Middle Management Scott Pattison Executive Director NASBO April 15, 2015

Budgeting tips  Contingencies  Make your case  12 month process  Relationships 2

3 State Budget Cycle

▫ Income Volatility ▫ Sales ▫ Gaming becoming limited Revenue Issues

Current Economic and Fiscal Situation 5

State Fiscal Overview  Fiscal 2015 marks the 5 th consecutive annual increase in general fund spending and revenues  Signs of fiscal distress have subsided and the fiscal environment for most states indicates continued stability and slow growth  Some states are facing difficult budget environments due to various issues (oil)  Fiscal improvements over the last several years have not returned states to normal patterns of growth 6

Trends ▫ State Employee Pay ▫ Transportation ▫ Levels of Taxation ▫ Limiting Growth (Prisons) ▫ Higher Education 7

Oil Prices Falling ▫ $50ish a barrel ▫ Lower gas prices = increased revenue (sales) ▫ Hard to predict ▫ Most states benefit, but not all 8

Governors’ Proposed Budgets for Fiscal 2016  Moderate increases in spending, modest revenue growth, and healthy reserves  Emphasis on being sustainable and structurally balanced  Much of additional spending directed towards core services such as education and healthcare  Various tax proposals either increasing or decreasing revenue ▫ Middle class tax cuts, lower CIT, property tax relief, expanding sales tax base, closing loopholes, examining incentives, higher cigarette taxes 9

Current Fiscal Situation: Indicators 10

Slow Budget Growth Continues 11 * Average *37-year historical average annual rate of growth is 5.5 percent *Fiscal 2015 numbers are enacted Source: NASBO Fall 2014 Fiscal Survey of States

GF Spending Still Below Pre-Recession Peak Adjusted for Inflation 12 Source: NASBO Fall 2014 Fiscal Survey of States; Fiscal 2015 numbers are enacted *Aggregate spending levels would need to be at $771 billion to remain equivalent with real 2008 spending levels.

States Restoring Some Cuts Made During Recession 13 ($ in Billions) Source: NASBO Fall 2014 Fiscal Survey

State Revenue Grows in 3 rd Quarter of 2014 after Declining in 2 nd Quarter 14 Source: Fiscal Studies Program, Rockefeller Institute of Government; U.S. Census Bureau *3 rd quarter of 2014 is based on 45 early reporting states

GF Revenue Also Below Pre-Recession Peak Adjusted for Inflation 15 Source: NASBO Fall 2014 Fiscal Survey of States; Fiscal 2015 numbers are enacted *Aggregate revenue levels would need to be $763 billon to remain equivalent with real 2008 revenue levels.

States Enact $2.3B in Net Tax and Fee Cuts for FY ($ In Billions) Fiscal Year

States Reserves Haven’t Reached Peak Levels 17

Minimal Midyear Budget Cuts So Far in Fiscal Source: NASBO Fall 2014 Fiscal Survey *Fiscal 2015 midyear cuts are ongoing

Spanish American War 1898 $16.5 million World War I 1919

▫ Infrastructure funding burden: 3.5% of GDP ▫ We spend: 1% ▫ New money muni debt: 42% below peak Debt

Management Points from Budget Folks 21

Forces Affecting State Budgets 22 Economics Politics State Laws (constitutional and statutory)  Balanced Budget Requirements Federal Policy

23 Trend Continues: Focus on Outcomes  Focus on results and outcomes  Spend funds for effective programs  Improve management

24 Structural Imbalances Will Persist CMS state Medicaid spending forecast Moody’s Analytics state tax revenue forecast Sources: Moody’s Analytics, CMS, Census Bureau % Year ago % change, calendar year

 Contingencies  Prudent use of debt  Rainy day funds  One time only  Use of performance information  Avoiding bad practices in good times 25 Financial Management Practices

 Ask performance questions  Ask for outcome data  Use performance information to justify changes to programs: Make your case!  Encourage your employees to think about goals and outcomes 26 What Can Be Done?

 Cybersecurity  Open government  Systems need replacing  Cloud  Good things can come from IT – better customer service, increased efficiencies 27 IT issues

Background on State Spending Trends 28

Spending by Funding Source (Percentage) 29 Source: NASBO State Expenditure Report

Total State Expenditures by Function Estimated Fiscal Source: NASBO State Expenditure Report

General Fund Expenditures by Function Estimated Fiscal Source: NASBO State Expenditure Report

Federal Funds Expenditures by Function Estimated Fiscal Source: NASBO State Expenditure Report

Revenue Sources in the General Fund (Percentage) Source: NASBO State Expenditure Report 33

Scott D. Pattison Executive Director NASBO