Transcript The 2009 and 2010 Budget Outlook

THE 2009 AND 2010 MISSOURI
BUDGET OUTLOOK
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James R. Moody & Associates
September 3, 2008
SPECIAL THANKS
Senate Appropriations Staff
 House Appropriations Staff
 Missouri Office of Budget and Planning Staff
 Missouri Department of Economic Development
Staff

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WHOSE VIEW IS CORRECT ON THE
MISSOURI BUDGET?
Governor Blunt—Largest budget surplus ever
 Missouri Budget Project—We are about to fall off
of the cliff
 The View of Many Legislators—Expenditures
above revenues on a consistent basis, Do we
have a structural deficit?
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THE ANSWER

A little bit of all three
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THE SURPLUS
Missouri ends each year with a balance that is a
combination of planned cash balances and lapsed
appropriations (authority to spend that is not
spent)
 The cash balance is similar to an individual’s
bank account—it does not represent ongoing
revenue
 Similar to your bank account, the cash balance
should not be put into ongoing programs, because
it is not supported by ongoing revenue
 We will show you how the “surplus” fits into the
overall budget picture
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COMPONENTS OF MISSOURI GENERAL
FUND
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BASIC BUDGETING 101
What goes up can also come down
 With our limited revenue stream, it is easy to
define which components could trigger a
downturn
 Because we rely so heavily on individual income
tax and sales tax, there is a direct relationship
between general revenue growth and personal
income growth
 Income tax growth (and decrease) over the past
decade has also been driven by taxation of capital
gains
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HOW MISSOURI HANDLES CASH FLOW
AND BUDGET EMERGENCIES
Missouri has a constitutional “Budget Reserve
Fund” equal to 7 ½% of general fund revenues
 This fund can be used for cash flow requirements,
or as a Rainy Day Fund
 If used as a Rainy Day Fund, it must be repaid
within three years
 Since this fund is available for cash flow and
emergencies, budgeting all revenues and
beginning balances makes more sense
 The Budget Reserve Fund is not a general
revenue fund. The general revenue balance
referenced here does not include the Budget
Reserve Fund
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INTRO TO STATE BUDGETING
Historically Missouri has had nominal balances
carried forward, and has budgeted beginning
balance and prior year’s lapse
 The next year’s beginning balance and lapse are
created by expenditure management and the
statutory 3% reserve
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THE FISCAL YEAR 1998 BUDGET—A GOOD
EXAMPLE OF TRADITIONAL STATE
BUDGETING OF THE GENERAL FUND
Beginning balance and lapse
are completely budgeted
All funds are appropriated
and ending balance is zero
(in millions)
Beginning
balance
Lapse
Revenue
Collections
$132.8
$86.9
$5,906.6
Other
Resources
$374.5
Total
Resources
$6,500.8
(in millions)
Operating
Appropriations
Tax Refunds
$4,612.7
$536.9
Capital Impr.,
Deseg, Other
Expenditures
$1,351.2
Total
Obligations
$6,500.8
Ending
Balance
$0
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CURRENT CASH BALANCES ARE MUCH
HIGHER THAN HISTORIC AVERAGES
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WHAT SHOULD WE KNOW ABOUT THE
TRADITIONAL BUDGETING METHOD
It probably does not work when the beginning
balance and lapse are very large
 In current circumstances, it could have the effect
of putting one-time moneys into ongoing
programs
 If budgeted, one-time funds should be put into
one-time expenditures, such as capital
improvements
 Many people, including many elected officials, do
not understand that the “surplus” is one-time
money
 Therefore, they suggest putting the one-time
money into ongoing programs
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THE
IMPORTANCE OF PERSONAL INCOME TO THE
MISSOURI BUDGET
Missouri derives most of its general fund income
from the individual income tax and the sales tax
 Growth in these factors is derived primarily from
growth in personal income
 Personal income does include all earned income
and most unearned income, including dividends,
interest and rents
 Personal income does not include capital gains,
and so what is happening with capital gains must
be viewed independently from personal income
growth
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MOODY’S RATING SERVICE OUTLOOK
FOR MISSOURI PERSONAL INCOME
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THE RELATIONSHIP OF PERSONAL INCOME
AND GENERAL FUND GROWTH
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INCOME TAX WITHHOLDING COMPARED
TO PERSONAL INCOME GROWTH
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IS THE GR BUDGET GETTING OUT
OF BALANCE?
Fiscal
Year
Revenues
Expend
Difference
2006
$7,635.0
$7,219.9
$145.1
2007
$8,015.4
$8,018.2
($2.8)
2008
$8,312.1
$8,364.9
($52.8)
2009
$8,618.8
$8,754.9
($136.1)
2010
$8,754.9
$9,204.4
($399.5)
Fiscal Year 2010
assumes a 3.4% revenue
growth in FY 2009 and
FY 2010, and $350
million growth in
obligations in Fiscal
Year 2010
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CAPITAL GAINS SUBJECT TO STATE INCOME
TAX
(IN THOUSANDS)
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THOUGHTS ON CAPITAL GAINS
They are not included in personal income, and
budget decision-makers should track them
separately
 The major downturns in state revenues in the
early 2000’s were largely driven by a major
downturn in capital gains, not by a drop in
income tax withholdings
 Treatment of capital gains could change at the
federal level, but have a direct impact on
Missouri’s general fund
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INDIVIDUAL INCOME TAX
For Fiscal Year 2009, the consensus revenue
estimate is that 66% of general fund revenues
will come from the individual income tax
 Approximately 72% of all income tax revenues
come from employee withholdings
 Non-withholding income tax comes in the form of
declarations and remittances, and would include
income from quarterly estimated payments and
annual final payments by self-employed persons,
as well as payments of taxes on unearned income
such as interest, dividends, and capital gains
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INDIVIDUAL INCOME TAX
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Individual income
tax withholding
has been growing
each year since
1999. The
shortfalls in
income tax in the
early 2000were
driven by reduced
capital gains, not
by reduced
withholdings
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THOUGHTS REGARDING INDIVIDUAL
INCOME TAX WITHHOLDING
The last three years have been strong for income
tax withholding (7.0%,5.1%,6.0%).
 The four years prior to FY 2006 only averaged
3.3% withholding growth.
 Income tax withholding tends to track personal
income growth, and Moody’s projects moderate
personal income growth in the next few years.
That would tend more toward the four years of
moderate growth
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SALES TAX GROWTH
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CAUTIONS REGARDING SALES TAX
GROWTH
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We generally do not tax the products where prices are
rapidly rising (food, prescription drugs, utilities)
Some products which we do tax are experiencing price
declines (electronics, appliances)
Motor fuel is not subject to the sales tax, and the
motor fuel tax is earmarked for transportation. Motor
vehicle sales tax also goes to transportation
Continued erosion of the sales tax base due to
internet sales
It appears that nominal sales tax growth (or slightly
negative growth) will continue
Sales tax is over 23% of the general fund. If it is
not growing, the other major component
(individual income tax) must outperform for
revenues to grow (Note consensus revenue
estimate slide)
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FY 2007 Credits
Issued--$171
million
FY 2008 Credits
Issued--$161
million
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OVERALL TAX CREDIT REDEMPTION
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OTHER BUDGETARY PRESSURES
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Medicaid inflationary pressures
Possible uninsured expansion of coverage
Corrections
Fully funding the school formula
Higher education funding
Deferred maintenance
Capital improvements
Unknown impact of Senate Bill 30 changes to sales
tax laws
Unknown impact of accelerated depreciation from the
federal economic stimulus package
Potential impact of Missouri Guaranty Fund covering
pre-need policies for National Prearranged Services
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Component
Individual Income Tax
Sales Tax
Conensus Revenue
Growth Estimate
4.5%
.4%
Corporate Tax
5.0%
County Foreign
Insurance
6.6%
All Other
Net GR Collections
(2.8%)
3.4%
The consensus
revenue
estimate for
Fiscal Year
2009 illustrates
the
dependence on
the individual
income tax. To
reach 3.4%
growth
overall,
individual
income tax
must grow
4.5%, while
sales tax is
estimated to
grow only .4%.
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THE “GUN AT THE HEAD” QUESTION

If forced to predict whether actual receipts
would exceed the revenue estimate or be below
the revenue estimate in the next few fiscal
years, what would your prediction be?
Below
However, because Missouri exceeded the
revenue estimate in FY 2008, only 2.8% growth
is need to make the FY 2009 estimate of 3.4%
growth. Potential problems might not appear
until FY 2010.
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WHAT SHOULD MISSOURI DO?
Relative to other states, we may actually be
in an enviable position
 Budget Rule 1—Don’t put one-time funds
into ongoing programs.
 Keep a very close eye on capital gains and
personal income
 Consider putting one-time funds into
capital improvements or deferred
maintenance or other one-time investments
 Don’t allow the public to think that excess
cash balances are ongoing revenue
 Manage the situation
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