1. Update on State Fiscal Conditions 2015-2016 Scott Pattison Executive Director NASBO NSAA June 10, 2015

2. www.nasbo.org 2 @iStock.com/svetikdsvetikd

3. 3 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

4. Current Economic and Fiscal Situation www.nasbo.org 4

5. Economy GDP: 1 st Q 0.2% - Flat Federal Reserve projects 2.5% GDP growth in 2015, 2.5% in 2016 Other economic figures : Unemployment rate remains at 5.4% Consumer spending rose 0.4% Consumer price index rose 0.2% Nearly 650,000 less state and local employees since ‘08 www.nasbo.org 5

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7. State Fiscal Overview  Fiscal 2015 marks the 5 th year increase in general fund spending and revenues  Signs of fiscal distress have subsided and the fiscal environment for most states is good  Some states are facing difficult budget environments due to various issues  Not post-WWII normal patterns of growth www.nasbo.org 7

8. 8 @iStock.com/Rawpixel @iStock.com/EduardoLuzzattiEduardoLuzzatti

9. Overall www.nasbo.org 9 ▫ Modest Growth (Mirror Economy) ▫ Most States: Good/Decent ▫ Tough Decisions ▫ Some States Very Difficult (Oil prices, etc.)

10. 10 Long Term:  Medicaid and Health Care  Pensions  Demographic Changes  Not Corrections  Yes, Infrastructure www.nasbo.org

11. Different Reasons for Tight Budgets ▫ Energy States (AK, NM) ▫ Tax Related Issues (CO, IL) ▫ Federal Cuts (VA, MD) ▫ Modest Growth (Northeast) ▫ Limitations (NY, CO) www.nasbo.org 11

12. Top Issues ▫ Infrastructure ▫ Education ▫ Tax Cuts (Ark., ME) ▫ Liabilities (Pensions) ▫ Shortfalls (Some States) ▫ Other Revenue Issues (Tolls, Sin Taxes) ▫ Health Care (Medicaid Issues) www.nasbo.org 12

13. MA Aa1/AA+/AA+ Minnesota Aa1/ AA+/AA+ Iowa (Aaa)/(AAA)/(AAA ) Illinois A3/A-/A- Indiana (Aaa)/ (AAA)/ (AAA) Missouri Aaa/ AAA/AAA Arkansas Aa1/AA/NR Louisiana Aa2/AA/AA Alabama Aa1/ AA/AA+ Georgia Aaa/ AAA/AAA South Carolina Aaa/AA+/AAA North Carolina Aaa/AAA/AAA Tennessee Aaa/AA+/AAA Kentucky (Aa2)/(AA-)/NR Virginia Aaa/AAA/AAA Ohio Aa1/ AA+/AA+ Michigan Aa2/ AA-/AA New York Aa1/ AA/AA+ Vermont Aaa/AA+/AAA NH Aa1/AA/AA+ CT Aa3/AA/AA/AA NJ A1/A+/A+ Washington Aa1/AA+/AA+ Oregon Aa1/AA+/AA+ Nevada Aa2/AA/AA+ Utah Aaa/AAA/AAA California Aa3/A/A Idaho (Aa1)/(AA+)/(AA+) Montana Aa1/AA/AA+ Wyoming NR/(AAA)/NR Arizona (Aa3)/(AA-)/NR Colorado (Aa1)/(AA)/NR New Mexico Aaa/AA+/NR Texas Aaa/AAA/AAA Oklahoma Aa2/(AA+)/AA+ Kansas (Aa2)/(AA+)/NR Nebraska Aa2*/(AAA)/NR South Dakota Aa2*/(AA+)/(AA+) North Dakota (Aa1)/(AAA)/NR Wisconsin Aa2/ AA/AA/AA Maine Aa2/ AA/AA Pennsylvania Aa2/AA/AA MD Aaa/AAA/AAA Florida Aa1/AAA/AAA RI Aa2/AA/AA Puerto Rico B2/BB+/BB- Alaska Aaa/AAA /AAA Hawaii Aa2/AA/AA DE Aaa/AAA/AAA West Virginia Aa1/AA/AA+ Aaa/AAA Aa/AA One Less than Aa3/AA- Order of Ratings: Moody’s/S&P/Fitch/Kroll as of July 10, 2014. *Lease revenue and/or Certificate of Participation (“COP”) rating NR: General Obligation Debt is Not Rated ( ) Indicates issuer credit rating which is equivalent to a General Obligation rating Mississippi Aa2/AA/AA+ DC Aa2/AA-/AA- One Aaa/AAA State General Obligation Ratings – July 2014 (from Citi) Guam NR/BB-/NR www.nasbo.org 13

14. Strategies Used to Reduce or Eliminate Budget Gaps, FY 2015 (Enacted)  Targeted Cuts: 16 states  Across the Board Cuts: 6 states  Reorganize Agencies: 3 states  Cuts to Employee Benefits: 3 states  Reduce Local Aid: 2 states  User Fees: 3 states  Higher Education Related Fees: 5 states www.nasbo.org 14 Source: NASBO Fall 2014 Fiscal Survey of States

15. Changes to Budgeting and Finance Practices in Fiscal 2015  Budgeting and financial management practices (19)  Increase performance budgeting efforts (3)  Rainy day fund (2)  Tax expenditure studies (2)  Capital budgeting and planning processes (3)  New IT budgeting systems (5) www.nasbo.org 15

16. Current Fiscal Situation: Indicators www.nasbo.org 16

17. GF Spending Expected to Grow for 5 th Straight Year, Although Below Average www.nasbo.org 17 37-year historical average rate of growth is 5.5 percent *Fiscal 2015 numbers are enacted Source: NASBO Fall 2014 Fiscal Survey of States

18. States Enact $2.3B in Net Tax and Fee Cuts for FY15 www.nasbo.org 18 ($ In Billions) Fiscal Year

19. States Reserves Haven’t Reached Peak Levels www.nasbo.org 19

20. Minimal Midyear Budget Cuts So Far in Fiscal 2015 www.nasbo.org 20 Source: NASBO Fall 2014 Fiscal Survey *Fiscal 2015 midyear cuts are ongoing

21. State Revenue Grows in 3 rd Quarter of 2014 after Declining in 2 nd Quarter www.nasbo.org 21 Source: Fiscal Studies Program, Rockefeller Institute of Government; U.S. Census Bureau *3 rd quarter of 2014 is based on 45 early reporting states

22. Fiscal 2015 Enacted Revenue Changes by Major Tax  Sales Taxes (-$248M): 5 states enacted increases, 13 enacted decreases  Personal Income (-$747M): 1 increase, 14 decreases  Corporate Income ($207M): 2 increases, 9 decreases  Cigarettes/Tobacco ($8M): 2 increases  Motor Fuels ($33M): 1 increase  Alcohol (-$0.2M): 1 increase, 1 decrease  Other Taxes (-$698M): 4 increases, 9 decreases www.nasbo.org 22 Source: NASBO Fall 2014 Fiscal Survey of States

23. Background on State Spending Trends www.nasbo.org 23

24. Spending by Funding Source (Percentage) www.nasbo.org 24 Source: NASBO State Expenditure Report

25. Total State Expenditures by Function Estimated Fiscal 2014 www.nasbo.org 25 Source: NASBO State Expenditure Report

26. General Fund Expenditures by Function Estimated Fiscal 2014 www.nasbo.org 26 Source: NASBO State Expenditure Report

27. Federal Funds Expenditures by Function Estimated Fiscal 2014 www.nasbo.org 27 Source: NASBO State Expenditure Report

28. Revenue Sources in the General Fund (Percentage) www.nasbo.org Source: NASBO State Expenditure Report 28

29. Revenue Sources in GF Relatively Consistent 19982014 29 www.nasbo.org

30. Pension Policy Matters Spanish American War 1898 $16.5 million World War I 1919

31. Outlook www.nasbo.org 31

32. 32 Trend Continues: Focus on Outcomes  Focus on results  Spend funds for effective programs  Improve management

33. State Fiscal Outlook  Growth  Revenue stable in FY 2015  Federal govt uncertainty  Tough competition for general funds  Dealing with infrastructure, long-term liabilities  Painful choices www.nasbo.org 33

34. Photos NM car window for ny www.nasbo.org 34

35. www.nasbo.org Scott D. Pattison Executive Director NASBO 202-624-8804 spattison@nasbo.org 35 www.nasbo.org