Presentation on theme: "State Budget Outlook “The Breach” Mike Shealy / Craig Parks"— Presentation transcript:
1 State Budget Outlook “The Breach” Mike Shealy / Craig Parks SC Senate Finance Committee
2 SC State Budget (expenditures in FY07-08) General Funds $7.04 BillionFederal Funds $6.21 BillionOther Funds $6.95 Billion TOTAL: $20.20 Billion SC Personal Income $140 Billion(Budget is about 14% of economy)
3 Top 10 Statewide Federal/Other Fund Revenue Sources Fiscal Years 1994-95 and 2007-08
4 Breach Pronunciation: \brēch\ Function: noun Etymology: Middle English breche, from Old English brǣc act of breaking; akin to Old English brecan to break Date: before 12th century 1: infraction or violation of a law, obligation, tie, or standard 2: a broken, ruptured, or torn condition or area b: a gap (as in a wall) made by battering 3: a break in accustomed friendly relations b: a temporary gap in continuity
5 Unusual Circumstances Over the Past 12 Months General Assembly returns October 20-24, 2008 to pass Recission Bill in 5 days (-$488M)HR1 American Recovery & Reinvestment Act, Budget Stabilization Fund (Supreme Court Order of 6/4/09)Senate Concurrence to House Amendment on H3560, the General Appropriation Bill on 5/13/09 (no Budget Conference Committee)
7 General Fund Revenue Collections Average Annual Percent ChangeFY FY 2010198019901,598,097,6353,294,770,9877.5%20005,006,736,9294.3%20105,201,191,3710.4%200220074,929,959,8596,658,502,9086.2%-7.9%
8 From the peak of General Fund Revenue collections in FY through FY (forecast) Collections have dropped $1.457 Billion or 21.9%.
9 What were we thinking?Incorrect Assumption: Revenue growth from FY04-05 through FY06-07 was recovery from “9/11” recession.Reality: The revenue growth was a bubble mirroring the economic bubble caused partially by mortgage financing.
10 Assumptions of Bubbles Economic: Housing prices will always increase.General Fund: Revenues will always increase.
11 Summary of Revenue Shortfall FY 2008-09 FY Appropriation Act Revenue Estimate (Net of Tax Relief Trust Fund)6,718,657,837BEA Forecast Reduction July 21, 2008(140,000,000)BEA Forecast Reduction October 8, 2008(414,000,000)BEA Forecast Reduction November 7, 2008(135,100,507)BEA Forecast Reduction December 10, 2008(230,000,000)BEA Forecast Reduction March 11, 2009(64,000,000)BEA Forecast Reduction June 11, 2009(92,000,000)Total BEA Revenue Forecast Reductions(1,075,100,507)Additional Revenue Shortfall (FM13)(129,784,560)Open-Ended AppropriationsHomestead Exemption Fund Shortfall(52,995,831)DOC & DJJ Deficits (Recognized by B&C Board)(51,795,768)Other Open-Ended Accounts(4,512,014)Total Open-Ended Appropriations(109,303,613)Total Year End General Fund Shortfall(1,314,188,680)FY General Assembly and Budget & Control Board ActionsB&CB Action 8/08/08--Reduce Capital Reserve Fund133,170,058FY Appropriation Rescission Act- Targeted Agency Reductions-Oct 2008487,906,416B&CB Action 12/11/08--7% Across the Board Agency Reductions383,475,665B&CB Action March 18--2% Across the Board Agency Reductions101,894,963Total General Assembly and B&C Board Actions1,106,447,102Agency Lapsed Funds and Sustained Vetoes1,428,054Remaining Year End General Fund Shortfall(206,313,524)General Reserve Fund Balance Applied to Shortfall108,096,907FY Year End Deficit Remaining After Reserve Funds Applied(98,216,617)
12 Summary of Revenue Shortfall FY 2009-10 FY Appropriation Act Revenue Estimate (Net of Tax Relief Trust Fund)5,529,491,371BEA Forecast Reduction June 11, 2009(120,000,000)BEA Forecast Reduction July 16, 2009(208,300,000)Total BEA Reductions to Date(328,300,000)FY General Assembly and Budget Control Board ActionsB&CB Action 6/29/09--Reduce Capital Reserve Fund (CRF) effective7/1/09120,000,000B&CB Action 9/3/09--Apply Remaining Balance of CRF ($7.8m) and4.04% Across the Board Agency Reductions ($200.4m)208,300,000Total General Assembly and B&C Board Actions328,300,000FY Estimated Year End Deficit Remaining To Date
13 How Did We Get Here? The National Recession The Structure of Our State Revenue SystemTaxation and Spending Policies
14 The National Recession and Its Effects on the State Economy
20 Comparison of Gross and Net Taxable Sales FY 1999 – FY 2008FY 1999FY 2008% ChangeGross Sales Amount94,435,505,424146,328,024,47455%Net Taxable Sales Amount45,199,250,86659,660,508,89532%Percentage of Net Taxable Sales47.9%40.8%Source: Department of Revenue, Annual Report.
21 Consumer Expenditure Survey 1984 & 2007 Percent Distribution of Total Annual ExpendituresBy Major CategoryCategory19842007DifferenceHousing30.4%34.1%3.7%Materials TaxedDocumentary Stamp TaxTransportation19.6%17.6%- 2.0%Per Unit Gas Tax, $300 Cap on AutosFood15.0%12.4%- 2.6%Restaurant Food TaxedGroceries Not TaxedPersonal insurance and pensions8.6%10.8%2.2%Not TaxedHealthcare4.8%5.7%0.9%Entertainment5.4%0.6%Admissions TaxApparel and services6.0%3.8%- 2.2%Apparel TaxedCash Contributions3.2%0.5%Education1.4%1.9%Miscellaneous2.0%1.6%- 0.4%TaxedPersonal care products and services1.3%1.2%- 0.1%Products Taxed, Services Not TaxedAlcoholic beveragesTaxed on TaxTobacco products and smoking supplies1.0%0.7%- 0.3%Taxed on Tax; SC is the Lowest Per UnitReading0.2%Books Mostly TaxedNewspapers Not TaxedTotal100.0%Source: Bureau of Labor Statistics
22 Spending (and Tax) Cuts Tax Relief in South CarolinaNetted Over $500M in the last 4 yearsRelief passed by the General Assembly since 2005 includes:Property tax relief for homeowners – “The Swap” $585 millionTotal elimination of the state’s “grocery tax”. $354 millionElimination of the state’s bottom income tax bracket. $86 millionReduction of the tax on small business from a top marginal rate of 7% to a flat rate of 5% $129 millionProperty Tax – Almost $500M –Bottom bracket - $86M - $66 per returnChamber’s “Compositeness Agenda” – Questions Prop Tax Swap – want to revisitSupport Comprehensive study of tax system – will discuss at end.Of the 41 states that impose an income tax, SC’s avg. state tax liability per filer ($1,428) is lower than 33 other states - only 8 states have a lower avg. tax burden than SC.SC’s “starting point” for taxation is “federal taxable income”, which is typically a lower base (and therefore advantageous to taxpayers) than “federal adjusted gross income”, which most other states use. In addition, SC has more generous deductions and personal exemptions than many other states, lowering the effective tax rate here.Small Business fairs well in SC too. According to the Small Business and Entrepreneurship Council’s 2007 “Small Business Survival Guide”, SC ranked as the 8th “friendliest” state to small business - and their analysis doesn’t appear to factor the two recent significant changes to our state’s small business tax structure (the small business tax cut (from 7% marginal to 5% flat - their choice) and allowing small business better access to “jobs tax credits”)).
24 The SC Taxation Realignment Commission (aka “TRAC”) http“//www Sponsored by Sen. Leatherman and OthersModeled after the federal Base Realignment Commission11 members (credentialed), No Legislators & Lobbyist ProtocolsExhaustive Study (State and Local including exemptions)Look for “adequacy, equity and efficiency” (aka, “Broad Base / Low Rates”)ie, 3.4% vs. 6.0% sales tax rate, etc.“Modernize and Stabilize” the systemRecommend legislative changes to Money Committees6 meetings scheduled through January ‘10 – initial recommendations due by March ‘10
26 H.R.1 of 2009 American Recovery and Reinvestment Act of 2009 $ Billion or about $2600 per capitaSouth Carolina's Portion of Stimulus FundsTotal $7.86 BillionTax Cuts $2.86 BillionTotal Spending in SC $5 Billion**(includes Federal spending on Federal installations)Of the $5 Billion spent in SC:$3.4 Billion will be received by cognizant State agencies through the state budget. (The $3.4 billion includes allocations received by state agencies and subsequently distributed to local governments, non-profits, etc)
27 H.R.1 of 2009 American Recovery and Reinvestment Act of 2009 ESTIMATED ALLOCATIONS BY MAJOR CATEGORY:BUDGET STABILIZATION FUND $ 694,060,272MEDICAID * $ 876,040,898TRANSPORTATION $ 504,200,000WATER AND SEWER $ ,755,697ENERGY $ 111,700,000HEALTH AND HUMAN SERVICES $ 441,842,913HOUSING $ ,600,000EDUCATION $ 406,064,498STATE AND LOCAL LAW ENFORCEMENT $ ,484,716WORKFORCE/EMPLOYMENT SERVICES $ 168,620,882TOTAL ESTIMATED SC ALLOCATIONS $3,382,369,876Percentage21%26%15%2%3%13%12%1%5%100%Medicaid Distribution – Temporary increase in the Federal Medical Assistance Percentage (FMAP). Approximately 9% increase in Federal share of Medicaid reimbursements from 70% to 79%. Increased FMAP in effect for 9 quarters from July 2008 through December 2010.* ARRA Medicaid is a temporary increase in the Federal Medical Assistance Percentage (FMAP). Approximately 9% increase in Federal share of Medicaid reimbursements from 70% to 79%. Increased FMAP in effect for 9 quarters from July 2008 through December 2010.
28 H.R.1 of 2009 American Recovery and Reinvestment Act of 2009 BUDGET STABILIZATION FUNDDistribution Requirements:82% must be allocated to K-12 Higher Education and 18% may be allocated for other government purposes.FY AllocationsFundingPercentageState Department of Education$184,992,33953%Colleges and Universities$ 99,922,33929%Public Safety$ 46,120,00013%Other Government Services$ 16,969,4855%TOTAL FY$348,004,163100%
29 The Outlook for the Next Several Years and Beyond
30 Possible Annualizations Needed in FY 2010-11 & FY 2011-12 Based on FY Appropriation Act (H.3560) with Actual FY RevenuesThe Annualizations list is the State Budget Office's attempt to identify items that may be funding issues in the next fiscal year. The list is a subjective interpretation of items funded in the Appropriation Bill and is not intended or to be construed as a binding, legal document.The Appropriation Act uses A.R.R.A. funding from the Federal Medical Assistance Percentage (FMAP) increases and funding of $348 million from the Fiscal Stabilization Fund over two state fiscal years. It is assumed that the FMAP increases and the remaining $346 million from the Stabilization Fund will be used in Fiscal Year for the same purposes. Therefore, the bulk of the annualizations from the A.R.R.A. expenditures will occur in Fiscal YearFYFYStatewide:Formula Driven by State, Federal, & Constitutional Mandates:FY General Fund Deficit - Repay the General Deposit Account98,216,617General Reserve Fund55,441,72836,670,069Capital Reserve Fund(16,964,433)(6,859,628)Local Government Fund19,255,184(15,434,163)(Restore to statutory formula)Homestead Exemption Shortfall87,133,74591,632,299Recurring Appropriations Contained in Part 1A Supported w/ Nonrecurring Revenue149,514,202Subtotal - Statewide Items392,597,043106,008,577Subtotal - State Agencies18,135,560578,221,604ANNUALIZATION OF FY410,732,603684,230,181
31 Education Finance Act Formula Funding Requirement
32 Well, given those TRENDS - name severely limited and declining “operational” support for Higher Ed - coupled with a corresponding increase in COST OF ATTENDANCE (i.e., tuition) - what you’d HOPE to see - BEST CASE is INCREASED levels of effort by the State in terms of “aid” provided DIRECTLY to Students - -In either the form of MERIT based aid or NEED based aid, or a combination of both.And fortunately, as this table illustrates - we have seen JUST THAT.And NOW would be a good time for me to pass out a nice BROCHURE from CHE that describes in detail each type of “aid” that is available, the amount of the award, and what students must do to “qualify”…what you WON’T see on this brochure is reference to the Tuition Grants program - just know that that is the state’s NEED BASED aid for PRIVATE colleges…Before I go any further, let me say generally, what you probably already know - is that there are 3 PRIMARY MERIT based awards - LIFE - which we’ll spend most of our time talking about - PALMETTO FELLOWS and HOPE.Then there’s the LTA - which you know was created at the Lottery’s inception and has been a tremendous asset to our state’s Tech and 2 year students…Then, again - there’s need based aid in 2 categories, 1 for public colleges and 1 for private colleges - i.e., the Tuition Grants program - What I WON’T spend time talking about - but many people are beginning the discussion, is whether or not we have the appropriate MIX of student aid, i.e., the right “balance” of MERIT vs. NEED…that is up for debate.Bottom line - what this chart shows is both IMPRESSIVE and TROUBLING at the same time - Impressive, b/c student aid has increased more than 400% over the last decade - DISTURBING, b/c, now, student aid comprises almost 40% of all Higher Ed funding - and that figure is up from just under 10% 10 yrs ago…The point is - unless we can either 1) REVERSE the trend relative to the dramatic cuts in direct institutional funding or 2) INCREASE not just the funding for scholarships and grants - not just to cover growth - but increase the ACTUAL LEVEL of the AWARD - our colleges AND our students are in from some tough days ahead -- and let me be candid - I believe they are in for some tough days ahead - LET ME SHOW YOU WHY…
33 Let’s take a look for a moment - and look at the “VALUE” of LIFE - and in doing so, what you’ll immediately note - if you hadn’t before - is a SIGNIFICANT ISSUE and its’ a COST - not being born by the STATE - we’ll get back to that in a minute - but it’s a COST being born by students and their families…Simply put - despite the fact that appropriations for LIFE are at record levels - and continue to grow as demand has grown the ACTUAL VALUE of the award has actually diminished significantly over time…In fact, and you can see it clearly on this chart the “value” of LIFE is actually worth LESS today than it was 10 years ago and that’s despite the award having actually increased by $3000 over the last decade…Bottom line, the growth in tuition which as we’ve seen is directly correlated with the decline in state operating funding has more than “eclipsed” the growth in scholarship award…And as tuition continues to increase - that trend will only continue…This also raises a legitimate policy question that I’ve at least been “alluding” to and that is, is it better policy to subsidize, or in this case, more adequately fund, the institutions directly, or is it sufficient to subsidize the student -via scholarships and grants - as we’ve seen the trend become in SC??? Well, that too, is an answer for another day, but what I’m presenting may at least give you “pause” as you contemplate that question…
34 First, let me say - that our lottery is one of the BEST performing lotteries in the country - but as ALL lotteries do, they reach a peak performance - they MATURE, if you will…the challenge becomes maintaining interest and therefore maintaining a stable and predictable level of revenue…and that’s what our lottery has done…but make no mistake, gone are the days of $322 Million transfers…you can instead see, that we’ve leveled off at between $250M and $260M in revenue each year…but what that means is, items formerly funded by the lottery either won’t be - or will have to be “shifted” to the General Fund…the challenge is, there’s no money in the General Fund…Let me close with this handout - I believe it will succinctly encapsulate what the General Assembly faces as early as next year related to all these issues I’ve been addressing…
35 Lottery & Scholarship Outlook FY2010-11 Current Lottery Appropriations: $255.0M (FY09-10)Endowed Chairs Statutory Mandate: $30.0M (SC )Scholarship (annualize surplus): $5.8MScholarship Growth (demand): $12.0M (*Est. for FY11)Restoration of Technology Funds: $5.5M (“Excess U.P”. in FY10)Unobligated FY08-09 Carry forward: $2.1M (*Est. for FY11)Total Funding Required: = $306.2MVs.Lottery Revenue to Appropriate: $255.0M (Est. for FY11)Resulting Lottery Shortfall/Deficit for FY10-11: $51.2 Million
36 Policy QuestionsWill Policy Makers put EFA Restoration at the Front of the Line?How Much More Funding Will Be Required to Underwrite Federal Health Insurance Changes?Have We Reached a Bottom Threshold on Funding for Corrections? DJJ?How Much More Will Policy Makers Tolerate Fee Increases (Tuition, License Fees, Ticket Surcharges) ?
37 The Breach1: infraction or violation of a law, obligation, tie, or standard State Government will be forced to change or ignore funding statutes. 2: a broken, ruptured, or torn condition or area b: a gap (as in a wall) made by battering The state budget’s structural deficit will become more pronounced over time. Changes to address the structural deficit will be incremental and very difficult to attain. 3: a break in accustomed friendly relations b: a temporary gap in continuity State government will not be able to afford continuing business as usual so benefits currently provided to citizens will diminish. Citizens will become even more angry.