State of the States: STATE FISCAL OUTLOOK Middle Management Conference NASACT April 20, 2010 Scott Pattison Executive Director National Association of State Budget Officers 444 North Capitol Street, NW, Suite 642 • Washington, DC 20001 • (202) 624-5382 • www.nasbo.org

State and Local Governments Play a Large Role in Economy State and local governments account for over 14% of total U.S. employment State and local governments contribute about 12% to national GDP Over $2 trillion in operating and capital expenditures in 2008 Source: Bureau of Labor Statistics; Government Accountability Office

State Governments: Tough Fiscal Times Should Start to Improve Recession impacts Unemployment Slow improvement in housing sector Lower tax revenue for states should begin to improve Recovery Act has helped Tough choices Source: Moody’s Investors Services, Annual Sector Outlook for U.S. State Governments, February 2010

New Leadership: 23 Open Governors’ Seats

Current Fiscal Situation: Indicators

Negative Spending in Both FY 2009 and FY 2010 * The New Normal? *32-year historical average rate of growth is 5.6 percent **Fiscal 10 numbers are appropriated Source: NASBO Fall 2009 Fiscal Survey of States

Balances Declining In Billions *2009 totals without AK & TX **32-year historical average is 5.5% Source: NASBO Fall 2009 Fiscal Survey

Budget Cuts at Record Levels Source: NASBO Fall 2009 Fiscal Survey of States

State Revenue Down 4.1% in 4th quarter; 5th Straight Quarter Source: Fiscal Studies Program, Rockefeller Institute of Government; U.S. Census Bureau

State Revenue Impacted by Economic Conditions State revenue has become more sensitive to economic conditions during this past decade The change is especially noticeable with income tax Reasons for increased volatility: Reliant on upper income taxpayers Capital gains and investment income have become increasingly important Most states unwilling to raise taxes Source:Leslie McGranahan & Richard Mattoon, Federal Reserve Bank of Chicago

So far…State Bond Ratings Mostly Stable 44 have a stable outlook, 6 negative Recent Actions: 2 states have had ratings lowered (AZ, IL) 1 state raised (LA) Source: Standard & Poor’s, 12/28/09

Ratings Less rating downgrades this recession than 9/11 recession 14 Moody’s rating downgrades in 2001-2003 4 in 2001, 2 in 2002, 8 in 2003 7 rating downgrades in 2007-2010 1 in 2007, 0 in 2008, 6 in 2009, 0 in 2010 One Reason: This downturn slower and deeper Source: Moody’s Investors Services

Future Implications

CA general fund spending declining at least $18B in 2 years Source: December 2009 Fiscal Survey of States

Example of Michigan May 2009 estimates Source: Michigan Office of Revenue and Tax Analysis, Dept. of Treasury, 7/31/09

Volatility: The Example of Medicaid Spending and Enrollment 16

The Cliff… Source: Stateline.org

Who gets out of this first Who gets out of this first? Historical Boost to State Earnings and Employment due to Oil & Natural Gas Source: Federal Reserve Bank of Kansas City, Economic Review, Fourth Quarter 2009

State Fiscal Outlook Austere state budgets for at least the next several years Tough competition for state general funds Demand for performance, transparency and results Opportunity for reform

Rethinking State Government “How much a state spends often matters less than how it spends.” The Economist, January 23, 2010 Strategic thinking: should certain parts of government continue to get general funds - what’s the role? Peter Drucker, 1995

www.nasbo.org Scott Pattison (202) 624-8804 spattison@nasbo.org