State Budgets: Crisis Over, but Need for Caution

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State Budgets Crisis Over, but Need for Caution

• Council of State Governments
• MIDWEST
• August 1, 2005
• Scott Pattison
• Executive Director
• National Association of State Budget Officers

444 North Capitol Street, NW, Suite 642
Washington, DC 20001 [phone]
www.nasbo.org
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• Current Fiscal Situation

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The Current Fiscal Situation

• Gradual recovery after three very difficult
  fiscal years for almost all states
• Most states reporting improvement in revenues
  over projected
• State budgets face expenditure pressure in FY06
  and beyond
• States and regions dependent on manufacturing
  still face difficulties

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Revenue Up

• State sees revenue surplus Atlanta Journal
  Constitution, July 8
• Illinois tax revenue beats expectations Chicago
  Sun Times, July 8
• After the past three recession-plagued years,
  state revenues are flowing in like water through
  a broken dam Arizona Republic, May 4
•  
• Maryland has surplus of 1 billion Baltimore
  Sun, July 20
• State's rainy-day fund in good shape Richmond
  Times Dispatch July 18

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But on spending Headlines,July 2005

• Costs rising for Medicaid
• Public colleges facing shortfall
• State pension fund deficit grew by 1 billion
  last year, officials say
• Retirement fund short
• States to Foot Transit Safety Bill

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Significant Improvement
Source NASBO, Fiscal Survey of States
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State Expenditures Sluggish Recovery
Source NASBO Fiscal Survey of States
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State Expenditures Sluggish Recovery
Source NASBO, State Expenditure Report
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Revenue is Improving, After Dramatic Fall
Source Fiscal Studies Program, Rockefeller
Institute of Government
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State Rating and Outlook Changes 2000-2004
Outlook Review Changes
Rating Changes
Source Moodys Investors Service
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• Background
• Revenue Volatility

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Revenue Volatility

• Non-base wage income
• Energy price impact
• Housing values impact
• Corporate volatile
• Sales tax stability?

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Stock Market Volatility
Source Economy.com, Standard Poors
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Revenue Growth May Not Match Economic Activity
Source Bureau of the Census, Bureau of Economic
Analysis, Federation of Tax Administrators
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• Spending Pressures

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Competing Fiscal Pressures

• Medicaid and Health Care
• K-12 Increases
• Demographic Changes
• Infrastructure
• Pensions

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State General Funds Today
Source NASBO 2003 State Expenditure Report
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State General Funds Medicaid has Doubled Just
Since 1987
Source NASBO 2003 State Expenditure Report
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• Medicaid A Budget Driver

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Medicaid Spending
Source NASBO, Fiscal Survey of States
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70 of Medicaid Spending on Benefits in 2005 is
for Elderly and Disabled
Elderly 9
Elderly 25
25
Disabled 16
70
Adults 27
Disabled 45
Children 48
Adults 12
Children 18
U.S. Total 288 billion in 2005
2005 U.S. Total 58.5 million

Source Vernon Smith, Health Management Associates
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• Outlook

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Strengths

• Employment/Consumer spending good, sustainable
• Revenue growth strong
• Credit ratings improving
• State liquidity good

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Risks

• Decreased federal funding growth
• Energy prices/inflation
• OPEB (Other Post Employment Benefits)
• Possible housing bubble
• Health care costs

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The Next Ten Years

• Cyclical Revenue
• Less Federal Monies
• Tough Competition for State General Funds
• Budget Drivers
• K-12
• Medicaid and Health Care

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www.nasbo.org