1. NSAA Annual Conference June 14, 2016 STATE FISCAL OUTLOOK John Hicks Executive Director National Association of State Budget Officers | NASBO

2. CURRENT ECONOMIC AND FISCAL SITUATION

3. 3 12 3 4 NATIONAL ECONOMIC INDICATORS 2016 1st Quarter GDP increased 0.8% after increasing 1.4% in 4th quarter of 2015 Federal Reserve forecasts 1.9% to 2.5% GDP growth in 2016; 1.7% to 2.3% in 2017 (March 16, 2016 projection) Many economists predict around a 15-20% chance of recession by end of the year - “watching the clock” ˃ Unemployment rate at 4.7% in May ˃ Retail sales up 1.3% in April ˃ Personal income up 0.4% April ˃ Inflation up 0.4% in April

4. 4 Local employment has declined 403,000 from July 2008 – May 2016 ˃ Locals positions increased by 8,000 in May STATE AND LOCAL EMPLOYMENT HAS DECLINED 514,000 FROM THEIR PEAK State employment has declined 111,000 from Aug. 2008 – May 2016 ˃ State government employment declined by 7,000 in May Source: Bureau of Labor Statistics

5. 5 Ratings in parentheses are issuer credit ratings or implied General Obligation ratings Note: Green shaded box indicates upgrade and red shaded box indicates downgrade since January 1, 2016. * No general obligation, implied general obligation or equivalent issuer credit ratings (1) Lease revenue and/or Certificate of Participation (“COP”) rating. (2) Kroll Bond Rating Agency also assigns ratings to Connecticut (AA/stable), Wisconsin (AA/stable), New York (AA+/Stable) and New Jersey (A/Stable). CWN stands for Credit Watch Negative Appendix: State Ratings & Outlooks Sources: Compiled by CITI using Bloomberg, Moody’s Investors Service, Standard & Poor’s Ratings Services, Fitch Ratings, Kroll Bond Rating Agency; As of May 11, 2016.

6. 6 Fiscal 2017 expected to mark the 7th consecutive annual increase in general fund spending and revenues Budget environment for most states indicates continued stability and modest growth Fiscal progress has been uneven across states, with some facing difficult budgetary challenges (energy states especially) With long-term spending pressures and slower revenue growth expected, governors’ spending proposals are cautious State Fiscal OVERVIEW

7. 7 STATE FISCAL OVERVIEW 50-state total general fund spending in fiscal 2016 has barely surpassed pre- recession peak after inflation 29 states still haven’t reached their pre-recession spending peak General fund spending in fiscal 2016 grew at the highest rate since the Great Recession – median growth was 3.8% With limited revenue growth expected, governors proposed modest spending increases in fiscal 2017, 2.5% on average Most states continue to increase rainy day fund balances Revenue growth slowed down in fiscal 2016 after strong performance in fiscal 2015

8. 8 2016 Budget gaps and mid-year budget cuts have decreased Revenues on target or above projections in most states MEASURABLE IMPROVEMENTS TO THE STATE FISCAL ENVIRONMENT Total balances reached an all- time high in fiscal 2015 in actual dollars Rainy Day fund balances are growing State Medicaid spending growing more slowly States enacting 2017 spending increases in many areas

9. 9 1 2 34 GOVERNORS’ 2016-2017 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 Continued priority for K-12 funding Opioids & other substance abuse, Juvenile justice reforms, Water management, Recruitment/retention of teachers & public safety workers (corrections, law enforcement, social workers)

10. CURRENT FISCAL SITUATION: INDICATORS

11. 11 SLOW BUDGET GROWTH CONTINUES General Fund Expenditure Growth (%) *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

12. 12 FISCAL 2008-2016 GENERAL FUND SPENDING Source: NASBO Fall 2015 Fiscal Survey of States; Fiscal 2016 figure is based on enacted budgets. *Aggregate spending levels would need to total $789 billion in fiscal 2015 to be equivalent with real 2008 spending levels.

13. 13 MIDYEAR BUDGET CUTS Enacted Budget Cuts Made After the Budget Passed Source: NASBO Fall 2015 Fiscal Survey *Fiscal 2016 midyear cuts are ongoing

14. 14 States Directed Most New Spending to K-12 and Medicaid FY 2016 Enacted General Fund Spending Changes by Category Source: NASBO Fall 2015 Fiscal Survey

15. 15 FISCAL 2016 ENACTED SPENDING INCREASES Elementary & Secondary Education 41 states Medicaid 31 states Corrections 37 states Higher Education 35 states Public Assistance 18 states Transportation 14 states Other 29 states

16. 16 STRATEGIES USED TO MANAGE BUDGETS, FY 2016 (ENACTED) 24 states TARGETED CUTS 8 states REORGANIZE AGENCIES 4 states HIGHER EDUCATION RELATED FEES 6 states ACROSS THE BOARD CUTS 3 states TRANSPORT. RELATED FEES 3 states USER FEES 3 states GAMBLING EXPANSION 2 states CUTS TO EMPLOYEE BENEFITS 5 states REDUCE LOCAL AID 4 states LAYOFFS

17. 17 1 2 34 Increasing volatility Revenues recovering slowly compared to past recessions April 2016 results ˃ non-wage income Gaming becoming limited REVENUE ISSUES

18. 18 GENERAL FUND REVENUE BELOW PRE-RECESSION PEAK AFTER INFLATION General Fund Revenue: FY 2008-FY 2016 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.

19. 19 Final Fiscal 2015 Projections ˃ Revenue collections outpaced projections in 39 states ˃ Were on target in 3 states ˃ And came in below estimates in 7 states GENERAL FUND COLLECTIONS COMPARED TO PROJECTIONS Most Recent Fiscal 2016 Projections ˃ Revenue collections are outpacing projections in 11 states ˃ Are on target in 20 states ˃ Are coming in below estimates in 19 states Source: Fall 2015 Fiscal Survey of States

20. 20 APRIL REVENUE COLLECTIONS WERE MIXED Unlike last year when most states experienced a positive “April surprise,” revenue collections this April were mixed Reasons for variations in revenue collections include: Differing economic performance Oil producing states in particular are facing significant challenges Composition of state revenue collections States heavily reliant on capital gains and high income earners impacted by weak stock market performance in 2015. Fiscal policy choices, including spending decisions and prior tax changes Some of the reasons for apparent variation related to what is being measured Revenues may come in below projections but still be growing

21. 21 STATE SEVERANCE TAX REVENUE AS A PERCENTAGE OF TOTAL STATE TAX COLLECTIONS Fiscal 2014 Source: U.S. Census Bureau

22. 22 STATE BALANCE LEVELS REACHED ALL-TIME HIGH IN ACTUAL DOLLARS IN FISCAL 2015, ALTHOUGH NOT AS A PERCENTAGE OF EXPENDITURES Total Year-End Balances, Fiscal 2006 to Fiscal 2016 * 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

23. BACKGROUND ON STATE SPENDING TRENDS

24. 24 TOTAL STATE EXPENDITURES BY FUND SOURCE FISCAL YEAR 2015 $1,872 Billion FISCAL YEAR 2008 $1,479 Billion

25. 25 TOTAL STATE EXPENDITURES BY FUNCTION FISCAL YEAR 2008 $1,479 Billion FISCAL YEAR 2015 $1,872 Billion Total State Expenditures by Function State funds are general funds and other state funds combined, excluding bonds. Total state expenditures are all federal and state funds.

26. 26 GENERAL FUND EXPENDITURES BY FUNCTION FISCAL YEAR 2008 $687 Billion FISCAL YEAR 2015 $749 Billion

27. 27 FEDERAL FUNDS EXPENDITURES BY FUNCTION FISCAL YEAR 2008 $395 Billion FISCAL YEAR 2015 $586 Billion Federal Funds Expenditures by Function

28. 28 General Fund Percentage Growth in Spending Categories Over 10 Years Percentage Growth in Spending Categories Between Fiscal 2006-Fiscal 2015 (General Funds) Source: NASBO State Expenditure Report

29. 29 MEDICAID EXPANSION AS OF MAR. 2016 (KAISER)

30. 30 MEDICAID EXPANSION - STATE SHARE OF COSTS July – June Fiscal Year *Total state expenditures include spending from general funds, other state funds, bonds, and federal funds to states

31. 31 K-12 AND MEDICAID SPENDING AS A % OF TOTAL STATE EXPENDITURES % Source: NASBO State Expenditure Report

32. 32 Changing Composition of Higher Ed Funding

33. 33 General Fund Revenues by Share (Percentage) Fiscal 2015 Source: NASBO State Expenditure Report

34. 34 Revenue Sources Consistent Over Time Fiscal 1998Estimated Fiscal 2015

35. OUTLOOK

36. 36 MAJOR CHALLENGES TO STATE BUDGETS: 2016+ 41 states have passed a budget for fiscal 2017 (6/7/16) ˃ 17 states passed biennial budgets in their 2015 Sessions Revenues and spending have yet to surpass pre-recession highs after accounting for inflation for many states ˃ Revenue growth is likely to be modest in fiscal 2016 and 2017 Modest economic growth even as the recovery matures Rising health care costs and state share of Medicaid expansion ˃ 2014-16 states paid 0% of expansion costs (31 states have expanded) ˃ 2017 1st year that states pay some of expansion costs 2.5%

37. 37 Pensions, pensions, pensions Pent-up demand for past budget cuts Modest economic growth = modest revenue growth Updating infrastructure that has aged and at end of life Certain states impacted by oil price declines, federal cuts, tax related issues, long-term liabilities, slow economic growth, etc. Federal uncertainty surrounding future funding levels, tax code, ACA, etc. MAJOR CHALLENGES TO STATE BUDGETS: 2016+

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