1. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Copyright © 2013 by Standard & Poor’s Financial Services LLC. All rights reserved. Economic Report For The States John Sugden Senior Director- Analytic Manager U.S. States Group/ U.S. Public Finance NASACT – August 13th, 2014

2. Economic Update 2

3. 3 2014-2015 Economic Outlook for U.S. State and Local Governments Source: U.S. Economic Forecast: Keep Calm and Carry On” June 25 th, 2014. as updated by U.S. Forecast Update: The Waiting (Is The Hardest Part), July 31 st, 2014

4. Source: Credit Conditions: North America’s Credit Conditions Remain Favorable, But Not Without Risk, June 9th, 2014 4 U.S. Public Finance Sector Conditions and Outlook

5. Text level one is used for introductory text or where a line of text without a bullet is needed: 20-point Arial (Body) font, spacing and paragraph indents are preformatted and automatic Text level two is bulleted: defaults to 20-point Arial (Body) font Text level three is bulleted: defaults to 16-point Times New Roman font User tip: “Tab” at beginning of line will indent and demote the text one level lower and automatically add or reformat bullet To reverse (promote to a higher level): press “Shift” + “Tab” While pages can accommodate up to 11 second-level bullets, use of fewer than eight bullets is a presentation best practice Unlike headings, body text is sentence case 5 Unemployment Drops Below 8% For All States

6. 6 Why Hasn’t Recovery Brought A Stronger Bounce Back For Governments

7. Macroeconomic Conditions – Upside Labor market recovers at a greater pace, driving growth in wages. Consumer confidence would rise and fuel greater real personal consumption. Historically low mortgage rates and stronger labor market lead to increased demand for single-family homes. Unemployment declines to 5.5% for the first time since the Great Recession. US GDP would expand almost 5% in the second half of the year, boosting GDP growth to 2.7% and 4.4% in 2014 and 2015, respectively. 7

8. Macroeconomic Conditions – Downside Disruption in oil supply gives rise to higher gasoline prices Global growth slows due to volatility in Iraq and to a lesser extent Ukraine Stock market pulls back and consumer confidence wanes lowering domestic demand Weakness in housing would remain driven by declining affordability, tight credit, and rising construction costs Unemployment increases to 7.3% by 4 th quarter Federal government spending shrinks 5.0% in 2014, (0.5%) decline in 2015 U.S. real GDP grows 1.1% in 2014 and 1.2% in 2015 8

9. 9 Credit Quality Overview

10. As of April 2, 2013 U.S. State Rating Distribution 10

11. Overview of State Credit Quality Overall credit quality for the sector has remained strong, with a few exceptions. 94% of U.S. State Ratings are AA- or better. A majority of U.S. states are in a better budgetary position than at any other point since the start of the recession States began the 2 nd Quarter of 2014 – which for most is the final quarter of the fiscal year – with the wind at their backs. Fundamentals point to ongoing expansion Even if revenues in the last quarter of the fiscal year hold up, the states’ fiscal situations are not without risk heading into fiscal 2015. 11

12. 12 2015 Budgets

13. The Fiscal 2015 Challenge: Striking a Balance Between Competing Objectives Modest revenue growth and easing pressures on social networks are the result of the confluence of three factors: o A gradual, but sustained economic expansion o A five-year bull market for equities; and o Broad political consensus in favor of budgetary restraint Elections, a less crisis-like budgeting atmosphere and austerity fatigue could give way to weaker fiscal restraint “Repressed fiscal deficits” add to the challenge 13

14. Measuring The Status Of The States Fiscal Recovery? 14

15. Measuring The Status Of The States’ Fiscal Recovery? 15

16. FY 2015 Is A Year To Watch Closely Conclusion Our outlook calls for ongoing economic expansion Economic recovery is mature at this point Sluggish rebound has contributed to incomplete fiscal recovery State revenue is volatile, as we saw in April Austerity fatigue in an election year Long-term pressures remain and will require continuous management 16

17. Recent Articles Economic Research: How Increasing Income Inequality Is Dampening U.S. Economic Growth, And Possible Ways To Change The Tide, Aug. 6 th, 2014 Not All Loans Are Equal: Some Terms and Conditions That Make Disclosure Critical In Evaluating Credit Risk U.S. Public Finance Rating Changes Were Still Positive In The Second Quarter, But A Bit Less So, July 18 th, 2014 U.S. State And Local Government Credit Conditions Forecast: Ramping Up After A Slower-Than-Expected Start, July 8 th, 2014 U.S. Economic Forecast: Keep Calm And Carry On, June 25, 2014 U.S. State Pension Funding: Strong Investment Returns Could Lift Funded Ratios, But Longer-Term Challenges Remain, June 24, 2014 Credit Conditions: North America’s Credit Conditions Remain Favorable, But Not Without Risks, June 9 th, 2014 17

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19. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Copyright © 2013 by Standard & Poor’s Financial Services LLC. All rights reserved. Thank You John Sugden Senior Director – Analytic Manager T: 212.438.1678 | F: 212.438.0140 John.sugden@standardandpoors.com