FY10-11 State Budget Overview

Dr. Howard Fleeter

Education Tax Policy Institute

February 13, 2009

How Did We Get Here?

Part 1: HB 66 Tax Reforms (June 2005)

• Elimination of Tangible Personal Property (TPP) and Corporate Franchise Tax

• Creation of Commercial Activity Tax (CAT)• 21% Decrease in State Income Tax Rates• Permanent Sales Tax Rate set at 5.5%• Cigarette Tax Increased to $1.25 per pack• Class 2 Rollback repealed• 5 year phase-in period (FY06-FY10)

Estimated Impact of HB 66 Tax Changes in FY10 (Net revenue reduction = $3.8 billion)

HB 66 Tax Changes ($ in Billions)

$1.6

$0.4

-$1.6 -$1.6

-$2.2

-$0.8

$0.4

-$2.5

-$2.0

-$1.5

-$1.0

-$0.5

$0.0

$0.5

$1.0

$1.5

$2.0

CAT Repeal Class2 Rollback

CorporateFranchise

Tax Repeal

TangibleProperty Tax

Repeal

Income TaxReduction

Sales TaxReduction

CigaretteTax Increase

Billions of Dollars

Source: Driscoll & Fleeter, 2009

Impact of HB 66 on State GRF Tax Revenues (2007 Estimates)

Source: OBM & Driscoll & Fleeter, 2008

Percent Change in Revenue from State GRF Taxes, FY04-FY10

8.1%

7.2%

2.5%

-0.5%

1.0%

-0.5%

-1.1%-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

FY04 FY05 FY06 FY07 FY08 (OBMEst)

FY09 (OBMEst)

FY10 (D&FEst)

Impact of HB 66 Tax Changes on State Revenues

• The estimates on the previous slide were from November 2007, when chance of recession was estimated at 10%

• The chart shows that in 3 of the 5 years of the HB 66 Tax Reform Phase-out period GRF tax revenues were expected to decrease, even assuming moderate economic growth

Actual and Estimated GRF Revenues Assuming Moderate Economic Growth, FY05-FY10

Actual FY05 Revenues: $19,089 millionActual FY06 Revenues: $19,562 millionActual FY07 Revenues: $19,468 millionEstimated FY08 Revenues: $19,659 millionEstimated FY09 Revenues: $19,564 millionEstimated FY10 Revenues: $19,348 million

• As a result of the HB 66 tax changes, GRF revenues in FY10 were estimated to be less than in FY06, assuming moderate economic growth.

Source: FY08 and FY09 revenue estimates from OBM FY08-09 budget as enacted.

FY10 revenue estimate by Driscoll & Fleeter, 2007

How Did We Get Here?

Part 2: Economic Recession

• As signs of an economic downturn appear, OBM revises revenue estimates 3 times in 2008.

• January 23, 2008 revisions result in $733 million in budget reductions

• Sept 11, 2008 revisions result in $540 million in budet reductions

• Dec 1, 2008 revisions result in $640 million in budget reductions

• Total budget reductions (FY08 and FY09) = $1.9 billion

FY09 GRF Revenues Under Different Economic Scenarios

OBM As Enacted

Low Growth (Feb 2008 Revision)

Zero Growth (Feb 08)

July 2008 Revision

Recession (Feb 08)

Dec 2008 Revision

GRF Taxes FY09 FY09 FY09 FY09 FY09 FY09

Sales 7,948 7,792 7,715 7,635 7,610

Income 9,201 9,096 8,825 8,718 8,450

Corporate 522 470 430 495 400

KWH/PU 306 297 297 307 297

Cigarette 942 942 942 917 942

Other 645 628 628 613 628

Total 19,564 19,226 18,837 18,685 18,327 18,045

Source: OBM

The Impact of the Recession on State Revenues

• $1.5 billion in anticipated FY09 tax revenue evaporated in 2008.

• Revenue estimates for FY10 and FY11 are even worse ($17.219 billion in FY10 and $17.278 billion in FY11)

• The FY10 revenue estimate in the Executive Budget is $2.1 billion less than we forecast just 15 months ago.

• Revenues in FY11 are now forecast to be less than in FY04!

Actual and Estimated GRF Tax Revenues, FY03-FY11

Source: OBM and FY10-11 Executive Budget

Actual and Estimated GRF Tax Revenues, FY03-FY11 ($ in millions)

$16,318$17,740

$19,088 $19,749 $19,469 $19,419$18,045

$17,219 $17,278

$0

$5,000

$10,000

$15,000

$20,000

$25,000

2003 2004 2005 2006 2007 2008 2009(Est)

2010(Est)

2011(Est)

The FY10-11 Executive Operating Budget

• In December 2008, OBM projected potential budget deficits as high as $7.3 billion for the FY10-FY11 biennium.

• The FY10-11 budget IS balanced, however.

• The HB 66 tax reforms are completely implemented, and no taxes have been increased

How did they balance the budget?

• Many programs and line items are funded below FY09 levels and at 80%-95% of planning levels for FY10.

• State employee pay reductions from 0-6% and reduced benefit contributions save up to $200 million per year

• 120 fee changes (most paid by business)• $5 billion in one-time money

$1.5 billion in State One-time Funding

• In FY11, $948 million will be drawn from the Budget Stabilization Fund (Rainy Day Fund)

• In FY11, $200 million will be borrowed from OSFC (this is money that can’t be spent because the tobacco fund money needed to be spent first - that was before a judicial ruling on Tuesday froze that money, however)

• $200 million in FY10 and $120 million in FY11 come from other sources

$3.5 billion in Federal Funding from the Economic Stimulus Bill

• $283 million enhanced FMAP (Medicaid)• $821 million for special education• $2.274 billion for state fiscal stabilization (60% to

be spent on education = $1.353 billion)

• These figures based on the House version of the stimulus bill

• Not clear how much less Ohio will receive as a result of the modified bill that was just agreed upon - possibly $1.2 billion less

Uh oh, what happens if we just lost a Billion $?

• Besides, “the budget just got a lot worse”, I have no idea, and I’m not sure who does right now.

• And don’t even ask me about the $200 million from the tobacco fund.

• Or the grocer’s lawsuit against the CAT. (though we think they will ultimately lose)

So, how much are we spending?(Part I)

• Total GRF spending in FY10 = $26.1 Billion• Total GRF spending in FY11 = $28.6 billion• Total for the biennium = $54.7 billion• These figures include all Federally funded GRF

expenditures (Medicaid, education, etc…)• This was initially thought to be a 4.4% increase

over the FY08-09 budget (which was a 4.4% increase over the FY06-07 budget)

• However, due to an accounting error in FY09, it is actually a 6.3% increase from FY08-09

So, how much are we spending?(Part II)

• Total State only GRF spending in FY10 = $18.295 Billion

• Total State only GRF spending in FY11 = $19.733 billion

• Total of $38.0 billion for the biennium• About $3.5 billion more than projected GRF

revenues of $34.5 billion in FY10 and FY11

Is spending more than we have a good idea?

• Economists overwhelmingly answer “yes”• State fiscal needs always increase during a

recession (particularly “safety net” programs)• Expansive fiscal policy is especially necessary in

this recession, as monetary policy has been ineffective (interest rates are almost at zero)

• The whole point of the Federal stimulus package is to spend the money (and Ohio will lose it if they don’t spend it)

But won’t this just create a problem balancing the next budget?

• Umm…yes.

• But that problem will almost certainly be even worse if we are still in a recession in FY12.

How do we fund the new education plan?

• OBM estimates that total revenue growth will be $7.5 billion by FY17

• OBM also estimates that the education reform plan will cost an additional $6.1 billion by FY17

• So we can fund the new education plan if we devote 80% of expected revenue growth to primary and secondary education in FY17.