children = 19%

Elderly = 22%

Disabled = 46%

Adults = 13%Children = 48%

Elderly = 9%

Disabled = 17%

Adults = 26%

2007 U.S. Total = 62.2 million U.S. Total = $305 billion in 2007

26% 68%

Source: Vernon Smith, Health Management Associates

25NASBO

Federal Funds to States:

Medicaid Consuming Larger Share

State Spending from Federal Funds

43.442.641.5

29.9

56.657.458.5

70.1

0

10

20

30

40

50

60

70

80

1990 1995 2000 2006

%

Medicaid All Other

Source: NASBO, 1990, 1995, 2000 and 2006 State Expenditure Reports

26NASBO

Outlook

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State Fiscal Outlook

Revenue and spending growth likely to slow • Housing decline and a slowing

economy could be problematic• National economic situation will

determine extent of state revenue slowdown

States will face fiscal challenges over next several years

States will look for creative financing opportunities to meet spending demands

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