2012 fall leadership summit october 2, 2012 grant gibson senate finance committee

2012 Fall Leadership SummitOctober 2, 2012

Grant GibsonSenate Finance Committee

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.”

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Unsustainable and the Inevitable?: Take Your Pick…

“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

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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)

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Where is the Money Spent? FY 2012-13 Appropriations

Source: Office of State Budget

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Where is the Money Spent?FY 2010-11 Expenditures


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Top 10 Statewide Federal Revenue Sources

Fiscal Years 1994-95 and 2010-11

Source: Office of State Budget, August 2012

Avg. AnnualDescription 1994-95 2010-11 % Change

1 DHHS Medicaid (MAP) Assistance Payments 1,443,188,191 3,465,238,755 2,022,050,564 5.6%

2 DSS Food Stamp Coupons 301,893,005 1,247,641,253 945,748,248 9.3%

3 DOT Federal Grants 245,045,118 671,161,667 426,116,549 6.5%

4 ARRA Budget Stabilization Funds (K12, Higher Ed, Other) - 362,353,398 362,353,398 -

5 DHHS Disproportionate Share 93,746,470 329,209,649 235,463,179 8.2%

6 SDE School Food Services - District 93,806,685 262,250,575 168,443,890 6.6%

7 SDE Chapter I - Low Income 87,104,395 204,131,064 117,026,669 5.5%

8 DHHS Medicaid Asst Pymts - Refund Prior Yr Expenditure - 220,823,761 220,823,761 -

9 SDE Title VI Part B Handicapped 29,305,979 170,756,933 141,450,954 11.6%

10 MUSC Health Services Research and Development Grants 39,884,506 169,264,315 129,379,809 9.5%

Totals (Top 10) 2,333,974,349 7,102,831,370 4,768,857,021 Total (All) 9,227,240,929 77%

AmountsDifference

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Top 10 Statewide Other Revenue Sources

Fiscal Years 1994-95 and 2010-11

Source: Office of State Budget, August 2012

Avg. AnnualDescription 1994-95 2010-11 % Change

Other Funds - Earmarked/Restricted

1 University Fees 428,475,336 1,905,914,911 1,477,439,575 9.8%

2 Sales Tax - EIA 366,650,309 567,538,358 200,888,049 2.8%

3 Medicare and Medicaid Reimbursements 375,563,268 524,462,741 148,899,473 2.1%

4 Gasoline Tax 214,376,940 414,112,710 199,735,770 4.2%

5 Auxiliary Enterprises - Sales and Services 182,278,795 396,514,683 214,235,888 5.0%

6 Contributions Hospitals/ Medicaid Hospital MIAA 93,746,470 272,677,821 178,931,351 6.9%

7 Lottery Proceeds - 264,580,854 264,580,854 -

8 Medicaid CPE - 166,679,419 166,679,419 -

9 Motor Vehicle Licenses - 139,969,962 139,969,962 -

10 Special Fuel Tax 68,591,714 110,328,557 41,736,843 3.0%

Totals (Top 10) 1,729,682,832 4,762,780,016 3,033,097,184 Total (All) 7,851,392,293 61%

DifferenceAmounts

“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

“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 education 79% “No”Health care services 76% “No”

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Cumulative General Fund Changes July 2008 - July 2012


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A National Trend

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Local Government Fund

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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

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Fiscal Year 2012-13 Budget:H4813 General Appropriations Bill & H4814

Capital Reserve Fund Conference Committee

Sources of Revenue above previous year Appropriation Base

Recurring General Fund Revenue Growth $672 millionNon-Recurring Sources

Capital Reserve Fund $100 millionContingency Reserve Fund $122 millionProjected Surplus $392 million

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Fiscal Year 2012-13 AppropriationsSmall Business Tax Relief $20 million ($60 million when fully implemented) Note: over three years the tax rate for small businesses (Subchapter S corporations, sole proprietorships, partnerships and certain limited liability corporations) will drop from five to three percent. Unemployment Tax Assessment (SUTA) Tax Relief $77 million General Reserve Fund $98 million Note: Funded at a level of 5% which is fully funded two years earlier than required by law. Employee Pay (3% Increase) $43 million Employee Health Insurance $52 million Homestead Exemption Shortfall $36 million College and University Deferred Maintenance $33 million

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Fiscal Year 2012-13 Appropriations (Continued)

State Ports Authority Harbor Deepening $300 million Local Government Fund $30 million State Department of Education: Education Finance Act $152 million Individuals with Disabilities Education Act $36 million ReadySC (Worker Training) $19 million Dept. of Health and Human Services (Medicaid) $176 million Department of Commerce Closing Fund $25 million

23Note: Based on personal income growth rate – FY12, 4.0%; FY13, 3.5%.

Source: Board of Economic Advisors, November 10, 2011.

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Forecasted General Fund Revenue Growth is roughly $180 Million.

The “Annualization List” is roughly $180 Million.

Fiscal Year 2013-14 Budget Outlook

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

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1.) The Reason for Tepid Growth

Updated May 2011. Sources US Bureau of Economic Analysis, Bureau of Labor Statistics, Census Bureau

YearPersonal Income

GrowthPopulation

GrowthActual General Fund

Revenue Growth2001 3.3% 1.0% 1.8%2002 2.7% 1.1% -3.4%2003 3.4% 1.0% 0.1%2004 6.0% 1.5% 5.0%2005 6.1% 1.4% 7.8%2006 7.9% 2.1% 9.7%2007 5.9% 2.0% 8.2%2008 5.0% 1.9% -3.1%2009 -2.7% 1.3% -12.5%2010 3.6% 1.0% -5.3%2011 4.7% 0.9% 6.4%

Average Annual 4.2% 1.4% 1.0%Percent Change

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Pre & Post RecessionWhere we Stand 5 Years Later

Oct. '07 (FY08) Today (FY13)

Stock Market (DJIA) 14,165 13,125Unemployment Rate (US/SC) 4.7%/5.6% 8.3%/9.6%# Unemployed (SC) 119,081 206,474Avg. Weeks Unemployed (US) 17 weeks 39 weeksGeneral Fund Revenue Forecast $6.9 Billion $6.67 BillionTotal Appropriatioons (SC) $20.3 Billion $23.0 BillionFood Stamp Recips (US/SC) 27M/575K 46M/875KFederal Food Stamp Expend in SC $684 Million $1.5 BillionMedicaid Recipients (SC) 888,000 1,000,000Total Medicaid Expend (SC) $4.6 Billion $5.9 BillionBase Student Cost (General Fund) $2,476 $2,012Higher Ed Funding (State portion) $771 Million $435 Million# State Employees (State funded) 33,721 25,104

Comparison of Gross and Net Taxable SalesFY 2000 – FY 2012

The Base is Shrinking.28

FY 2000 FY 2012

Gross Sales Amount 94,435,505,424 156,213,293,606 4.3%/yr.

Net Taxable Sales Amount 45,199,250,866 54,309,990,195 1.5%/yr.

Percentage of Net Taxable Sales 47.9% 34.8%

FY 2011 FY 2012

Gross Sales Amount 142,299,773,124 156,213,293,606

Net Taxable Sales Amount 51,890,792,002 54,309,990,195

Percentage of Net Taxable Sales 36.5% 34.8%

Source: Department of Revenue, Annual Reports.

+9.8%

+4.7%

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Retail Sales: Services = Stability in a Volatile World?

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

federal programs.

31Source: CBO

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

2003-04 2012-13 Average Annual % ChangeResearch Universities $6,356 $11,581 6.89%Teaching Universities $5,467 $9,855 6.77%All 2-Year $2,761 $4,160 4.66%

Fees for Full-Time, In-State Undergraduates - Public Institutions

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Fiscal Cliff (No Congressional Action)

• More than $600 billion of tax increases and spending cuts will take effect automatically January 1st

• 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%)


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• 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 billion3. Business expansion & other

corporate: $65 billion4. 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?


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The Federal Budget Crisis –No One’s Immune

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

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The Federal Budget Crisis –No One’s Immune (cont.)

“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

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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

Thank You

[email protected]

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2012 fall leadership summit october 2, 2012 grant gibson senate finance committee

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