The Current State of the States: Is there Light at the End of the Tunnel?

NASACT Economic Summit

Charleston, WV

August 11, 2010

Brian SigritzDirector of State Fiscal Studies

National Association of State Budget Officers

444 North Capitol Street, NW, Suite 642 • Washington, DC 20001 • (202) 624-5382 • www.nasbo.org

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Current Fiscal Situation

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Recent State Fiscal Situation

The “Great Recession” has been an extremely difficult fiscal period for states

$300 million in shortfalls

Fiscal 2010 revenue projections: As of May, 46 states lower than projected, 2 on target, 2 higher

Some improvement in fiscal 2011, although still below pre-recession levels

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National Recovery Impacted by States and Locals

“With economic conditions far from normal, state budgets will probably remain under substantial pressure for awhile, leaving governors and legislatures a difficult juggling act as they try to maintain essential services while meeting their budgetary obligations.”

- Federal Reserve Chairman Ben Bernanke, 8/2/10

5

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Source: Federal Reserve Bank of Philadelphia State Coincident Index (June 2010)

3-Month Index: Increases in 47 states, decreases in 3

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This downturn vs. Post ‘01

Last Time: Housing sector relatively strong in ’01 Primarily income tax decline

This Time: Broad economic decline; Longer recession Localities will be hit this downturn

17 states reduced local aid in ‘09; 20 in ’10

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Negative Spending Two Years in a Row, Slight Increase in 2011

-8

-6

-4

-2

0

2

4

6

8

10

12

%

General Fund Expenditure Growth (%)

*33-year historical average rate of growth is 5.6 percent *Fiscal ‘11 numbers are proposed Source: NASBO June 2010 Fiscal Survey of States

*

The New Normal?

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Proposed FY 2011 Spending is $52 billion less than FY 2008

InBillions

* FY 2007, 2008, and 2009 are actual. FY 2010 is estimated and FY 2011 is proposed.

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Balances Declining

$0

$10

$20

$30

$40

$50

$60

$70

$80

1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Total Year-End Balances and Total Year-End Balances as a % of Expenditures, Fiscal 1979 - Fiscal 2011

Total Balances as a Percentage of Expenditures Total Balance

* Fiscal 2010 totals are estimates and fiscal 2011 is proposed **33-year historical average is 5.7%

Source: NASBO June 2010 Fiscal Survey

In Billions

NASBO

Balances are Projected to be $22 billion less in FY 2011 than FY 2008

In Billions

Source: NASBO June 2010 Fiscal Survey of States

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Budget Cuts at Record Levels

12

20

28

35

22

9 813

72 3 1

16

37 37

18

5 2 4

13

4340

0

10

20

30

40

50

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

Budget Cuts Made After the Budget Passed,Fiscal 1990-Fiscal 2010 ($ millions)

Number of states Amount of reduction

Recession endsRecession ends

Source: NASBO June 2010 Fiscal Survey of States:; fiscal 201 0 totals are estimates

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State revenue up 2.5 % in 1st quarter, although 33 states saw declines

-20

-15

-10

-5

0

5

10

15

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010%

Year-Over-Year Real Change inQuarterly State Tax Revenue

Total

Source: Fiscal Studies Program, Rockefeller Institute of Government; U.S. Census Bureau

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Projected FY 2011 Revenue is $53 billion Less than FY 2008

InBillions

* FY 2007, 2008, and 2009 are actual. FY 2010 is estimated and FY 2011 is proposed

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States Have Closed Budget Gaps of $169 Billion – Still Face $127 Billion in Gaps

InBillions

Blue = closed gaps; Red = ongoing gaps

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American Recovery and Reinvestment Act (ARRA)

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American Recovery and Reinvestment Act – State $

Approximately $246 billion+ going to or through states

State Fiscal Stabilization Fund - $53.6 billion: $39.5 billion to schools and higher ed $5 billion in incentive grants $8.8 billion in flexible funds

Medicaid Funding: $87 billion $48 billion to transportation: highway and bridges

$27.5B; transit $8.4B; passenger rail $8B Also safety net expansions, economic development,

other appropriated programs

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The Cliff…

Source: Stateline.org

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Significant Lag?

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Background on State Spending Trends

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Spending by Funding Source(Percentage)

General Funds45.7%

Federal Funds26.3%

Other State Funds25.7%

Bonds2.4%

Total State Expenditures By Funding Source, Fiscal 2008

Source: NASBO 2008 State Expenditure Report

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General Fund: Medicaid & Education Over 62%

Elementary & Secondary Education

35.1%

Higher Education11.1%

Medicaid16.2%

Public Assistance1.9%

Corrections7.2%

Transportation0.7%

All Other27.8%

General Fund Expenditures by Function, Estimated Fiscal 2009

Source: NASBO 2008 State Expenditure Report

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Total Expenditures Percentage Growth in Spending Categories Over 10 Years

Sources: NASBO 1999 and 2008 State Expenditure Reports

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Total Medicaid Spending Growth, 1996-2010

6.8%

10.4%

5.7%

3.4%

8.7%

12.7%

8.5%

7.7%

6.4%

1.3%

7.9%

4.1%

4.7%

3.8%

6.3%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Strong Economy, Welfare Reform,

Enrollment Drops, Managed Care

1995-1998

Economic Downturn, Enrollment & Cost Growth,

2000-2003

NOTE: Data for State Fiscal Years, for total Medicaid spending, including state, ,local and federal funds.

SOURCE: Historic Medicaid Growth Rates from KCMU Analysis of CMS Form 64 Data, FY 8, 2009 and 2010 based on KCMU survey of Medicaid officials in 50 states and DC conducted by Health Management 200Associates, 2009.

Low Enrollment Growth & Medicare Part D 2006-

2007

Economic Downturn 2008-2010

Adopted

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Medicaid Cost Containment

About three-quarters of states are planning to contain Medicaid costs in proposed fiscal 2011 budgets

The most common strategy for both fiscal 2010 and fiscal 2011 would be to reduce or freeze provider payments

Other strategies include limiting benefits, limiting prescription drugs, eliminating benefits, and expanding managed care

States are also raising provider taxes or fees to generate additional resources for Medicaid

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Outlook

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Long Term Spending Pressures

Medicaid and Health Care

K-12 and Higher Education

Demographic Changes

Corrections Transportation Infrastructure Pensions

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The “New Normal” is Here

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State Fiscal Outlook

Austere state budgets for at least the next several years Slow revenue growth; ARRA declines

Health care reform will have an impact on state finances

Tough competition for general funds

Demand for performance, results, and transparency

Opportunity for reform, restructuring

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www.nasbo.org

Brian Sigritz

Director of State Fiscal Studies

(202) 624-8439

bsigritz@nasbo.org