1. State of the States Brian Sigritz Director of State Fiscal Studies NASBO NASACT Middle Management April 12, 2016

2. Current Economic and Fiscal Situation www.nasbo.org 2

3. State Fiscal Overview  Fiscal 2016 marks the 6 th consecutive annual increase in general fund spending and revenues  Budget environment for most states indicates continued stability and modest growth  Some states are facing difficult fiscal challenges due to various issues  Fiscal improvements over the last several years have not returned states to historical patterns of growth www.nasbo.org 3

4. Measurable Improvements to the State Fiscal Environment  States enacting spending increases in many areas  Budget gaps and mid-year budget cuts have significantly decreased  Tax revenues grew more strongly in fiscal 2015 after declines at the end of fiscal 2014  Revenues on target or above projections in most states  Total balance reached an all-time high in fiscal 2015 in actual dollars  State Medicaid spending growing more slowly  Overall state and local hiring has begun to increase somewhat www.nasbo.org 4

5. Major Challenges to State Budgets: 2016+  Revenues and spending have yet to surpass pre-recession highs after accounting for inflation ▫ Revenue growth projected to be modest in fiscal 2016  Future economic growth levels?  Rising health care costs and questions around ACA ▫ Long-term Medicaid concerns remain  Pensions and retiree health care  Pent-up demand for infrastructure  Certain states impacted by oil price declines, tax related issues, stock market volatility, long-term liabilities, slow economic growth, etc.  Federal uncertainty surrounding future funding levels, tax code, ACA, etc. www.nasbo.org 5

6. Governors’ 2016 State of State Themes  Many governors spoke about progress in their state, including job growth, lower unemployment, balanced budgets, higher reserves, tax reductions, and various reforms  However a number also discussed serious fiscal challenges facing their states  Many of themes were similar to years past such as prioritization of K-12  Some areas received additional emphasis including needing to address drug abuse, juvenile justice reforms, water management, and the recruitment and retention of teachers www.nasbo.org 6

7. National Economic Indicators 2015 4 th Quarter GDP increases 1.4% after increasing 2.0% in 3 rd quarter Federal Reserve projects 2.3% to 2.5% GDP growth in 2016; 2.0% to 2.3% in 2017 (December 16, 2016 projection) Many economists predict around a 15-20% chance of recession by end of the year Other economic figures: Unemployment rate at 5.0% in March; 215,000 jobs added Retail sales declined 0.1% in February Consumer price declined 0.2% in February www.nasbo.org 7

8. 8  State and local employment has declined 512,000 from their peak through March ▫ State employment has declined 114,000 from Aug. 2008 – Mar. 2016  State government employment declined by 1,000 in March ▫ Local employment has declined 398,000 from July 2008 – Mar. 2016  Locals increased positions by 19,000 in March Source: Bureau of Labor Statistics

9. State GDP Growth 3 rd Quarter 2015 www.nasbo.org 9

10. State Severance Tax Revenue as a Percentage of Total State Tax Collections www.nasbo.org 10 % Source: U.S. Census Bureau

11. Current Fiscal Situation: Indicators www.nasbo.org 11

12. Slow Budget Growth Continues www.nasbo.org 12 * Average *38-year historical average annual rate of growth is 5.5 percent Fiscal 2016 numbers are enacted Source: NASBO Fall 2015 Fiscal Survey of States

13. States Direct Most New Spending to K-12 and Medicaid www.nasbo.org 13 Source: NASBO Fall 2015 Fiscal Survey

14. Fiscal 2015 GF Revenue Below Pre-Recession Peak After Inflation www.nasbo.org 14 Source: NASBO Fall 2015 Fiscal Survey of States; Fiscal 2016 figure is based on enacted budgets. *Aggregate revenue levels would need to total $781 billon in fiscal 2015 to be equivalent with real 2008 revenue levels.

15. State Revenue Grows 3.8% in 3 rd Quarter of 2015 and 2.6% in 4 th Quarter, According to Early Estimates www.nasbo.org 15 Source: Fiscal Studies Program, Rockefeller Institute of Government; U.S. Census Bureau

16. States Enact $0.5B in Net Tax and Fee Increases for Fiscal 2016 www.nasbo.org 16 ($ In Billions) Fiscal Year

17. States Enacted a Mix of Tax Increases and Decreases in Fiscal 2016 www.nasbo.org 17 Source: Fall 2015 Fiscal Survey of States Revenue Type # of States Enacting Increases # of States Enacting Decreases Net Change ($ in millions) Sales Tax97+$494 Personal Income Tax915-$1,264 Corporate Income Tax410+$576 Cigarette/Tobacco Tax80+$535 Motor Fuel Tax81+$472 Alcohol Tax13-$9.3 Other Tax115-$239 Fees133-$19

18. Midyear Budget Cuts Relatively Minimal in Fiscal 2015 at $1B www.nasbo.org 18 Source: NASBO Fall 2015 Fiscal Survey *Fiscal 2016 midyear cuts are ongoing

19. State Balance Levels Reached All-Time High in Actual Dollars in Fiscal 2015, Although Not As a Percentage of Expenditures 19 * Fiscal 2016 totals are enacted and exclude 5 states with data not available. **38-year historical average is 6.3%. Source: NASBO Fall 2015 Fiscal Survey www.nasbo.org

20. Background on State Spending Trends www.nasbo.org 20

21. Spending by Funding Source (Percentage) www.nasbo.org 21 Source: NASBO State Expenditure Report

22. Total State Expenditures by Function Estimated Fiscal 2015 www.nasbo.org 22 Source: NASBO State Expenditure Report

23. K-12 and Medicaid Spending as a % of Total State Expenditures www.nasbo.org 23 % Source: NASBO State Expenditure Report

24. General Fund Expenditures by Function Estimated Fiscal 2015 www.nasbo.org 24 Source: NASBO State Expenditure Report

25. Federal Funds Expenditures by Function Estimated Fiscal 2015 www.nasbo.org 25 Source: NASBO State Expenditure Report

26. Medicaid Outlook for FY 2016  Growth in state spending on Medicaid projected to slow in fiscal 2016 – 3.1% (compared to 5.2% in fiscal 2015)  Total Medicaid spending expected to grow by 5.2% in fiscal 2016 (compared to 18.2% in fiscal 2015)  Medicaid enrollment projected to grow by 4.6% in fiscal 2016  States cited numerous long-term concerns ▫ Growing cost of pharmaceutical drugs ▫ Funding the Medicaid state match in 2017 and beyond (for expansion states) www.nasbo.org 26

27. Revenue Sources in the General Fund (Percentage) www.nasbo.org Source: NASBO State Expenditure Report 27

28. Outlook www.nasbo.org 28

29. 29 Long Term Spending Pressures:  Medicaid and Health Care  K-12 and Higher Education  Demographic Changes  Corrections  Infrastructure  Pensions  Retiree Health Care www.nasbo.org

30. State Fiscal Outlook  43 states enacted budgets with spending increases in FY 2016, but growth still below average  Revenue growth projected to remain slow in FY 2016  Uncertainty remains concerning federal spending decisions and ACA implementation  Tough competition for general funds  Dealing with infrastructure, long-term liabilities  States will continue to make some painful choices www.nasbo.org 30

31. www.nasbo.org Brian Sigritz Dir. of State Fiscal Studies NASBO 202-624-8439 bsigritz@nasbo.org