Download State of Iowa:Economy and Budget Update (Powerpoint file)

The State of Iowa:
Economy and Budget Update
By Randy Bauer
Budget Director
State of Iowa
Economic pressures continue
for all states
•
• Reduced State
Revenues
•
• Corporate Tax
State
Receipts
Budget
•
• Personal Tax
Receipts
•
• Sales Tax
•
Receipts
•
• Inheritance/Estat States face difficult budgetary choices
e Tax Receipts • Increase Revenues
•
• Reduce Expenditures
• Use Reserves
Higher
Expenditures
Medicaid
Costs
Homeland
Security
Education
Corrections
Employee
Salaries
Employee
Healthcare
Costs
Tax Revenue Decline Much Worse Than
Economy Might Suggest
State Tax Revenue Has Fallen Far More Sharply Relative to Economy
Than in 1980-82 and 1990-91 Recessions
6
4
% Change
2
0
-3.0
-4

-1.8
-3.5
Real GDP per capita, calendar y ear in which f iscal y ear began
Real state tax rev enue per capita, adjusted f or legislation
-6
-7.4
-8
1978
1980
1982
1984
1986
1988
1990
1992

-0.7

-2.0
-2
1994
1996
1998
2000
2002
State Fiscal Year
Sources: U.S. Bureau of Economic Analy sis, U.S. Bureau of the Census,
Significant Features of Fiscal Federalism 1984 (ACIR), Fiscal Survey of the States (NGA), Rockef eller Institute of Gov ernment
Tax Revenue: No Longer Plummeting
But Remains Weak
State Tax Revenue Adjusted for Legislation and Inflation
Four-Quarter Moving Average, Indexed to 1994
125
1994=100
120
115
110
105
100
95
19
19
96
97
19
8
9
19
99
19
00
20
01
20
02
20
Source: Nicholas W. Jenny, Rockefeller Institute of Government, Underlying State Revenue Picture Remains Bleak, August
2003
03
20
Iowa – worst
revenue “growth” in 50 years
Iowa General Fund Revenue Growth
40.0%
Sales Tax Increased
35.0%
30.0%
Incom e Tax Increased
20.0%
Sales Tax
Increased/Decreased
Three Year Rolling
Average
Sales Tax
Increased
15.0%
Sales Tax
Increased
Incom e Tax
Decreased
10.0%
5.0%
20
02
19
99
19
96
19
93
19
90
19
87
19
84
19
81
19
78
19
75
19
72
19
69
19
66
19
63
19
60
19
57
19
54
0.0%
19
51
Percentage Increase
25.0%
-5.0%
20
-10.0%
Fiscal Year
State Balances are Declining
Source: National Association of State Budget Officers
Only 10 States Have Adequate Balances
Source: National Association of State Budget Officers
States Borrowing Record Amounts
•
•
•
•
•
$224 billion during FY 2003
Double the amount of two years ago
“Follow the federal leader” tactics?
Stall tactic?
Even this market has limits
Iowa General Fund Expenditures
Have Been Reduced
General Fund Expenditure Growth
10.0%
8.2%
7.7%
8.0%
7.2%
6.0%
4.0%
5.2%
3.8%
2.3%
2.3%
2.0%
1.3%
0.9%
0.4%
0.3%
0.0%
1998
1999
2000
2001
2004
-2.0%
-1.7%
2003
Enacted
-4.0%
-6.0%
-5.7%
2002
Iowa
-8.0%
Fiscal Year
Source: National Association State Budget Officers
All States
Over 60 percent of the State’s General
Fund budget goes toward education
FY2003 General Fund Expenditures
Saf e
C o mmunit ies
10 %
Pr o p er t y T ax
R elief
8%
Healt h and
F amily Ser vices
17%
Eco no mic
D evelo p ment ,
A g , Ot her
4%
K- 12 Ed ucat io n
46%
Hig her
Ed ucat io n
15%
Source: Iowa Department of Management
State Responses So Far
• Fund balances: drawn down from more than 10% of expenditures in
FY 2001 to 1.3% of expenditures at end of FY 2003; 16 states now
have balances of <1%
• Special funds: At least 23 states tapped capital, highway, other funds
for FY 2003, and 29 for FY 2004; at least 16 have used tobacco
settlement money
• Spending cuts: 31 states cut for FY 2004 in some fashion; Medicaid
cost containment planned in many states (but how real?)
• Tax increases:
– FY 2003: >= 1% in 16+ states, for $6.7 billion, 40% of $ was
cigarette taxes; a few large or broad-based tax increases – KS, IN,
MA, NJ, TN – but these were exceptions, not the rule
– FY 2004: more income and sales tax increases, $6.9 billion tax
increase in total (see next page)
Source: Donald Boyd, Director, Rockefeller Institute of Government, SUNY
States are Raising Taxes
Source: National Association of State Budget Officers
The Tax Burden: Rising Expectations?
(Ratio of personal taxes to personal income)
0.16
0.15
0.14
0.13
0.12
0.11
0.10
1970
Source: Global Insight
1975
1980
1985
1990
1995
2000
2005
2010
Gimmicks and Tricks
• Payment shifts
–
–
–
–
Texas delayed $2 billion over 2 years
Minnesota delayed $700 million
New Jersey $300 million school aid payment delayed
Kansas $200 million delayed $170 million advanced
deadline for payment of property taxes
• Sit on bills
– Illinois $1.5 billion this year ($2 billion last year)
• Asset sales and leasebacks
• Draining trusts and other funds
– Florida $1.3 billion
When Will Finances
Of State Governments Recover?
• Economy currently at least as weak as state government
forecasters expected
• Additional near-term risks for income taxes, related to
financial markets
• Will be many years before markets, and associated
income, recover to 2000 and 2001 levels
• Continued erosion of states’ sales taxes
• Medicaid and K-12 education spending pressures
• Many states solved 2003-04 problems in ways that make
2004-05 and 2005-06 much worse
•  Good times for most states probably at least 2-3
years away
Moody’s Outlook for States
Continues to be Negative
• 16 states currently on
negative outlook.
• More negative outlooks and
rating actions likely.
• Oregon downgrade in March
was 8th for states since last
state upgrade in 2/01
(Connecticut).
• 4 states now on Watchlist for
downgrade (Conn., Minn.,
Mich., Ill.)
All States:
Structural Balance Will Be Elusive
• Spending is on a higher growth
plane and is outstripping revenue
growth.
• Budget problems will persist into
FY05:
– FY04 have large budget gaps due to
substantial use on non-recurring
resources to balance FY03.
• Pace of economic recovery will be key, but modest recovery
forecasts will leave a difficult FY04 and FY05.
• Higher rated credits will restore structural balance and
rebuild reserve funds quickly.
• Further credit deterioration among states is likely.
• Problems beginning to be pushed down to local governments.