State Fiscal Outlook NAMM Washington, DC May 11, 2010 Brian Sigritz Director of State Fiscal Studies National Association of State Budget Officers 444 North Capitol Street, NW, Suite 642 Washington, DC (202)

NASBO 2 Current Fiscal Situation

NASBO 3 Recent State Fiscal Situation The “Great Recession” - Extremely difficult fiscal period for states  States experiencing significant shortfalls and large revenue declines  Fiscal 2010 revenue projections: For the year, 41 states lower than projected, 6 on target, 3 higher March and April revenue collections a mixed bag Widespread budget cuts, layoffs/furloughs continue across the nation ARRA helping, but does not fully solve shortfalls

NASBO 4 Economics 1st Quarter GDP grows 3.2% Slow economic growth likely in calendar 2010 Some economic improvement:  Stability in many indicators  Conference Board LEI up 11 straight months  Economy adds 290,000 jobs in April  9 straight monthly increases in manufacturing

NASBO 5 Source: Federal Reserve Bank of Philadelphia State Coincident Index (March 2010) 3-Month Index: Increases in 31 states, decreases in 17, unchanged in 2

NASBO 6 This downturn vs. Post ‘01 Last Time:  Housing sector relatively strong in ’01  Primarily income tax decline This Time:  Broad economic decline; Longer recession  Localities will be hit this downturn 17 states reduced local aid in ‘09; 20 in ‘10

NASBO 7 State of the State Speeches Common themes include the need for a smaller and more efficient government, and prioritizing job creation A number of governors have called for tax hikes, often temporary sales tax increases Several governors have called for increased federal aid  Especially extension of enhanced FMAP

NASBO 2010 Governor Races: 37 Races, 23 Open Seats 8

NASBO Negative Spending in Both FY 2009 and FY 2010 *32-year historical average rate of growth is 5.6 percent **Fiscal 10 numbers are appropriated Source: NASBO Fall 2009 Fiscal Survey of States * The New Normal?

NASBO 37 States with Negative Growth Budgets in FY Source: December 2009 Fiscal Survey of States

NASBO 11 Balances Declining *32-year historical average is 5.5% Source: NASBO Fall 2009 Fiscal Survey

NASBO Budget Cuts at Record Levels 12 Source: NASBO Fall 2009 Fiscal Survey of States

NASBO State Revenue Down 4.2% in 4 th quarter; 5 th Straight Quarter Source: Fiscal Studies Program, Rockefeller Institute of Government; U.S. Census Bureau

NASBO 14 Job Growth – “The Lag” Source: Washington Post; Bureau of Labor Statistics

NASBO State Budget Gaps (in millions) NGA & NASBO State Fiscal Update – February 2010

NASBO 16 Michigan GF Revenue less in 2010 than in 1997 Source: Michigan Office of Revenue and Tax Analysis, Dept. of Treasury, 7/31/09 May 2009 estimates

NASBO CA general fund spending declining at least $18B in 2 years 17 Source: December 2009 Fiscal Survey of States

NASBO 18 American Recovery and Reinvestment Act (ARRA)

NASBO 19 American Recovery and Reinvestment Act – State $ Approximately $246 billion+ going to or through states State Fiscal Stabilization Fund - $53.6 billion:  $39.5 billion to schools and higher ed  $5 billion in incentive grants  $8.8 billion in flexible funds Medicaid Funding: $87 billion $48 billion to transportation: highway and bridges $27.5B; transit $8.4B; passenger rail $8B Also safety net expansions, economic development, other appropriated programs

NASBO 20 The Cliff… Source: Statelin e.org

NASBO Significant Lag? 21

NASBO 22 Background on State Spending Trends

NASBO 23 Spending by Funding Source (Percentage) Source: NASBO 2008 State Expenditure Report

NASBO 24 General Fund: Medicaid & Education Over 62% Source: NASBO 2008 State Expenditure Report

NASBO 25 State Spending from Federal Funds Source: NASBO 2008 State Expenditure Report

NASBO 26 Health Care and Medicaid

NASBO 27 Total Expenditures Percentage Growth in Spending Categories Over 10 Years Sources: NASBO 1999 and 2008 State Expenditure Reports

NASBO Increases in Medicaid Spending and Enrollment 28

NASBO 29 Outlook

NASBO 30 Slow Fiscal Recovery…

NASBO 31 Long Term Spending Pressures Medicaid and Health Care K-12 and Higher Education Demographic Changes Corrections Transportation Infrastructure Pensions

NASBO The “New Normal” is Here 32

NASBO 33 State Fiscal Outlook Austere state budgets for at least the next several years Health care reform will have an impact on state finances  Already seeing increases in Medicaid spending & enrollment; 21% of total expenditures Tough competition for general funds Demand for performance and results Opportunity for reform

NASBO 34 Brian Sigritz Director of State Fiscal Studies (202)