1. 2012 Fall Leadership Summit October 2, 2012 Grant Gibson Senate Finance Committee

2. European and American Debt Crises Signal an Era of Austerity Michael Gerson, Washington Post, May 19, 2010 “America is about to enter its own period of austerity, which likely will be the dominant political reality for the next decade. The new game will have few winners and many losers. If the federal government takes spending reductions seriously, the first wave of austerity would hit the states and public employees.” 2

3. Unsustainable and the Inevitable?: Take Your Pick… 3 “If the fiscal policy currently in place are continued in coming years, the revenues collected by the federal government will fall far short of federal spending. That gap will grow over time as the aging of the population and the rising cost of health care continue to boost federal spending under current policies. Therefore, putting the budget on a sustainable path will require significant changes in spending policies, tax policies, or both.” Source: Congressional Budget Office: “Economic Effects of Reducing the Fiscal Restraint That is Scheduled to Occur in 2013.” May 2012

4. SC State Budget FY 11-12 FY 12-13 (appropriations) (appropriations) General Funds $5.7 Billion $6.1 Billion Federal Funds $8.4 Billion $8.7 Billion Other Funds $8.1 Billion $8.2 Billion TOTAL: $22.2 Billion $23.0 Billion* *3.6% growth SC Personal Income $159.8 Billion (Budget is about 14% or 1/7th of economy) 4

5. Where is the Money Spent? FY 2012-13 Appropriations 5 Source: Office of State Budget

6. Where is the Money Spent? FY 2010-11 Expenditures 6 Source: Office of State Budget

7. Top 10 Statewide Federal Revenue Sources Fiscal Years 1994-95 and 2010-11 Source: Office of State Budget, August 2012 7

8. Top 10 Statewide Other Revenue Sources Fiscal Years 1994-95 and 2010-11 Source: Office of State Budget, August 2012 8

9. “Conflicted” Views In a Gallup Poll taken during the last recession – and as state’s were struggling as to how to balance their budgets (raise taxes or cut spending – many did both) – 79% of Americans favored cutting spending, while just 13% favored raising taxes. (Gallup, July 1, 2003) 9

10. “Conflicted” (cont.)… But what looks good in theory, loses “…its luster when it comes to specifics.” (Gallup) 2011 (Pew) UPDATE – If the state needs to balance its budget, it should decrease… K-12 education79% “No” Health care services76% “No” 10

11. Cumulative General Fund Changes July 2008 - July 2012 11 Source: Office of State Budget

12. A National Trend 12

13. 13

14. 14

15. 15

16. Local Government Fund 16

17. 17

18. A Return to Peak…Really? When? 2012 - 15 states (SC - no) 2013 - 21 states (SC - no) 2014 - 26 states (SC - no) 2015 - 29 states (SC – no) 2016 - 33 states (SC - YES*) *Based on the BEA’s long-range General Fund growth forecast through FY2014-15, SC’s projected “return to peak” is 2016. That equates to almost 10 years between peaks, the longest in the state’s modern history. Source: NCSL “State Budget Update: Spring 2012” and BEA data 18

19. Fiscal Year 2012-13 Budget: H4813 General Appropriations Bill & H4814 Capital Reserve Fund Conference Committee 19

20. Fiscal Year 2012-13 Appropriations 20

21. Fiscal Year 2012-13 Appropriations (Continued) 21

22. 22

23. 23 Note: Based on personal income growth rate – FY12, 4.0%; FY13, 3.5%. Source: Board of Economic Advisors, November 10, 2011.

24. Forecasted General Fund Revenue Growth is roughly $180 Million. The “Annualization List” is roughly $180 Million. 24 Fiscal Year 2013-14 Budget Outlook

25. General Fund Revenue Forecast Tepid Growth FY 2011-12 was: 5.2% growth (actual) FY 2012-13 is:3.8% growth (estimate)* BEA’s Long Range Forecast indicates** FY2013-14:2.8% growth (estimate) FY2014-15:3.5% growth (estimate) *BEA 5/8/12 *BEA 11/10/11 25

26. 1.) The Reason for Tepid Growth 26 Updated May 2011. Sources US Bureau of Economic Analysis, Bureau of Labor Statistics, Census Bureau

27. Pre & Post Recession Where we Stand 5 Years Later 27

28. Comparison of Gross and Net Taxable Sales FY 2000 – FY 2012 The Base is Shrinking. 28 FY 2000FY 2012 Gross Sales Amount94,435,505,424156,213,293,6064.3%/yr. Net Taxable Sales Amount45,199,250,86654,309,990,1951.5%/yr. Percentage of Net Taxable Sales47.9%34.8% FY 2011FY 2012 Gross Sales Amount142,299,773,124156,213,293,606 Net Taxable Sales Amount51,890,792,00254,309,990,195 Percentage of Net Taxable Sales36.5%34.8% Source: Department of Revenue, Annual Reports. +9.8% +4.7%

29. Retail Sales: Services = Stability in a Volatile World? 29

30. 2.) Most Federal Funding will diminish as entitlements crowd out other federal programs. 30

31. 31 Source: CBO

32. 32

33. 3.) The trend to other funds (fee for service) will likely grow. 33

34. Fiscal Cliff (No Congressional Action) 34 More than $600 billion of tax increases and spending cuts will take effect automatically January 1 st This is equal to 4% of GDP The CBO, expects falling over fiscal cliff will push the U.S. into recession in the first half of 2013 (-1.3%) Source: Congressional Budget Office: “Economic Effects of Reducing the Fiscal Restraint That is Scheduled to Occur in 2013.” May 2012

35. 35 Two-thirds ($399B) of fiscal cliff is tax increases: 1.Bush tax cuts and 2009 ARRA: $221 billion in 2013 2.2% payroll tax cut: $95 billion 3.Business expansion & other corporate: $65 billion 4.Tax increases to finance health care act: $18 billion Spending cuts and Other totaling $208B: 1.Defense and discretionary spending :$65 billion 2.Unemployment benefits reduction :$26 billion 3.Physicians Medicare payment rates reductions: $11 billion 4.Other expiring policies: $105 billion Fiscal Cliff: $607 Billion on Auto Pilot? Source: Congressional Budget Office: “Economic Effects of Reducing the Fiscal Restraint That is Scheduled to Occur in 2013.” May 2012

36. The Federal Budget Crisis –No One’s Immune 36 The federal budget crisis will have serious spillover effects on state and local governments, and state actions will have spillover effects on local governments: – Cuts in federal grant dollars, lower spending on federal installations, procurement, and infrastructure, and potential changes to federal tax code all threaten states’ fiscal stability. – Pressures on local governments, caused by the weak economy and cuts to state aid, are constraining education spending, law enforcement, aid to the needy, and the institutions that make up the culture of our cities. Local government cuts pose a significant risk to the overall economic and social fabric of states. Source: Report of the State Budget Crisis Task Force, July 2012

37. The Federal Budget Crisis –No One’s Immune (cont.) 37 “The threats and risks vary considerably from state to state, but the storm warnings are very serious…The costs, whether in service reductions or higher revenues, will be large. Deferring action can only make the ultimate costs even greater. The conclusion of the Task Force is unambiguous. The existing trajectory of state spending, taxation, and administrative practices cannot be sustained.” Source: Report of the State Budget Crisis Task Force, July 2012

38. Budget Outlook General Fund Revenue growth will be tepid for the foreseeable future. Most Federal Funding will diminish as entitlements crowd out other federal programs. The trend to other funds (fee for service) will likely grow. Our budget discourse in the General Assembly will be dominated by the federal debate on the role and size of government 38

39. Thank You grantgibson@scsenate.gov 39