Intergovernmental Dependency and Transparency Joe Kull PwC January, 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 Federal Liabilities: Publicly-held Debt $9,060* $7,583** Federal Employee & VA Benefits 5,720 5,284 Other 1,576 1,257 Intragovernmental Debt—Owed to Social Security, Medicare/Other Trust Funds Federal Social Insurance Obligations Social Security 7,947 7,677 Medicare—Parts A, B & D 22,813 38,107 Other Total Liabilities, Intragovernmental Debt & SI Obligations $51,790 $64,393 Current-dollar GDP 3 rd qtr 2010, 4 th 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

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 $290K = $370B 7.0M $269K = $1.9T ‘08:.3M $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 Dependency Measurements VA 2008 MA 2008 NV 2008 NC 2008 WV 2008 NY 2008 FL 2008 AL 2008 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

Key Measurements VA 2008 MA 2008 NV 2008 NC 2008 WV NY 2008 FL 2008 AL 2008 Real GDP by State Inflation Adjusted to 2000 (billions) $324.5$312.5$103.2$329.4$46.3$964.8$603.5$137.1 Total Federal Flows Gross 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 % Federal Debt Securities Held by State (billions) $6.3N/A$6.9N/A$6.6N/A$40.1- Estimated 2009 Population (millions)

19 Key Measurements VA 2008 MA 2008 NV 2008 NC 2008 WV 2008 NY 2009 FL 2008 AL 2008 Military Facilities (9/30/08) 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)

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 20

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

27 Appendix Report of the U.S. Government The Federal Government's Long-Term Fiscal Outlook Intergovernmental Financial Dependency and Related Risks— Proposed Reporting By State and Local Governments Available at no cost at—