1. 0 OFFICE OF FINANCIAL MANAGEMENT Budget Outlook October 2, 2002 Office of Financial Management

2. 1 OFFICE OF FINANCIAL MANAGEMENT 1971197319751977197919811983198519871989199119931995199719992001 100 300 500 700 900 1100 1300 Percent of 1971 value Excluding tax base and rate changes, over the past 30 years General Fund revenue has grown more slowly than the economy. Revenues (excluding tax base and rate changes) The Economy (Personal Income) Based on growth in major General Fund tax sources. Based on constant rate, constant base assumptions, excluding legislative changes. 1971 = 100

3. 2 OFFICE OF FINANCIAL MANAGEMENT 100 300 500 700 900 1100 1300 197319751977197919811983198519871989199119931995199719992001 Percent of 1971 value Meanwhile, operating expenses grew at about the same pace as the economy. Expenditures from all operating funds Expenditures grew at 8.9 percent Personal Income grew at 8.8 percent. 1971 = 100 Operating Expenses Personal Income

4. 3 OFFICE OF FINANCIAL MANAGEMENT Budget pressures and personal income growth diverge… when specific population budget drivers, like the age 5-17 school population, grow much faster or slower than general population growth when specific inflation budget drivers, like “health care inflation,” grow much faster or slower than general inflation when utilization rates for government services change – e.g., change in the percent of women in child-bearing years on public assistance rolls when policy changes increase or reduce government services

5. 4 OFFICE OF FINANCIAL MANAGEMENT Enrollment in higher education follows demographic change. Demographic pressure in higher education is now strong. 100,000 200,000 300,000 400,000 500,000 600,000 0 19751980198519901995200020052010201520201970 Prime College-Age Population (Age 17-22) Public Higher Education Headcount Enrollment (Fall) Technical College Enrollment Included Beginning in 1993

6. 5 OFFICE OF FINANCIAL MANAGEMENT Policy choices can offset demographic pressures. 19801985199019952000 Public Assistance Caseload 0 50,000 100,000 150,000 200,000 250,000 0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 Females Age 18-34 FIP/ Family Support Act TANF (WorkFirst) Implemented Caseload

7. 6 OFFICE OF FINANCIAL MANAGEMENT From 1970 through 1988 the prison population tracked the population fairly closely. The Sentencing Reform Act reduced the prison population. Emphasis on drug crimes increased the prison population. 197019751980198519901995200020052010 0 400,000 800,000 1,200,000 Males 18-39 0 5,000 10,000 15,000 20,000 Inmates Drug Legislation Sentencing Reform Act Males 18-39 Inmates

8. 7 OFFICE OF FINANCIAL MANAGEMENT Demography is a major factor in K-12 enrollment. In the medium term demographic pressures in K-12 will be very low. 0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 19751980198519901995200020052010 Public School Enrollment Age 5-17 Population

9. 8 OFFICE OF FINANCIAL MANAGEMENT Medical Assistance Caseload 0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000 8,000,000 19701975198019851990199520002005201020152020 0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 Total Population Policy factors have been a driver of Medical Assistance caseloads. 1 July 1988: First Steps expansion for children and pregnant women. 1 3 August 1996-August 1997: unintentional drop in AFDC/TANF related component as a result of Welfare Reform. 3 2 July 1994: Expansion to 200% federal poverty level (FPL) for children. 2 4 August 1999: TANF redetermination and reinstatement. 4 Medical Assistance caseload 1981-2001 Growth: 168% Total Population 1981-2001 Growth: 41%

10. 9 OFFICE OF FINANCIAL MANAGEMENT Expected Percent Change in Medical Costs Compared with Selected Inflation Indicators

11. 10 OFFICE OF FINANCIAL MANAGEMENT Underlying Pressures Increase Health Care Costs Traditional inflation drives prices up to pay for the same levels of service while an aging population adds to demand. New procedures, tests, and technology New drug costs, new drugs, and new demand for drugs

12. 11 OFFICE OF FINANCIAL MANAGEMENT What Does It All Mean for 2003-05 and Beyond? Spending, Revenue, and Reserves Beginning with the 2002 Supplemental Budget

13. 12 OFFICE OF FINANCIAL MANAGEMENT $21.05B June Revenue Forecast *Maintenance Level plus selected other costs: e.g. higher estimate of health care inflation; salary cost-of-living increase for state employees, health benefits maintained at current level; tort costs. $22.7B September Revenue Forecast Preliminary 2003-05 GFS Budget Outlook Gap of $2.04 Billion $24.7 Billion ———— 2003-05 Preliminary Expenditure Estimate Maintenance Level Plus*

14. 13 OFFICE OF FINANCIAL MANAGEMENT $364 Million Ending Balances assuming 7/02 expenditure estimate and September revenue forecast (GFS and Emergency Reserve Fund) – $1.64 Billion Preliminary 2003-05 GFS Budget Outlook 2003-05 2001-03

15. 14 OFFICE OF FINANCIAL MANAGEMENT Revenue and Resource Assumptions $2.3 billion diversion to Student Achievement Fund through 05-07 under Initiative 728 5.0% per year underlying revenue growth after 03-05 (0.5% less than past decade Official September 2002 Economic and Revenue Forecast for 2001-03 Biennium and 2003-05 Biennium 5.8% per year personal income growth after 03-05 (slightly less than past decade) Based on 0.85 elasticity, compared with 0.91 over past decade FY 2004 – FY 2007

16. 15 OFFICE OF FINANCIAL MANAGEMENT Scenario 1Scenario 2 Health Care Costs Drive Spending Levels Employee COLAs: Seattle CPI – 2.3% XX Caseload growth – based on official caseload forecasts where available OR growth in associated population group XX General inflation (goods and services): IPD – 2.2% XX Higher education maintains its 01-03 participation rate. X X No other policy adds are included. X X *Down from 15% in 01-03 Annual growth in health care costs IPD (2.2%) 12%* (Builds on 2001-03 Supplemental Budget as passed in March 2002 and Governor’s vetoes.)

17. 16 OFFICE OF FINANCIAL MANAGEMENT Scenario 1: All programs grow based on caseload/specific population growth and general inflation. Revenue grows at 85% of personal income growth. Total Revenues & Resources $10,533$11,300 $11,161$11,539$12,106$12,698 Total Expenditures $11,226$11,222 $11,755$12,272$12,805$13,338 DIFFERENCE ($693)$78 ($594)($733)($699)($640) *Includes statutorily required transfers to other funds. TOTAL RESERVES/DEFICIT* $315$364 ($229)($963)($1,661)($2,302) 200220032004200520062007 PROJECTION In Millions

18. 17 OFFICE OF FINANCIAL MANAGEMENT Scenario 2: Same as Scenario 1 except health care annual cost per case growth is 12%. Total Revenues & Resources $10,533$11,300 $11,161$11,539$12,106$12,698 Total Expenditures $11,226$11,222 $11,973$12,736$13,552$14,413 DIFFERENCE ($693)$78 ($812)($1,197)($1,446)($1,715) *Includes statutorily required transfers to other funds. TOTAL RESERVES/DEFICIT* $315$364 ($447)($1,645)($3,090)($4,805) 200220032004200520062007 PROJECTION In Millions