What the National Financial Crisis means for Ohio s Revenues in FY2009, FY2010 and FY2011. Ohio Office of Budget & Management December 1, 2008

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1 What the National Financial Crisis means for Ohio s Revenues in 2009, 2010 and 2011 Ohio Office of Budget & Management December 1, 2008

2 It means that in the next 2 years, Ohio will confront the most serious erosion in revenues it has experienced in the last 40 or 50 years. 2

3 National Recession: 49 of 50 states are either in recession or at risk Source: Mark Zandi, Moody s Economy.com, November 19,

4 National Economy is in Crisis National economy has lost 1.2 million jobs since crisis began; monthly job losses may reach 300,000 Consumer confidence has fallen to its lowest level for 40 years (since records kept); retail sales declined by 2.8% Housing crisis has removed $4 trillion in household wealth in the last year. Every $1 loss in household wealth reduces consumer spending by 5 cents over the next two years US GDP is expected to fall by 2.6% in 2009 without Federal stimulus action; steepest decrease since Great Depression Source: Mark Zandi, Moody s and Economy.com, Written Testimony before Senate Budget Committee, 11/19/08 4

5 Budget HB119 lowest growth budget in 42 years $1.3 billion has already been removed with cash management and spending reductions to date Current agency spending level is 87.25% of HB budget will require action to address additional $640 million gap depending upon Potential Federal recovery package Ongoing economic performance; retail holiday season 5

6 Budget In view of reduced revenues even at 90% guidance levels, the budget results in projected deficits of 10 of $2.0 billion and 11 of $2.7 billion Total $4.7 billion across the biennium All line items at 90% except debt service, tax relief and Medicaid 6

7 How did we get here?

8 Continual Erosion of Workers Wages beyond our expectations 6 5 Ohio Wage and Salary Income 4 Y/Y Percent Chang ge 3 2 July Baseline October Baseline November Baseline November Pessimistic Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 Source: and Ohio Department of Taxation analysis 8

9 Ohio could see a reduction in wage and salary income for the first time Ohio wage and salary income growth Global Insight November 2008 pessimistic forecast for Source: and Ohio Department of Taxation Analysis 9

10 Ohio Wage & Salary Income (millions) 250, , , , , , , , , , , , , September Forecast and Tax Consensus Forecast 11/20 10

11 Ohio Disposable Personal Income (millions) 410, , , , , , , , , ,251 September Forecast and Tax Consensus Forecast 11/20 340, ,

12 Over $2.6 billion in forecast GRF Revenues lost in last 10 weeks due to economic conditions $19,000.0 $18, $640.5 $18, $1.3 $17,500.0 $18, $721.9 $18,394.5 $17,000.0 $18,044.5 $17,774.3 $16,500.0 $17,052.4 $17,021.5 $16,000.0 Source: analysis September '08 November '08. 12

13 3 Scenarios Developed by /Tax: September 2008 Forecast A Conventional Month Recession B Extended Consumer-led Recession C Severe Mfg and Fin Sector Contraction Mild Recession of two quarters Wage and Salary declines somewhat, recovers by 3 rd quarter of CY2010 No further disruptions in credit markets; credit begins to ease significantly Recovery in 3 rd to 4 th quarter of CY2009 Deeper recession lasting into CY2010 Deeper disruptions in labor markets, sustained unemployment rates at US rates Modest decrease in consumer demand Credit markets soft GSP growth still below trend No appreciable growth in Ohio economy over biennium Extended recession with negative real GSP throughout CY2008 and CY2009 Labor market contracts consistently over 3 year period Consumer confidence and spending continues to slide through late 2010 Automotive sector in extended decline Prolonged and deep recession lasting well into 2011 Continued freeze in credit markets making credit difficult to obtain for most commercial enterprises, state and local government Severe contraction of manufacturing and financial service sector Widespread and longterm reductions in Ohio s labor market 13

14 All 3 Scenarios Predict Substantial Reductions in GRF Revenues $20,000.0 GRF Tax Revenue $19,000.0 September '08 $18,000.0 Scenario A $17,000.0 $19,419.6 Scenario B $18,044.5 Scenario C $16,000.0 $17,052.4 $17,021.5 $15,

15 $20,000.0 Ohio Office of Budget and Management Scenario B: Most Likely Scenario for $19,563.4 $19,468.9 $19,419.6 GRF Tax Revenues $19,000.0 $19,088.0 $18,000.0 $18,044.5 $17,000.0 $17,052.4 $17,021.5 $16,000.0 $15, (est) 10 (est) 11 (est) Until 08, there was no time in the past half century when GRF tax revenues declined two years in a row. 15

16 Tax Losses are of Historic Proportions Since 1972, there has never been a 2 year decline in collections from the personal income tax. Today, we are managing a 3 year decline of $1.379 Billion. B illio ons $9.5 $9.0 $8.5 $8.0 $7.5 $7.0 Personal Income Tax $9.114B $8.257B $7.980B $7.735B Source: Ohio Department of Taxation 16

17 Tax Losses are of Historic Proportions Sales tax revenues will be $491 Million lower in 10 than in 08. This is the first 2- year sales tax decline since B illio n s $7.8 $7.6 $7.4 $7.2 $7.0 $6.8 Sales & Use Tax $7.614B $7.452B $7.363B $7.123B Source: Ohio Department of Taxation 17

18 GRF Total Taxes and Revenue Losses Compared to 08 $20,000.0 $19,419.6 $18,044.5 $17,052.4 $17,021.5 $15,000.0 $10,000.0 $5,000.0 $0.0 ($1,375.1) ($2,367.2) ($2,398.1) ($5,000.0) Total GRF tax revenues, for 2011 will be less than 2004 revenues (seven years earlier). 18

19 Ohio Office of Budget and Management