State Strategies to Manage Budget Shortfalls Presentation to Great Lakes Region Fiscal Leaders Meeting Chicago, Illinois February 11, 2011 Luke Martel, Fiscal Affairs Program, NCSL
Overview State revenue performance is improving. Higher revenues will be inadequate to cover the loss of one-time funds and rising costs. States have reported a total estimated budget gap of $562.9 billion (FY 2008 through FY 2013 est). 2
Year-Over-Year Percent Real Change in Major Taxes Source: The Nelson A. Rockefeller Institute of Government. State Revenue Report, February 11, 2011. 3
Number of States 9 8 7 6 5 4 3 2 1 0 Projected Return to Peak Revenue Collections FY 2011 FY 2012 FY 2013 FY 2014 Fiscal Year N/A: North Dakota Not in the current forecast horizon: 19 states No Response: 2 states Source: NCSL survey of state legislative fiscal offices, Summer 2010. FY 2015 FY 2016 4
AK Projected FY 2012 Budget Gaps as a Percentage of General Fund Budget WA 14.5% OR 16.0% HI 3.6% ID 14.0% NV 32.0% UT CA 18.7% AZ 14.7% VT, 8.6% ND MT 10.2% MN 19.8% WI 9.2% SD WY IA 4.7% NE 13.2% CO 16.0% KS 7.9% OK 14.0% NM 4.6% 0.1% to 4.9%, n = 6 5% to 9.9%, n = 7 10% to 19.9%, n = 18 More than 20% n= 4 No gap or no forecast, n= 16 NH NY 13.6% MI 17.0% PA IN MO WV KY TN,1.2% AR LA 16.3% AL MA, 7.6% RI, 9.2% CT, 18.3% NJ, 26.0% OH IL MS TX 17.0% ME 12.9% VA DE MD, 13.5% NC 20.3% SC GA 12.7% FL 6.7% Puerto Rico, 5.5% Source: NCSL survey of state legislative fiscal offices, November 2010. 5
AK Projected FY 2013 Budget Gaps as a Percentage of General Fund Budget WA 14.5% OR 17.0% VT, 6.5% ND MT 8.5% MN 12.1% ID WI 9.6% SD WY HI 2.6% NV 40.0% UT CA 20.2% OK AZ 13.5% NM 0.1% to 4.9%, n = 7 5% to 9.9%, n = 5 10% to 19.9%, n = 10 More than 20%, n= 3 No gap or no forecast, n=26 PA IN MO TX 17.0% WV VA KY LA 15.6% CT, 16.8% DE MD, 11.8% SC AR AL RI, 9.5% NC TN, 0.6% MS MA NJ OH IL KS ME 10.6% NY 20.4% MI IA NE 11.8% CO NH GA FL 7.7% Puerto Rico, 5.5% Source: NCSL survey of state legislative fiscal offices, November 2010. 6
Billions State Budget Gaps FY 2002-FY 2013 $200 $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 (projected) $174.1 $117.3 $110.6 $79.0 $83.7 $37.2 $82.1 $37.0 $26.9 $66.0 No $12.8 Estimate Fiscal Year Amount Before Budget Adoption Amount After Budget Adoption Source: NCSL survey of state legislative fiscal offices, various years. Projected 7
State Measures to Balance FY 2010 & FY 2011 Budgets In partnership with the Pew Center on the States, NCSL is tracking actions states are taking to address budget gaps. The project consists of a series of tables, available at: http://www.ncsl.org/?tabid=19650 The project is moving to a searchable database this spring. 8
Major Components of General Fund Appropriations, FY 2008 Other, 32.8% K-12 Education, 33.9% Higher Education, Medicaid, 11.8% 15.2% Corrections, 6.3% Source: State Budget Actions, 2008 9
Overall Trends Cuts have been heavily concentrated in Medicaid and other health care services. Recent cuts to K-12 have been more severe than in FY 2010. Some states are revising sentencing policy in an attempt to reduce rising prison costs. Many states have cut aid to local government. States are instituting changes to employee benefit plans, and some states have changed plans for current retirees. Many states have relied significantly on rainy day funds and other one-time sources. 10
K-12 Education Cuts In FY 2010, states largely avoided cuts with direct impacts on classroom expenditures. FY 2011 cuts were more likely to impact direct expenditures, including the school funding formula. Examples: Post-enactment of the budget, the governor ordered cuts of $114 million, or 5%, to state funding for K-12 education (MS). Delayed $2 billion in payments to school districts (MN). Cut K-12 funding by 6.4%, saving an estimated $260 million (CO). Eliminated funding for one instructional day (KY). Cut funding for full-day kindergarten, saving an estimated $218 million (AZ). Cut $59 million in soft expenditure funding (OH). 11
Higher Education Cuts Percentage cuts to higher education tend to be greater than cuts made to the K-12 system. Increased enrollment because of the recession has exacerbated the problem. At least 2/3 of the states cut higher education funding in FY 2010, with about half imposing cuts in FY 2011. Examples: Eliminated $140 million Michigan Promise grant program (MI). Cut $150 million, about 6%, from higher education (IN). Cut $100 million from state aid to higher education (IL). Cut $61.5 million from state aid to higher education (CO). 12
Medicaid Cuts Nearly every state has reduced Medicaid funding during the past two years. Reductions have been focused on: Reducing provider payments (at least 2/3 of the states in FY 2010 alone) Imposing pharmacy controls Eliminating optional benefits Examples: $736 million cut to Medicaid (over biennium) (VA) Includes $367 million in provider rate reductions. Cutting payments to private health providers by $168 million (LA). Reducing in-home personal care services by $50.7 million (NC). 13
Other Health Care Cuts Examples: Cut $225 million from the state's basic health insurance plan for low-income individuals with approximately 40,000 people losing coverage (WA). Cut $90 million from local mental health agency funding (OH). Reduced funding to state psychiatric hospitals by 8% (ID). Cut the Dept. of Human Services budget by $312.6 million (IL). Cut the Dept. of Community Health budget by $204.5 million cut (GA). Consolidated child abuse intake centers from eight to one (IA). Closed 17 of 33 centers that evaluate children with significant behavioral problems (OK). 14
Criminal Justice & Court Cuts Many states have closed prisons or detention facilities. Other cuts have focused on prisoner programs or other expenses. Examples: Enacted sentencing reform law reduces sentences for some non-violent crimes and increases sentences for some violent crimes, saving an estimated $400 million over the next five years (SC). Imposed 5% across-the-board cuts to the prison system. Prison closures are anticipated as the agency prepares for a planned 10% cut (TX). Vegetarian enriched meals replaced inmate kosher meals (IN). Adopted Taco Tuesday at all state prisons, saving 10 cents a meal (WI). Cut expenses for the annual prisoner rodeo to save $120,000 (OK). Closed three prisons and five prison camps (MI). 15
Local Government Aid Cuts/ Parks and Recreation Many states have cut aid to local government. Post-enactment of the budget, the Board of Public Works approved cutting $211 million in FY 2010 aid to local governments (MD). FY 2011 funding to local government aid programs was cut by $404.3 million (MN). Many states have cut funding for state parks or other recreation venues. Examples: Local governments, private companies and Native American tribes are temporarily taking over operations at a number of state parks (AZ). Reduced parks and recreation budget by $23 million (MA). 16
Furloughs and Layoffs Many states have imposed furloughs or layoffs to reduce personnel expenses. At least 29 states implemented furloughs in FY 2010, with at least nine implementing them in FY 2011. 26 states laid off employees in FY 2010, with nine doing so in FY 2011. Examples: Laid off over 5,000 workers and instituted a total of 36 furlough days for various state agencies (CA). Reduced workforce by 14% (PR). Imposed voluntary furlough program - up to 10 days (IL) Allowed voluntary furlough plans in lieu of layoffs for agencies facing cuts (AL). Imposed 10 furlough days for 12,500 state employees, saving $50 million (WA). Imposed eight furlough days for most state employees (WI). 17
Other Employee Actions At least half the states have implemented benefits changes including: Pension plan changes Increased employee contributions for health insurance Changes to cost of living adjustments Other common changes affecting state employees include: Hiring freezes Salary freezes Early retirement program Travel bans Many of these actions were administratively implemented at the onset of the recession and still remain in effect. 18
Tapped Rainy Day or Other Funds Examples: Depleted the entire rainy day fund (CT). Used $2 billion in one-time funds, including rainy day fund, tax amnesty proceeds, a state emergency response fund and other sources (LA). Tapped $95.2 million from the Rebuild Iowa Infrastructure Fund to use for non-infrastructure items (IA). Many states also tapped other funds, such as tobacco settlement funds. 19
Securitization of State Assets Arizona. SB 1003 Requires the Arizona Department of Administration (ADOA) to issue State Lottery Revenue Bonds (Bonds) and enter into lease-purchase agreements of state owned facilities. California. Chapter 20, Statutes of 2009 Authorizes the DGS to (1) sell 11 state owned office buildings and (2) lease the buildings back from the new owners through a long term lease. New Hampshire. HB 55 Establishes a commission to inventory state assets, enterprises, and resources and to make recommendations as to those that may be monetized by sale or lease, and makes an appropriation to the department of administrative services. 20
AK Recent State Commissions and Agencies on Restructuring Government WA OR HI CA ND MT ID NV WY UT AZ CO VT MN SD KS MO OK NM TX WI IA NE NH AR LA MI IL IN OH TN AL MA, NY KY MS ME GA RI CT PA WV NJ DE VA SC MD NC FL USVI Source: NCSL & NASBO, 2010. Puerto Rico 21
For More Information luke.martel@ncsl.org 22
Key Concerns Looking Ahead Mounting spending pressures Feasibility of further budget cuts Unfunded pension and other liabilities Revenue performance/new revenues Replacing federal stimulus funds Federal actions affecting states Structural budget gaps 23
Quote of Note "All the low-hanging fruit has been eaten." Senator Joe Zarelli, Ranking Republican Member Senate Ways & Means Committee Washington 24
Digging for Dimes In Rest Stops, Bull Semen and Tacos IDEAS THAT PREVAILED Colorado lawmakers, aiming to recoup $100 million, removed several tax exemptions and credits, including the exemptions restaurants received for the cost of purchasing condiments and take-out containers; tax breaks ranchers got when buying pesticides and bull semen; and incentives bulk mailers enjoyed for printing coupon booklets. Wisconsin adopted Taco Tuesday at all state prisons, saving 10 cents a meal. Missouri clarified that yoga and Pilates classes are recreational rather than spiritual services and thus subject to a sales tax. The Wisconsin Supreme Court determined symphony tickets are subject to the sales tax since a concert is more entertainment than education. The Oklahoma State Penitentiary cut expenses for its annual prisoner rodeo to save $120,000. IDEAS UNDER CONSIDERATION California is currently considering the sale of digital advertising space on license plates. Wyoming is trying to get the Interior Department to trade land, minerals or mineral royalties for 1,366 acres the state owns within Grand Teton National Park. If the feds don t agree to a deal soon, the governor is threatening to sell the property. Georgia lawmakers are looking at privatizing rest stops. IDEAS THAT STALLED Tennessee lawmakers defeated a proposal to tax complimentary breakfasts offered by hotels. The Illinois Senate voted against a proposal to eliminate free bus rides for seniors. A proposal there to sell the state s executive air fleet for $22 million also failed. Mississippi defeated a proposal to allow some advertisements on school buses. The lllinois governor backed off on a proposal to collect sales taxes on Internet downloads. Source: State Legislatures, September, 2010. 2 5
AK Revenue Outlook for the Remainder of the FY 2011 WA HI CA ID NV UT CO KS MO OK TX WI IA NE NM VT MN SD WY AZ Pessimistic, n = 0 Concerned, n = 17 Stable, n = 31 Optimistic, n = 3 ND MT OR NH AR LA Source: NCSL survey of state legislative fiscal offices, November 2010. MI IL IN TN MS PA OH VA WV KY AL NY GA SC NC FL ME MA RI CT NJ DE MD Puerto Rico 26
Revenue Outlook for the Remainder of the Fiscal Year (2003-2010) 35 30 25 20 15 10 5 0 Nov. 2003* Nov. 2004 Nov. 2005 Optimistic Nov. 2006 Stable Nov. 2007** Concerned Nov. 2008 Nov. 2009** Nov. 2010** Pessimistic * 49 states reporting ** Includes Puerto Rico Source: NCSL survey of state legislative fiscal offices, November, various years. 27
AK Projected Return to Peak Revenue Collections WA OR HI CA FY 2011, n = 3 FY 2012, n = 8 FY 2013, n = 8 FY 2014, n = 4 FY 2015, n = 4 ND MT ID NV WY UT AZ CO VT MN SD WI IA NE NE KS MO OK NM NH TX FY 2016, n = 1 Unknown/No Forecast n = 22 Source: NCSL survey of state legislative fiscal offices, Summer 2010. AR LA MI IL IN TN MS PA OH VA WV KY AL NY GA SC NC ME MA RI CT NJ DE MD FL 28
AK Structural Budget Gaps FY 2012, FY 2013 & FY 2014 WA 2 ID 1 MN 3 CA 3 UT 1 AZ 3 IA 1 NE 3 HI NV WI 2 SD 3 WY CO 3 KS 1 OK 1 NM Structural gap, n = 30 NY 3 MI 1 PA IN MO WV VA KY, 1 RI, 3 CT, 3 DE MD, 3 NC 3 TN, 2 SC AR AL MA, 1 NJ, 1 OH IL 3 MS TX 2 ME 2 VT, 3 ND MT 2 OR NH GA LA FL 3 Not applicable or no response, n= 21 Puerto Rico, 1 Source: NCSL survey of state legislative fiscal offices, November 2010. 29
Number of States Top Fiscal Issues for 2011 Sessions 35 30 25 20 15 10 5 0 31 18 13 12 8 Source: NCSL survey of state legislative fiscal offices, November 2010. 30
FY 2011 Tax Collections (Compared with the Latest Estimate) Personal Income Tax General Sales Tax Corporate Income Tax Above Estimate On Target Below Estimate Not applicable Source: NCSL survey of state legislative fiscal offices, November 2010. 31
Revenue Concerns Sluggish recovery of state collections Use of one-time funds in FY 2009 and FY 2010 ARRA cliff Rainy day funds, tax amnesty programs, fund transfers, etc. Expiration of temporary taxes or repeal by voters Feasibility of increasing taxes or other revenues 32
Spending Concerns Rising program costs (Medicaid/health care, education, corrections, etc.) Unfunded pension liabilities More states enacted significant retirement legislation in 2010 than in any other year in memory. (Resource: NCSL s State Retirement Legislation in 2010) Implications of past budget cuts and the potential for further cuts