1. The State Fiscal Outlook University of Denver Strategic Issues Panel on the Future of State Government November 4, 2010 William T. Pound Executive Director, NCSL

2. Overview  State revenue performance is improving.  Sizeable budget gaps loom in many states.  States have reported a total estimated budget gap of $537.2 billion (FY 2008 through FY 2013 est.).

3. Year-Over-Year Percent Real Change in Major Taxes Source: The Nelson A. Rockefeller Institute of Government. State Revenue Report, August 30, 2010.

4. AK HI CA OR WA ID NV MT WY UT CO AZ NM ND SD NE KS OK TX MN IA MO AR LA WI MI IL IN OH KY MS AL FL GA SC NC VA WV PA NY ME VT NH MA RI CT NJ DE MD Projected FY 2010 Revenues (Compared to FY 2009 Collections) Source: NCSL survey of state legislative fiscal offices, 2009. Higher n = 9 Flat n = 1 Lower n = 40 Unknown n = 1 Puerto Rico TN

5. AK HI CA OR WA ID NV MT WY UT CO AZ NM ND SD NE KS OK TX MN IA MO AR LA WI MI IL IN OH KY TN MS AL FL GA SC NC VA WV PA NY ME VT NH MA RI CT NJ DE MD Projected FY 2011 Revenues (Compared to Estimated FY 2010 Collections) Puerto Rico Source: NCSL survey of state legislative fiscal offices, March 2010 Higher n = 42 Flat n = 4 Lower n = 5

6. FY 2011 Total Tax Forecast (Compared to FY 2010 Collections) Source: NCSL survey of state legislative fiscal offices, Summer 2010 Not available or no response: South Dakota, Utah and West Virginia.

7. FY 2011 Personal Income Tax Forecast (Compared to FY 2010 Collections) N/A: 7 states do not levy a personal income tax. NH and TN have limited individual income taxes. No Response: Hawaii and Utah. Source: NCSL survey of state legislative fiscal offices, Summer 2010

8. FY 2011 Sales and Use Tax Forecast (Compared to FY 2010 Collections) N/A: 5 states do not levy a sales tax. No Response: Hawaii and Utah. Source: NCSL survey of state legislative fiscal offices, Summer 2010

9. FY 2011 Corporate Income Tax Forecast (Compared to FY 2010 Collections) N/A: 4 states do not have a corporate income tax No Response: 4 states. Source: NCSL survey of state legislative fiscal offices, Summer 2010

10. Long-Term Tax Forecasts (Projected Total Tax Collection Growth Rate) Forecast Unavailable: FY 2012= 21 states; FY 2013=24 states; FY 2014 =29 states. No Response: California. Source: NCSL survey of state legislative fiscal offices, Summer 2010

11. Peak in General Fund Revenue Collections Source: NCSL survey of legislative fiscal offices, November 2009.

12. Projected Return to Peak Revenue Collections N/A: North Dakota Not in the current forecast horizon: 19 states No Response: 2 states Source: NCSL survey of state legislative fiscal offices, Summer 2010

13. State Budget Gaps FY 2002-FY 2013 (projected) No estimate Amount After Fiscal Year Began Amount Before Budget Adoption Projected Amount Source: NCSL survey of state legislative fiscal offices, various years.

14. State Actions to Close Budget Gaps  Budget cuts: All programs & services subject to cuts  Tax increases  Other revenue increases  Federal stimulus funds  Wide array of other actions, many one-time in nature  Renewed focus on streamlining and efficiency

15. Digging for Dimes In Bull Semen and Tacos IDEAS THAT PREVAILED Colorado lawmakers, aiming to recoup $100 million, removed several tax exemptions and credits, including the exemptions restaurants received for the cost of purchasing condiments and take-out containers; tax breaks ranchers got when buying pesticides and bull semen; and incentives bulk mailers enjoyed for printing coupon booklets. Wisconsin adopted “Taco Tuesday” at all state prisons, saving 10 cents a meal. Missouri clarified that yoga and Pilates classes are recreational rather than spiritual services and subject to a sales tax. The Wisconsin Supreme Court determined symphony tickets are subject to the sales tax since a concert is more entertainment than education. The Oklahoma State Penitentiary cut expenses for its annual prisoner rodeo to save $120,000. IDEAS THAT STALLED Tennessee lawmakers defeated a proposal to tax complimentary breakfasts offered by hotels. The Illinois Senate voted against a proposal to eliminate free bus rides for seniors. A proposal to sell the state’s executive air fleet for $22 million also failed. Mississippi defeated a proposal to allow some advertisements on school buses. Illinois’ governor backed off on a proposal to collect sales taxes on Internet downloads. California considered the sale of digital advertising space on license plates. Source: State Legislatures, September, 2010.

16. Net State Tax Changes by Year of Enactment Source: NCSL survey of legislative fiscal offices, various years. *FY 2010 figures are preliminary

17. Net Tax Changes by Type of Tax 2009 & 2010 2009 ($28.6 Billion) 2010* ($4.0 Billion) Personal Income Tax: a decline of $629 million. Source: NCSL survey of legislative fiscal offices, 2009 & 2010 *FY 2010 figures are preliminary

18. The State Budget Landscape is Mixed  Arizona: The fiscal situation appears to be stabilizing.  Maine: A small revenue surplus will begin to replenish reserves depleted during the last two years.  Ohio: In recent months year-over-year comparisons for major taxes have turned positive.

19. The State Budget Landscape is Mixed  Montana: The revenue decline projected in February 2010 has not declined further; however, this does not change the fact that the next Legislature will have a significant task developing the biennial budget.  Tennessee: Recent signs indicate revenues are beginning to stabilize, but state economic news continues to give mixed signals that recovery is not yet firmly underway.

20. The State Budget Landscape is Mixed  Colorado: The budget shortfall for FY 2012 could be as high as $1 billion (14 percent).  California: The state's fiscal situation will depend on whether the legislature and governor reach agreement on long-term fiscal reform or restructuring.  Illinois: For many reasons, both financial and political, the fiscal situation is tenuous at best.

21. Fiscal Ballot Measures 2010 Referendum Initiative Both

22. A Few Measures to Watch  Arizona: Propositions 301 & 302 --Transfers Land Conservation Fund to the general fund --Sweeps First Things First Fund to the general fund  California: Propositions 19, 21, 22, 24, 25 & 26 --Legalizes & taxes marijuana --Imposes vehicle license surcharges --Limits states access to transportation funds --Repeals corporate tax breaks --Moves from supermajority to simple majority to pass budget --Requires 2/3 vote for fee increases, etc.

23. A Few Measures to Watch  Colorado: Amend. 60 & 61, Prop. 101 --Reduces property taxes --Prohibits state borrowing --Reduces the personal income tax rate  Massachusetts: Question 3 --Cuts sales tax rate  Washington: Initiative 1098 & 1107 --Creates a personal income tax for high earners --Repeals taxes on soda, bottled water and candy

24. Key Concerns Looking Ahead  Replacing federal stimulus funds  Impact of further budget cuts  Mounting spending pressures  Length of time before revenues rebound  Feasibility of raising more revenues  New political landscape in states

25. Impact of ARRA Funds on State Budgets Percentage Point Increase in Spending Attributable to ARRA Funds Number of States FY 2009FY 2010 0.1 - 2.9 159 3.0 - 5.9 159 6.0 - 8.9 314 > 9.0 16 States Moving from Negative to Positive Spending Change 912 N/A or N/R: FY 2009 = 17 states; FY 2010 = 13 states Source: NCSL survey of state legislative fiscal offices, 2009.

26. Focus of State Government Reform  The easy to moderate cuts have been made: -- Real estate sales -- Vehicle fleet reductions -- Furloughs/layoffs, across the board cuts, etc.  Further cuts ahead will require tough policy decisions: -- Corrections (close prisons, release geriatric inmates, reform parole) -- Public employee benefits must be brought in line with private sector -- Infrastructure investments will require new user fees

27. Cost Reduction  Healthcare costs are unsustainable for both public and private sector.  By 2014, states will oversee 130 million people through Medicaid and the Exchanges.  States will be forced to be the "agents of change" in health reform.  States will need to be much more aggressive in going after quality and price.

28. What States Will Need to Do  Focus on the Exchange decision  Create a comprehensive all payers database ("what you don't know will hurt you")  Convene stakeholders (providers, plans, consumers and business) around data, quality and costs  Use all existing policy levers and create new ones if necessary to tackle costs  Communicate with the public

29. What is Likely to Happen?  More pushback from the states -- ARRA requirements/mandates  Growing interest in revenue increases in states  More structural deficits in states post ARRA  State government gets smaller?  Federal Action--or inaction will drive state changes  Adjustments driven by change in state economies and resources

30. Change is Occurring  K-12 Education  Evaluations  Testing  Standards  Charters  "Race to the Top"  Higher Education  Relationships changing  Decline in state funding  Emphasis on financial aid to students, not institutions

31. Change is Occurring  Corrections  Taxes -- Elimination of tax breaks -- Aversion to tax increases  Transportation and Infrastructure -- More public-private-partnerships  Health Care  Retirement Systems -- Increased member contributions -- Reduced benefits

32. Conclusion  State revenues are starting to show growth.  Many forecasts offer little room for error.  States face at least two more years of budget gaps.  Few states have concrete plans to address the end of federal stimulus funding.  The new political landscape will shape state actions to deal with budget problems.

33. www.ncsl.org For more information