The Fiscal Crunch Confronting the South : The Fiscal Crunch Confronting the South
Sujit M. CanagaRetna
The Council of State Governments
Southern Legislative Conference
Kentucky General Assembly
Joint Hearing of the Appropriations and Revenue Committees
Frankfort, Kentucky
January 14, 2003
Presentation’s Five Main Parts : Presentation’s Five Main Parts Where We Were
Where We Are
What these New Conditions Mean for States
What Measures States Have Taken
What Can We Expect
I. Some Measures of the Boom Years : I. Some Measures of the Boom Years Impressive GDP Growth at both the National and State Levels
Extremely Favorable Unemployment Rates at both the National and State Levels
High-Flying Stock Market
Soaring Personal Incomes and Corporate Profits
Low Inflation Rates
Rising Revenue Flows to All Levels of Government-Federal, State and Local
Focus on the Specifics: GDP : Focus on the Specifics: GDP National GDP Growth
1991= -0.5% 1994 = 4.0%
1997= 4.4% 2000 = 3.8%
SLC States Average GDP Growth
1998 = 5.3% 1999 = 5.6%
2000 = 6.1%
In 2000, Virginia = 8.6%; Texas = 8.4%;
North Carolina = 8.1%
Actual GDP in 2000 (Current Dollars)
Texas = $742.3 Billion; Florida = $472.1 Billion
Georgia = $296.1 Billion; North Carolina = $281.7 Billion; Kentucky = $118.5 Billion
Focus on the Specifics: Unemployment Rate (Percent), 1995 to 2000 : Focus on the Specifics: Unemployment Rate (Percent), 1995 to 2000
Focus on the Specifics: Low Unemployment Rates in SLC States, November 2000 (Percent) : Focus on the Specifics: Low Unemployment Rates in SLC States, November 2000 (Percent) AL = 4.6% MO = 3.5%
AR = 4.2% NC = 3.9%
FL = 3.6% OK = 2.9%
GA = 3.4% SC = 3.3%
KY = 4.1% TN = 4.2%
LA = 6.0% TX = 4.0%
MD = 3.8% VA = 2.1%
MS = 5.6% WV = 5.6%
Focus on the Specifics: Total Returns on the S & P 500 Stock Index Average Growth = 29% Between 1995-99 : Focus on the Specifics: Total Returns on the S & P 500 Stock Index Average Growth = 29% Between 1995-99 Stock Market’s Growth Brought in Tremendous Revenue Flows into Government Coffers with Increased Capital-Gains Taxes and Withholding Taxes
II.Current Predicament: Federal : II.Current Predicament: Federal Federal Budget Deficits Loom (FFY)
1992 = $-290.4 Billion 1996 = $-107.5 Billion
1998 = $69.2 Billion 1999 = $125.5 Billion
2000 = $125.5 Billion 2001 = $127.1 Billion
2002 = $-159 Billion 2003 = $-350 Billion(?)
In January 2001, CBO predicted a federal budget surplus of $5.6 Trillion between 2002
and 2011
In late 2002, that surplus shriveled to only about $1 Trillion between 2003 and 2012
II.Current Predicament: State : II.Current Predicament: State At least 46 states struggled to close a cumulative budget gap of $37 Billion in FY 2002
For FY 2003, the estimated cumulative budget gap is almost $68Billion
For FY 2004, the estimated shortfall is a staggering $60 billion to $85 billion, some 13 to 18 percent of all state expenditures
Highlights from outside the region:
California faces an almost $35 billion shortfall in the next 18 months
New York City alone faces a budget gap of $7.5 billion in the next 18 months
II.Current Predicament: Selected SLC State FY 2004 Deficit Estimates : II.Current Predicament: Selected SLC State FY 2004 Deficit Estimates
II. Current Predicament: Signs of the Weakening Economy: Subdued GDP Growth Two Consecutive Quarters of Negative GDP Growth in 2001 Met the Technical Requirements for a Recession : II. Current Predicament: Signs of the Weakening Economy: Subdued GDP Growth Two Consecutive Quarters of Negative GDP Growth in 2001 Met the Technical Requirements for a Recession
II.Current Predicament: Other Signs of Weakening Economy : II.Current Predicament: Other Signs of Weakening Economy Plummeting Consumer Confidence, Nine-Year Low in October 2002
Number of People Below the Federal Poverty Threshold in 2001stood at 32.9 Million, or 11.7% of Total Pop., first increase since 1991/92 recession
Plunging Stock Market-Worst Bear Market in Since World War II
III.Implications for State Finances: Anemic Revenue Inflows : III.Implications for State Finances: Anemic Revenue Inflows AL ▲ Total Revenues increased by 9% between Dec. 2001 and Dec. 2002 and increased by 5% between the first three months of FY 2002 and FY 2003
AR ▲ Net General Revenues increased by 4% between the first six months of FY 2002 and FY 2003 (July-Dec. 2001 vs. July-Dec. 2002)
FL ▲ Net Revenue increased by 2% between the first five months of FY 2002 and FY 2003 (July-Nov. 2001 vs. July-Nov. 2002)
GA ▼ Net Revenue decreased by 4% between the first six months of FY 2002 and FY 2003 (July-Dec. 2001 vs. July-Dec. 2002)
KY ▲ Tax Receipts increased by 6% between the first five months of FY 2002 and FY 2003 (July-Nov. 2001 vs. July-Nov. 2002)
MD ▼ Between Nov. 2001 and Nov. 2002, Sales and Use Taxes decreased by 2% but increased by 2% for the first four months of FY 2003 and FY 2004 (Aug.-Nov. 2001 vs. Aug.-Nov. 2002)
MS ▲ Total General Fund Revenue Transfers increased by 2% between the first five months of FY 2002 FY 2003 (July-Nov. 2001 vs. July- Nov. 2002)
MO ▼ Between Dec. 2001 and Dec. 2002, General Revenue collections decreased by 1% and decreased by 3% between the first six months of FY 2002 and FY 2003 (July-Dec. 2001 vs. July-Dec. 2002)
III.Implications for State Finances: Anemic Revenue Inflows (Cont.) : III.Implications for State Finances: Anemic Revenue Inflows (Cont.) NC ▲ State Tax Revenue collections for Nov. 2002 decreased by 7% over Nov. 2001. Between the first five months of FY 2002 and 2003, Tax Revenue collections increased by 11%
OK ▼ Total General Revenues barely increased (0.3%) between Nov. 2001 and Nov. 2002. Between the first five months of FY 2002 and 2003 (July-Nov. 2001 vs. July-Nov. 2002), total General Revenue declined by 8%
SC ▼ Total Revenue increased by 2% between the first five months of FY 2002 and 2003 (July-Nov. 2001 and July-Nov. 2002).
TN ▲ Total Revenues increased by 8% between Nov. 2001 and Nov. 2002
TX ▼ State Sales Tax Net Collections decreased by 1% between Dec. 2001and Dec. 2002 (Texas has no Income Tax)
VA ▼ Total General Fund Revenues decreased by 4% between Nov. 2001 and Nov. 2002. Between the first five months of FY 2002 and FY 2003 (July-Nov. 2001 vs. July-Nov. 2002) revenues declined by 1%
WV ▼ Revenues for Dec. 2002 were $4 million over estimates and $1million over estimates for the first six months of FY 2003
III.Implications for State Finances: Rising SLC State Unemployment Rates (Percent), November 2001 and November 2002 : III.Implications for State Finances: Rising SLC State Unemployment Rates (Percent), November 2001 and November 2002
III. Implications for State Finances: Rising Unemployment Rates (Percent), November 2001 and November 2002 (Cont.) : III. Implications for State Finances: Rising Unemployment Rates (Percent), November 2001 and November 2002 (Cont.) Average SLC Unemployment Rate Still Lower than National Rate in November 2002 (5.3% vs. 6%). They were 5.3% and 5.4% respectively in November 2001
SLC States Most Hard Hit in November 2002: Louisiana, Mississippi, North Carolina, South Carolina, Texas and West Virginia, all above 6%
III.Implications for State Finances: Exploding Medicaid Costs : III.Implications for State Finances: Exploding Medicaid Costs Major Reasons Cited by States for Exploding Medicaid Budgets: Prescription Drugs (44 states) and Increased Enrollment (39 states)
Some Cost Containment Actions Taken by SLC States in FY 2002:
● Pharmacy Controls (12 states)
● Provider Payment Reductions (8 states)
● Clamp Down on Fraud/Abuse (6 states)
Similar Measures Can Be Expected in FY 2003 along with cutbacks in Medicaid eligibility
III. Implications for State Finances: Exploding Medicaid Costs (Cont.) : III. Implications for State Finances: Exploding Medicaid Costs (Cont.) Average annual growth rates of total Medicaid spending has been rising
The almost 13% increase in 2002 is the highest in almost a decade
After dropping from the high of 27% in the early 1990s to 3.2% in the mid 1990s, the rates are rising again
Almost all the SLC states have seen double-digit increases in enrollment between Dec.1997 and Dec. 2001
IV. Measures Adopted by SLC States to Deal with Budget Shortfalls : IV. Measures Adopted by SLC States to Deal with Budget Shortfalls Slash Spending
Tap Rainy Day Funds
Utilize Tobacco Settlement Monies
Raise Taxes
Hike Cigarette Taxes
Establish State Lotteries
IV.Measures Adopted by SLC States to Deal with Budget Shortfalls: Slash Spending : IV.Measures Adopted by SLC States to Deal with Budget Shortfalls: Slash Spending LA imposes across-the-board cuts of $75 million followed by an additional $82 million
TX seeks input from agencies on cutting 3% to 5%
VA cuts $858 million in spending with agencies facing budget reductions of 11%-15% with another $400 million in cuts to follow
OK makes across-the-board cuts totaling 9%
GA agencies face budget reductions totaling 5%
MD considering a number of measures including cutting all employee pay by 1 percent, withholding aid to local governments, scaling back scholarships, raising income taxes on the wealthy and hiking the state’s sales tax and property tax rates
MO laid-off almost 900 workers and is looking at further layoffs
IV. Measures Adopted by SLC States to Deal with Budget Shortfalls: Tap Rainy Day Funds : IV. Measures Adopted by SLC States to Deal with Budget Shortfalls: Tap Rainy Day Funds In FY 2002, 19 states around the country tapped into their rainy day funds to close out their budget gaps
It is estimated that in FY 2003, 12 states would resort to this strategy
In FY 2002, Oklahoma, utilized $268 million from its rainy day fund; in the past five years, OK has used $571 million
North Carolina drew down its rainy day fund from $522 million in FY 1999 to $125 million in FY 2002
In Louisiana, Governor Foster secured $86 million of the $263 million currently in rainy day fund
Governor Glendening in Maryland decides to use $190 million from rainy day fund
IV. Measures Adopted by SLC States to Deal with Budget Shortfalls: Deploy Tobacco Settlement Monies : IV. Measures Adopted by SLC States to Deal with Budget Shortfalls: Deploy Tobacco Settlement Monies In FY 2002, 12 states used the proceeds of securitizing their tobacco settlement monies to address mounting budget gaps in their budgets
In FY 2003, it is estimated that 16 states would do so
Missouri tapped $139 million of its funds to offset its shortfall and hopes to use another $350 million
Alabama secured $30 million of its funds for Medicaid
Tennessee used $368 million of its funds to close the shortfall in fiscal year 2002. In addition, the legislature decided to count $160 million to be received every year under the agreement for the next 20 years as “recurring revenue” in its budget deliberations
IV. Measures Adopted by SLC States to Deal with Budget Shortfalls: Raise Taxes : IV. Measures Adopted by SLC States to Deal with Budget Shortfalls: Raise Taxes Personal Income Taxes went up in OK because of an automatic trigger adopted as part of a tax reduction act in 1998
AL increased Business Taxes by $58 million by taxing interstate long-distance telephone calls
Sales Taxes went up in TN and NC. In certain counties in TN, the sales tax is 9.75%, the highest in the country. In NC, the sales tax could be as high as 7.5%
AR’s governor, after re-election, proposed raising state’s sales tax and generating $474 million in new revenue
MO, MD and AR reviewing a number of corporate exemptions to bring in additional revenue
New Speaker in AR wants to remove the income and capital gains tax cuts passed in 1997 and 1999
IV. Measures Adopted by SLC States to Deal with Budget Shortfalls: Hiking Cigarette Taxes : IV. Measures Adopted by SLC States to Deal with Budget Shortfalls: Hiking Cigarette Taxes 19 states implemented higher cigarette taxes in 2002
27 states have not increased their cigarette taxes for at least five years
Four SLC states increased their cigarette taxes in 2002: Arkansas (34 cents, Louisiana (36 cents), Maryland (100 cents) and Tennessee (20 cents)
Governor Wise in VW has proposed increasing his state’s cigarette tax to at least 55 cents per pack and using the all revenue from the increase to bail out the state’s Medicaid program
Proposals in GA, TX and SC to raise the cigarette tax and secure additional revenue
IV. Measures Adopted by SLC States to Deal with Budget Shortfalls: Establishing State Lotteries : IV. Measures Adopted by SLC States to Deal with Budget Shortfalls: Establishing State Lotteries Tennessee became the latest state to move closer towards establishing a state lottery to pay for specific education initiatives
New Governor in Maryland campaigned on slots at the racetracks as a source of additional funding (possibly $800 million per year) for the state
South Carolina voters approved a state lottery to finance education initiatives a few years ago
In North Carolina, during the 2002 session, a measure to place a referendum on the ballot on introducing a state lottery to fund education initiatives was defeated
V. What Can We Expect? : V. What Can We Expect? Both the federal government and states will face significant budgetary problems in the next few years
The economy is not expected to begin generating jobs in a substantial manner for the next 12-15 months
Yet, there are several positive features of the current economy which should not be disregarded
(1) Inflationary pressures are minimal
(2) The economy is still expanding
(3) Record-low interest rates, lowest in some 40 years
(4) American productivity gains continue to be very impressive
V. What Can We Expect? : (1) Inflationary pressures remain minimal with the CPI expected to rise by just 2.6% in 2002
(2) GDP growth for the U.S. economy is expected to be close to 2.7% in 2002; in 2003, it is expected to be close to 3%
(3) Low mortgage rates have sustained the explosive growth pattern of the housing market as more and more Americans purchase their first homes and re- finance their existing mortgages. Between May 1998and January 2003, rates on a 30-Year fixed mortgage plunged with the U.S. average declining from 6.9% to 5.6%; the SLC average also dropped rom 6.9% to 5.6% V. What Can We Expect?
V. What Can We Expect? (Cont.) : V. What Can We Expect? (Cont.) (4) Productivity Improvements
Federal Reserve Bank Chairman Alan Greenspan has been a fervent proponent of the theory that the American economy has entered an era of stronger productivity growth based on the technological advances reached in the 1990s
American productivity has continued to post impressive gains recently and the 4 percent growth in productivity in the third quarter of 2002 brings the annual rate over the past year to a remarkable 5.3 percent, the best performance in nearly two decades V. What Can We Expect?
For More Information Please Contact Sujit M. CanagaRetna 404/266-1271 or scanagaretna@csg.org www.slcatlanta.org : For More Information Please Contact Sujit M. CanagaRetna 404/266-1271 or scanagaretna@csg.org www.slcatlanta.org