The State of Iowa: Economy and Budget Update By Randy Bauer Budget Director State of Iowa

Economic pressures continue for all states Reduced State Revenues Corporate Tax Receipts Personal Tax Receipts Sales Tax Receipts Inheritance/Estat e Tax Receipts Higher Expenditures Medicaid Costs Homeland Security Education Corrections Employee Salaries Employee Healthcare Costs State Budget States face difficult budgetary choices Increase Revenues Reduce Expenditures Use Reserves

Tax Revenue Decline Much Worse Than Economy Might Suggest

Tax Revenue: No Longer Plummeting But Remains Weak

Iowa – worst revenue “growth” in 50 years

State Balances are Declining Source: National Association of State Budget Officers

Only 10 States Have Adequate Balances

States Borrowing Record Amounts $224 billion during FY 2003 Double the amount of two years ago “Follow the federal leader” tactics? Stall tactic? Even this market has limits

Iowa General Fund Expenditures Have Been Reduced Source: National Association State Budget Officers

Over 60 percent of the State’s General Fund budget goes toward education Source: Iowa Department of Management

Fund balances: drawn down from more than 10% of expenditures in FY 2001 to 1.3% of expenditures at end of FY 2003; 16 states now have balances of <1% Special funds: At least 23 states tapped capital, highway, other funds for FY 2003, and 29 for FY 2004; at least 16 have used tobacco settlement money Spending cuts: 31 states cut for FY 2004 in some fashion; Medicaid cost containment planned in many states (but how real?) Tax increases: –FY 2003: >= 1% in 16+ states, for $6.7 billion, 40% of $ was cigarette taxes; a few large or broad-based tax increases – KS, IN, MA, NJ, TN – but these were exceptions, not the rule –FY 2004: more income and sales tax increases, $6.9 billion tax increase in total (see next page) Source: Donald Boyd, Director, Rockefeller Institute of Government, SUNY State Responses So Far

States are Raising Taxes Source: National Association of State Budget Officers

The Tax Burden: Rising Expectations? (Ratio of personal taxes to personal income) Source: Global Insight

Gimmicks and Tricks Payment shifts –Texas delayed $2 billion over 2 years –Minnesota delayed $700 million –New Jersey $300 million school aid payment delayed –Kansas $200 million delayed $170 million advanced deadline for payment of property taxes Sit on bills –Illinois $1.5 billion this year ($2 billion last year) Asset sales and leasebacks Draining trusts and other funds –Florida $1.3 billion

When Will Finances Of State Governments Recover? Economy currently at least as weak as state government forecasters expected Additional near-term risks for income taxes, related to financial markets Will be many years before markets, and associated income, recover to 2000 and 2001 levels Continued erosion of states’ sales taxes Medicaid and K-12 education spending pressures Many states solved problems in ways that make and much worse  Good times for most states probably at least 2-3 years away

Moody’s Outlook for States Continues to be Negative 16 states currently on negative outlook. More negative outlooks and rating actions likely. Oregon downgrade in March was 8th for states since last state upgrade in 2/01 (Connecticut). 4 states now on Watchlist for downgrade (Conn., Minn., Mich., Ill.)

All States: Structural Balance Will Be Elusive Spending is on a higher growth plane and is outstripping revenue growth. Budget problems will persist into FY05: –FY04 have large budget gaps due to substantial use on non-recurring resources to balance FY03. Pace of economic recovery will be key, but modest recovery forecasts will leave a difficult FY04 and FY05. Higher rated credits will restore structural balance and rebuild reserve funds quickly. Further credit deterioration among states is likely. Problems beginning to be pushed down to local governments.