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NASACT Annual Conference
STATES’ FISCAL REPORT
John HicksExecutive Director
National Association of State Budget Officers | NASBO
August 16, 2016
CURRENT FISCAL AND ECONOMIC SITUATION
3
Fiscal 2017 expected to mark the 7th consecutive annual increase in general fund spending and revenues
Budget environment for most states indicates continued stability with modest growth
Fiscal progress has been uneven across states, with some facing difficult budgetary challenges (energy states especially)
With long-term spending pressures and slower revenue growth expected, FY 2017 budgets are cautious
State Fiscal OVERVIEW
4
Spring 2016 Fiscal Survey:FY 2016 Key Findings
50-state total general fund spending in fiscal 2016 has barely surpassed pre-recession peak after inflation
29 states still haven’t reached their pre-recession spending peak
General fund spending in fiscal 2016 grew at the highest rate since the Great Recession – median growth was 3.8%
With limited revenue growth expected, governors proposed modest spending increases in fiscal 2017, 2.5% on average
Most states continue to increase rainy day fund balances
Revenue growth slowed down in fiscal 2016 after strong performance in fiscal 2015
5
2017 Revenues estimated to grow only 2.9%
State Medicaid spending growing more slowly
2017 STATE BUDGETS
Energy states facing serious fiscal challenges
Continued priority for K-12 funding and increased attention to opioids & other substance abuse
Juvenile justice reforms, Water management, Recruitment/retention of teachers & public safety workers
States enacting 2017 spending increases in many areas
6
1 2
3 4
NATIONAL ECONOMIC INDICATORS
2016 GDP Growth2nd Quarter 1.2%1st Quarter 0.8%
GDP Growth Forecasts2016: 1.8% to 2.2%2017: 1.6% to 2.4%(Federal Reserve-June, 2016)
Many economists predict around a 15-20% chance of recession by end of the year - “watching the clock”
˃ Unemployment rate 4.9% June˃ Retail sales up 0.6% in June˃ Personal income up 0.2% May˃ Inflation up 0.2% in June
7
Ratings in parentheses are issuer credit ratings or implied General Obligation ratingsNote: Green shaded box indicates upgrade and red shaded box indicates downgrade since January 1, 2016.* No general obligation, implied general obligation or equivalent issuer credit ratings(1) Lease revenue and/or Certificate of Participation (“COP”) rating.(2) Kroll Bond Rating Agency also assigns ratings to Connecticut (AA‐/stable), Wisconsin (AA/stable), New York (AA+/Stable) and New Jersey (A/Stable).CWN stands for Credit Watch Negative
State StateAlabama Aa1 Stable AA Stable AA+ Stable Missouri Aaa Stable AAA Stable AAA StableAlaska Aa1 Negative AA+ Negative AA+ Negative Montana Aa1 Stable AA Stable AA+ StableArizona (Aa2) Stable (AA-) Stable * N/A Nebraska Aa2(1) Stable (AAA) Stable * N/AArkansas Aa1 Stable AA Stable * N/A Nevada Aa2 Stable AA Stable AA+ StableCalifornia Aa3 Stable AA- Stable A+ Stable New Hampshire Aa1 Stable AA Stable AA+ StableColorado (Aa1) Stable (AA) Stable * N/A New Jersey A2 Negative A Negative A StableConnecticut(2) Aa3 Negative AA Negative AA Stable New Mexico Aaa Stable AA+ Negative * N/ADC Aa1 Stable AA Stable AA Stable New York(2) Aa1 Stable AA+ Stable AA+ StableDelaware Aaa Stable AAA Stable AAA Stable North Carolina Aaa Stable AAA Stable AAA StableFlorida Aa1 Stable AAA Stable AAA Stable North Dakota (Aa1) Negative (AA+) Stable * N/AGeorgia Aaa Stable AAA Stable AAA Stable Ohio Aa1 Stable AA+ Stable AA+ StableGuam * N/A BB- Stable * N/A Oklahoma Aa2 Negative (AA+) Stable AA+ StableHawaii Aa2 Positive AA Stable AA Stable Oregon Aa1 Stable AA+ Stable AA+ StableIdaho (Aa1) Stable (AA+) Stable (AA+) Stable Pennsylvania Aa3 Negative AA- CWN AA- StableIllinois Baa2 Negative BBB+ Negative BBB+ CWN Puerto Rico Caa3 Negative CC Negative CC CWNIndiana (Aaa) Stable (AAA) Stable (AAA) Stable Rhode Island Aa2 Stable AA Stable AA StableIowa (Aaa) Stable (AAA) Stable (AAA) Stable South Carolina Aaa Stable AA+ Stable AAA StableKansas (Aa2) Negative (AA) CWN (AA) CWN South Dakota Aa2(1) Stable (AAA) Stable (AA+) StableKentucky (Aa2) Stable (A+) Stable AA- Stable Tennessee Aaa Stable AAA Stable AAA StableLouisiana Aa3 Negative AA Negative AA- Stable Texas Aaa Stable (AAA) Stable AAA StableMaine Aa2 Stable AA Stable AA Stable Utah Aaa Stable AAA Stable AAA StableMaryland Aaa Stable AAA Stable AAA Stable Vermont Aaa Stable AA+ Stable AAA StableMassachusetts Aa1 Stable AA+ Negative AA+ Stable Virginia Aaa Stable AAA Stable AAA StableMichigan Aa1 Stable AA- Stable AA Stable Washington Aa1 Stable AA+ Stable AA+ StableMinnesota Aa1 Stable AA+ Positive AA+ Stable West Virginia Aa1 Negative AA- Stable AA+ StableMississippi Aa2 Stable AA Stable AA+ Stable Wisconsin(2) Aa2 Positive AA Stable AA Stable
Wyoming * N/A (AAA) Negative * N/A
FitchMoody's S&P Fitch Moody's S&P
Sources: Moody’s Investors Service, Standard & Poor’s Ratings Services, Fitch Ratings, Kroll Bond Rating Agency; As of July 27, 2016.
STATE G.O. RATINGS & OUTLOOKS AS OF JUNE 2016, FROM CITI
CURRENT FISCAL SITUATION: INDICATORS
9
SLOW BUDGET GROWTH CONTINUES
General Fund Expenditure Growth (%)
4.25.5
2.5
-8
-6
-4
-2
0
2
4
6
8
10
12
%
*38-year historical average annual rate of growth is 5.5 percent Fiscal 2016 median growth was 3.8 percent
Source: NASBO Spring 2016 Fiscal Survey of States Fiscal 2017 numbers are recommended
*Average
10
FISCAL 2016 GENERAL FUND SPENDINGEXCEEDS INFLATION-ADJUSTED PRE-RECESSION PEAK
General Fund Spending: FY 2008 – FY 2017
$687
$661
$623$645
$667
$695
$726
$756
$798$818
$789*
$550
$600
$650
$700
$750
$800
$850
FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
(in b
illion
s)
Source: NASBO Spring 2016 Fiscal Survey of States; Fiscal 2017 figure is based on governors’ recommended budgets.*For the first time, real aggregate spending levels in fiscal 2016 surpassed the pre-recession peak level of fiscal 2008, which was equivalent to $789 billion after adjusting for inflation. .
11
GOVERNORS RECOMMEND MODEST SPENDING INCREASES FOR FISCAL 2017DIRECT MOST NEW DOLLARS TO K-12 AND MEDICAID
FY 2017 Recommended General Fund Spending Changes by Category
$8.9
$1.1 $0.7
$7.6
$1.1$0.4
$4.1
0123456789
10
($ in
bill
ions
)
Source: NASBO Spring 2016 Fiscal Survey
12
FISCAL 2016 GENERAL FUND REVENUE EXCEEDSPRE-RECESSION PEAK AFTER INFLATION
General Fund Revenue: FY 2008-FY 2017
$680
$626$610
$650$669
$716$730
$766$787
$810$780*
$500
$550
$600
$650
$700
$750
$800
$850
FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Source: NASBO Spring 2016 Fiscal Survey of States; Fiscal 2016 figure is based on enacted budgets, fiscal 2017 on recommended.*For the first time, aggregate revenue levels in fiscal 2016 surpassed the real pre-recession peak level of fiscal 2008, equivalent to $780 billion after adjusting for inflation.
13
AFTER STRONG PERFORMANCE IN FISCAL 2015, REVENUE GROWTH SLOWS
Fiscal 2016 estimated general fund revenues increased by 2.8% (actuals will be lower)> PIT by 3.6% (actuals will be lower), Sales 3.5%, and CIT -1.2%(actuals will be much lower)
Fiscal 2017 general fund revenues projected to increase by 2.9%
˃ PIT by 3.9%, Sales 4.4%, and CIT 1.6%
* PIT = personal income tax; CIT = corporate income tax Source: Spring 2016 Fiscal Survey of States
Fiscal 2015 actual general fund revenues increased by 4.9%
˃ PIT* grew by 7.5%, Sales 5.0%, and CIT -5.7%
14
Sales 34%
Personal Income
39%
Corporate Income 8%
Gaming 1%
Other Taxes &
Fees 18% Sales 31%
Personal Income 43%
Corporate Income 6%
Gaming 1%
Other Taxes & Fees 19%
GENERAL FUND REVENUE SOURCES CONSISTENT OVER TIME
Fiscal 1998 Estimated Fiscal 2015
15
STATES CONTINUE TO STRENGTHEN RAINY DAY FUNDS27 STATES ARE AT 5% OR HIGHER IN FISCAL 2016
Rainy Day Fund Balances, Fiscal 2008 to Fiscal 2017
* FY2016 and FY2017 totals exclude 3 states with data not available. FY2017 based on governors’ recommended budgets. Source: NASBO Spring 2016 Fiscal Survey
$32.9$29.0
$21.0$24.7
$34.3
$41.3$44.8 $45.1
$49.3 $48.3
$23.0
$13.8
$3.0$6.7
$12.3$17.5
$22.6$26.3
$32.7$35.5
$0
$10
$20
$30
$40
$50
$60
2008 2009 2010 2011 2012 2013 2014 2015 2016* 2017*
Blue=All statesRed=Not Including AK & TX
BACKGROUND ON STATE SPENDING TRENDS
17
General Funds, 40.0%
Other State
Funds, 26.8%
Bonds, 2.0%
Federal Funds, 31.3%
TOTAL STATE EXPENDITURES BY FUND SOURCE
FISCAL YEAR 2015$1,872 Billion
General Funds, 45.7%
Other State
Funds, 25.7%
Bonds, 2.4%
Federal Funds, 26.3%
FISCAL YEAR 2008$1,479 Billion
18
K-12, 19.3%
Higher Ed, 10.3%
Transp. 7.7%
Corrections 3.1%
Public Assistance,
1.3%
All Other, 30.9%
Medicaid, 27.4%K-12
21.6%
Higher Education
10.2%
Transp. 7.9%
Corrections3.5%Public
Assistance1.7%
All Other34.5%
Medicaid 20.7%
TOTAL STATE EXPENDITURES BY FUNCTION
FISCAL YEAR 2008$1,479 Billion
FISCAL YEAR 2015$1,872 Billion
Total State Expenditures by Function
State funds are general funds and other state funds combined, excluding bonds. Total state expenditures are all federal and state funds.
19
K-12 Education
34.5%
Higher Education
11.3%Public Assistance
1.8%
Medicaid16.3%
Corrections7.0%
Transp.0.8%
All Other28.4%
K-12 Education
35.2%
Higher Education
10.0%Public Assistance
1.2%
Medicaid19.3%
Corrections6.8%
Transp.0.7%
All Other26.7%
GENERAL FUND EXPENDITURES BY FUNCTION
FISCAL YEAR 2008$687 Billion
FISCAL YEAR 2015$749 Billion
20
-25.7%9.9% 11.3%
22.3% 24.8% 27.3% 27.6%
38.5%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
GENERAL FUND PERCENTAGE GROWTH IN SPENDING CATEGORIES OVER 10 YEARS
Percentage Growth in Spending Categories Between Fiscal 2006-Fiscal 2015 (General Funds)
Source: NASBO State Expenditure Report
21
K-129.2% Higher
Education3.6%
Public Assistance
2.3%
All Other23.4%
Corrections0.1%
Transp.7.2%
Medicaid54.2%
FEDERAL FUNDS EXPENDITURES BY FUNCTION
FISCAL YEAR 2008$395 Billion
FISCAL YEAR 2015$586 Billion
Federal Funds Expenditures by Function
K-1211.5%
Higher Education
3.6%Public
Assistance3.1%
All Other29.4%
Corrections0.2%
Transp.8.5%
Medicaid43.6%
22
PER CAPITA FEDERAL GRANT INCREASES DRIVEN BY MEDICAID
Medicaid
Non-Medicaid
FY 2010
MedicaidNon-
Medicaid
FY 2015
Between FY 2010 and FY 2015,˃ Per capita Medicaid grant spending
increased 48.4%˃ Per capita non-Medicaid grant
spending decreased 3.9%
Prior to Medicaid expansion, the split of Medicaid and non-Medicaid per capita grant spending was roughly equal.
In FY 2015, the Medicaid share of per capita grant spending increased to 61.1% from 50.4% in FY 2010 .
Source: Federal Funds Information for States
MAJOR AREAS
24
1 2
3 4
MEDICAID OUTLOOK FOR FY 2017
Growth in state spending on Medicaid projected to slow in fiscal 2017 – 3.0% (compared to 8.3% in fiscal 2016)
Total Medicaid spending expected to grow by 2.1% in fiscal 2017 (compared to 9.0% in fiscal 2016)
Medicaid enrollment projected to grow by 2.8% in fiscal 2017 (compared to 4.4% in fiscal 2016)
States cited numerous long-term concerns˃ Growing cost of pharmaceutical
drugs˃ Overall enrollment trends, including
for the elderly and disabled˃ Federal policy changes
25
22
21.5 20.4 20.3
19.5
20 19.8
19.3
20.5
21.9 22.2
23.823.6
24.3
25.6
27.4
18
19
20
21
22
23
24
25
26
27
28
2008 2009 2010 2011 2012 2013 2014 2015
K-12 Medicaid
K-12 AND MEDICAID SPENDING AS A % OF TOTAL STATE EXPENDITURES
%
Source: NASBO State Expenditure Report
26
TRANSPORTATION FUNDING18 States Have Increased Gas Taxes since 2013 (NCSL)
27
CT – $2.8 billion in bondingGA, ID, MI and WY all implemented electric vehicle fees.DE – Increased various DMV fees and taxesGA – Hotel tax and local option taxMI – General fund transfers and various fee increasesMS – $200 million in bondingND – Oil & Gas tax revenueTX – Oil & Gas severance tax
AL – Restructured allocation mechanisms (funding bill being considered)IN – Budget reserve transfers & local wheel taxNE – Fund created to manage new revenues; use of budget reservesSC – $400 million Gen Fund transfer, DMV fees, vehicle sales tax and SIB restructureRI – Commercial Vehicle only tolls & GARVEE Bonds
TRANSPORTATION FUNDINGOther Approaches to More Investment Non-Gas Tax Options (NCSL)
2015 2016
28
PENSIONS - 48 States Have Enacted Reform Since 2007 (NASRA)
29
CHANGING COMPOSITION OF HIGHER ED FUNDING
General Funds, 58.2%
General Funds, 38.7%
Other State Funds, 32.0%
Other State Funds, 47.4%
Federal Funds, 6.4% Federal Funds, 11.0%
Bonds, 3.4% Bonds, 2.9%
0%
20%
40%
60%
80%
100%
120%
1995 2015
OUTLOOK
31
MAJOR CHALLENGES TO STATE BUDGETS: 2017+
Revenue growth is expected to be modest in fiscal 2017. Year-end 2016 revenues dampened
Cautious spending is the result - about 2.5% increase in 2017
Modest economic growth even as the recovery matures
Rising health care costs and state share of Medicaid expansion˃ 2014-16 states paid 0% of expansion costs (31 states have expanded)˃ 2017 1st year that states pay some of expansion costs 2.5%
32
Pensions, pensions, pensions
Modest economic growth = modest revenue growth
Updating infrastructure that has aged and at end of life
Certain states impacted by oil price declines, tax related issues, long-term liabilities, slow economic growth
Federal uncertainty surrounding future funding levels and tax code
MAJOR CHALLENGES TO STATE BUDGETS: 2017+
WWW.NASBO.ORG
CLICK TO EDIT MASTER TEXT STYLESWWW.NASBO.ORG
John HicksExecutive Director
National Association of State Budget Officers | NASBO
Michelle Sager Director, Strategic Issues
National Association of
State Auditors, Comptrollers and Treasurers
Indianapolis, IndianaAugust 16, 2016
GAO’s State and Local Fiscal Outlook
GAO’s State and Local Fiscal Model
• Recognition of importance of fiscal sustainability for all levels of government
• GAO simulations of receipts and expenditures for the state and local government sector
• Data from the Bureau of Economic Analysis, National Income and Product Accounts
• Updated annually
35
State and Local Governments Continue to Face Fiscal Challenges
36
Health and Nonhealth Expenditures of State and Local Governments
Notes: Historical data from 2005 to 2014 are from BEA’s NIPA. Our simulations are from 2015 to 2064, using many CBO projections and assumptions, particularly for the next 10 years.
37
Federal Grants to State and Local Governments, 1984 and 2014
Federal Grant Revenues, 1984 Federal Grant Revenues, 2014
38
Source: GAO analysis of historical data from the Bureau of Economic Analysis's National Income and Product Accounts.
Note: Medicaid grants comprised approximately 97 percent of health grants in 2014. ‘Other’ includes national defense, public order and safety, and recreation and culture.
General public service7% Economic
affairs8%
Housing and community services
6%
Health31%
Education10%
Income security37%
Other1%
Federal Grant Outlays to State and Local Governments, Medicaid and Non-MedicaidFiscal Years 1980 to 2013 (in 2013 Constant Dollars)
39
State and Local Revenues, by Type, 1984 and 2014
Total state and local revenues, 1984 Total state and local revenues, 2014
40
Source: GAO analysis of historical data from the Bureau of Economic Analysis's National Income and Product Accounts.
Note: Percentages may not sum to 100 because of rounding.
State and Local Expenditures, by Category, 1984 and 2014
State and Local Expenditures, 1984 State and Local Expenditures, 2014
41
Source: GAO analysis of historical data from the Bureau of Economic Analysis's National Income and Product accounts.
Note: The Other category includes Housing and Community Services and Recreation and Culture. Economic affairs includes transportation, space, agriculture, and natural resources. Health includes Medicaid. General public services includes interest payments and tax collection and financial management services. Income security includes disability, welfare, and social services. State and local government pension contributions are considered part of employee compensation and accounted for within the categories.
Other Recent and Forthcoming Intergovernmental Reviews• DATA Act• Grant Closeout• Pay for Success• Tiered Evidence• Performance Partnership Pilots• Merit-Based Grant Reform
42
Closing out Expired Grant Accounts
GAO’s third review on grant closeout found:
• Approximately $994 million in funding remained in expired grant accounts in the largest civilian payment system for grants at the end of fiscal year 2015.
• The total undisbursed balance increased by approximately $200 million from what GAO reported for the end of fiscal year 2011. However, the number of expired grant accounts with undisbursed balances decreased to 8,832 in 2015 compared to 10,548 in 2011.
43
44
Closing out Expired Grant AccountsWhat’s next for grant closeout?
• Grants Oversight and New Efficiency Act (GONE Act - January 28, 2016) requires the Director of OMB and the Secretary of HHS to:
• provide reports to Congress on grants for which the period of performance has been expired for more than 2 years,
• describe the challenges leading to delays in grant closeout, and
• explain why each of the 30 oldest grant awards at each agency have not been closed out.
Pay for Success• A contracting mechanism state,
local, and foreign governments are using to fund social service prevention programs for vulnerable populations
• Investors (private or philanthropic) provide upfront funding for a service provider to provide a prevention program
• Intervention targets the achievement of outcomes (such as reducing recidivism or homelessness)
• If outcomes are achieved, the government entity repays the funders, usually with a rate of return
45
Recent DATA Act Engagements• Establishment of data
standards• Design and implementation
of the Section 5 pilot project to reduce recipient burden
• Assessment of federal agency implementation plans
• Review of technical implementation progress
46
47
Michelle Sager, Director, Strategic Issues, [email protected]
GAO on the WebWeb site: http://www.gao.gov/Intergovernmental site: http://www.gao.gov/key_issues/management_of_federal_grants_to_state_local/issue_summary
Congressional RelationsKatherine Siggerud, Managing Director, [email protected](202) 512-4400, U.S. Government Accountability Office 441 G Street, NW, Room 7125, Washington, DC 20548
Public AffairsChuck Young, Managing Director, [email protected](202) 512-4800, U.S. Government Accountability Office441 G Street, NW, Room 7149, Washington, DC 20548CopyrightThis is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
2016 Annual Conference of the National Association of State Auditors, Comptrollers and Treasurers
Economic Report for the States
Robin Prunty, Managing Director – S&P Global Ratings
Copyright © 2016 by S&P Global. All rights reserved. 48
Economic Report for the States
49
• State Ratings Roundup• Credit Conditions• State Sector Outlook for 2016• U.S. State Budget Overview• State Debt Trends
Ratings and Outlook Distribution
50
51
U.S. states ratings distribution
AAA AA+ AA AA‐ A+ A BBB+
26%
12%
26%
30%
2% 2%2%
General Obligation and ICR ratings as of 6/09/16.
CA, CT, KS, MI, PA, WV
KY
NJ
IL
52
U.S. states outlook distribution
Stable Positive Negative Watch Negative
78%
16%
4%
2%
General Obligation and ICR ratings as of 6/09/16.
HI, MN
IL, LA, MA, NJ, NM, OK, PA, WY
AK
53
2016 YTD* rating activityTO: FROM:
State Action Rating Outlook/Watch Rating Outlook/Watch Date
Alaska On CreditWatch AA+ Watch Negative AA+ Negative 6/9/16
Alaska Rating downgrade AA+ Negative AAA Negative 1/5/16
Connecticut Rating downgrade AA‐ Stable AA Negative 5/19/16
Hawaii Outlook change AA Positive AA Stable 3/1/16
Illinois Rating downgrade BBB+ Negative A‐ Negative 6/9/16
Kansas Rating downgrade AA‐ Stable AA Negative 7/26/16
Kansas On CreditWatch AA Watch Negative AA Negative 4/25/16
Michigan Outlook change AA‐ Stable AA‐ Positive 3/17/16
New Jersey Outlook change A Negative A Stable 3/22/16
North Dakota Rating downgrade AA+ (ICR) Stable AAA (ICR) Stable 2/18/16
Pennsylvania Off CreditWatch AA‐ Negative AA‐ Watch Negative 7/19/16
Pennsylvania On CreditWatch AA‐ Watch Negative AA‐ Negative 7/11/16
Pennsylvania Off CreditWatch AA‐ Negative AA‐ Watch Negative 3/24/16
Pennsylvania On CreditWatch AA‐ Watch Negative AA‐ Stable 3/3/16
Oklahoma Outlook change AA+ Negative AA+ Stable 4/6/16
Tennessee Rating upgrade AAA Stable AA+ Positive 5/26/16
West Virginia Rating downgrade AA‐ Stable AA Stable 4/21/16
Wyoming Outlook change AAA Negative AAA (ICR) Stable 2/4/16*As of July 26th, 2016.
Credit Conditions
54
Gabriel Petek, CFA Managing DirectorU.S. Public FinanceStates Group
John SugdenSenior DirectorU.S. Public FinanceStates Group
Credit conditions in the U.S. macro economy
55
• Economic data since March remain consistent with S&P Global Ratings' forecast for continued slow growth.
• The United Kingdom's vote in late June to leave the European Union added to an already uncertain global economic setting and is likely to weigh indirectly on U.S. GDP.
• Uncertainty in the markets has become a theme in 2016, and the effects of Brexit and slow GDP growth in the first quarter have led us to raise our risk of recession estimate over the next 12 months to 20%-25% from 15%-20%.
• We perceive that state revenue forecasts are subject to greater risk as a consequence of the increased financial volatility and that this volatility will likely undermine the investment returns for state and local government pension systems with a July 1 fiscal year.
Credit conditions in the U.S. macro economy: Outlook Dims Amid Rising Global Uncertainty
56
• Housing starts to increase
• Real consumer spending will increase from the first quarter of 2016
• Job and unemployment trends improve
• Stock market performance turns less bullish amid increased volatility
Key drivers still point to credit stability but not robust conditions in 2016
57
Credit conditions by region
58
•States: CT, MA, ME, NH, RI, VT•Economic growth continued its tepid pace with forecasts of 1.6% growth in 2016 and 2.18% in 2017.New England
•States: NJ, NY, PA•Nominal GDP growth of about 1.8%, below our prior projection of about 2%, continuing to lag most of the country.
Mid‐Atlantic
•States: DE, DC, FL, GA, MD, NC, SC, VA, WV•Like national economic growth figures, the region’s GDP forecasts for 2016 and 2017 were revised downward to 2.39% and 2.83%, respectively, from 2.78% and 3.08%.
South Atlantic
•States: AL, KY, MS, TN• Slower growth than the national baseline at 1.59%. Despite the somewhat stagnant regional economy, we estimate that 2016 unemployment will fall to a new four year low of just 4.42%.
East South Central
•States: IL, IN, MI, OH, WI•Growth outlook revised considerably from 1.92% to 1.57% making the region one of the weakest in terms of growth.
East North Central
•States: IA, KS, MN, MO, NE, ND, SD•Overall, all states except North Dakota are expected to grow at a slightly faster rate than the national baseline growth scenario.
West North Central
•States: TX, OK, LA, AR•Region continues to trudge through economic headwinds with an estimated growth rate of 1%, lagging behind all other regions.
West South Central
•States: AZ, CO, ID, MT, NV, NM, UT, WY•Regions diversifying economy has proven one of the highlights of the US economic recovery. Job growth has remained above average and broad‐based.
Mountain
•States: AK, CA, HI, OR, WA•Key highlight is the continuation of the home‐buying party in the region well into 2016, leading a significant upward revision to our projected growth in home prices to 7.3% from 1.6% for 2016.
Pacific
For complete forecasts, see the Credit Conditions article (link in appendix).
• In 2016, the effects of a strong U.S. dollar and the collapse in oil prices (and related oil-sector investment) should continue to unfold unevenly across the country.
• We expect the ongoing slump in oil prices will continue to undercut the economies--and potentially the ratings--of some energy producing states to varying degrees.
Oil prices and dollar strength have uneven effects across the U.S.
59
Oil prices and dollar strength have uneven effects across the U.S.
60
• We don't expect the dollar's strength relative to other currencies to wane in 2016. However, the dollar is likely to strengthen further as the Fed proceeds with its agenda to normalize monetary policy (i.e., hike rates) throughout the year, even if at a slower pace than previously anticipated.
• The strong dollar will weigh more heavily on the economic performance of regions with relatively more reliance on manufacturing, exports, and tourism.
State Sector Outlook for 2016
61
• Credit quality across the U.S. states sector is somewhat uneven.
• Credit pressures stem from exposure to the energy sector, weakened budgetary performance, and political stalemates.
• We believe it's possible that in 2016, the state sector could experience an uptick in rating volatility, with the balance of risk weighted to the downside.
2016 state sector outlook
62
37
5
8 34
11
523
18
9
State fiscal condition leading up start of 2016
63
21
15
14
Energy producing states facing fiscal pressure due to fall of oil
price
Current year budget pressure from political gridlock or
revenue shortfall
Future year budget pressure possible or likely due to existing spending baseline,
actual or possible legally required spending, or potential for revenue
volatility
Large unfunded liabilities or high debt burden
Low Medium High
Exposure to Key Credit Risks in 2016
See appendix for details.
State fiscal conditions at start of 2016
64
Category One: Weathered the Great Recession with minimal stress and has good reserves.
Category Two: Narrow fiscal margins with near‐term structural budget alignment but typically low‐to‐adequate reserves.
Category Three: Hit hard by recession but has subsequently achieved considerable fiscal repair.
Category Four: Still experiencing fiscal stress typically stemming from soft revenue trends in general or because of a reliance on oil production‐related revenue; some states are undergoing self‐imposed fiscal distress as a result of political infighting.
U.S State Budget Outlook and Themes
65
Key themes for 2016
66
Slower Revenue Growth
Tax Incentives Spending Restraint
Aid to Higher Education
Pension Pressure Persists
Findings are consistent with recent Rockefeller Institute of Government reportthat: • Personal income
tax growth will decline to 4.4% in FY 2017 from 7.8% in FY 2015
• Sales tax revenue growth will slow to 3.9% in FY 2017 from 4.5% in 2015
Several state budget proposals include targeted spending initiatives or tax incentives aimed at economic development and job creation. Examples include:• New York• Delaware• Florida• Pennsylvania• Rhode Island
According to a survey by theNational Association of State Budget Officers, median general fund spending by states is budgeted to increase by 2.9% in FY 2016
As of FY 2016, most states have restored aid to higher education to pre‐recession levels• In some states,
additional state support has been contingent on flat or reduced tuition rates; and
• Fund payouts have been delayed by dysfunctional budget politics
Numerous states continue to struggle with fully providing actuarially based contributions to their systems• We anticipate
contribution pressures will ratchet upward in the coming one to two years as a result of weaker equity market performance in FY 2015
• Most state budget proposals assume economic and revenue growth will slow throughout 2016 and into 2017
• According to research from the Pew Charitable Trusts, as of mid 2015 there were still 21 states that had yet to see a full inflation adjusted revenue recovery from when revenue associated with the great recession bottomed out in 2009
• Labor productivity growth is at 1.2%, which is tied with the 1973-1979 period for the slowest growth rate through a business cycle since 1943
• States burdened by not only slow economic growth, but also complex budget politics (such as Illinois, Louisiana, New Jersey, and Pennsylvania) face a more challenging outlook from a credit perspective
• Changing demographics and an aging population are economic challenges that states have and will continue to encounter during budget formulation
Economic outlook calls for slow growth to persist
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Most of the states poised for faster economic growth are also those with more rapid population increases. Conversely, many of the states ranked in the bottom 10 in population growth are also expected to have slower economic progress
Economic growth trends by state
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Significant changes in state government spending priorities
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• States that have been unable or unwilling to make the difficult choices necessary to accommodate funding for significant liabilities, such as retiree benefits, were more likely to see their credit quality erode
• For states that have made these trade offs, the impact on credit quality is favorable in the near term (3‐5 years). However, looking ahead, the reduced investment in productivity enhancing areas (infrastructure and higher education), paints a dimmer picture of their long term economic growth prospects
States to keep an eye on in 2016
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• Large structural fiscal gap caused by fall in oil prices; major fiscal reform proposed by governor is currently under negotiation. Alaska
• Increasing revenue shortfall stemming from outsized financial sector linkages.Connecticut
• Budget compromise has become a casualty in a protracted standoff between the legislature and governor. The state is in an unprecedented tenth month of a fiscal year without an enacted budget.
Illinois
• Revenue declines that exceeded earlier projections following enactment of sweeping tax reduction in 2012‐2013 has led state to rely on extensive one‐time measures to close the budget gap.
Kansas
• Existing structural imbalance exacerbated by plummeting oil prices.Louisiana
• Lack of fiscal capacity both to fund actuarially sound pension contributions and maintain operating balance.New Jersey
• Contracting energy sector production and employment rippling through economy.Oklahoma
• Negotiation stalemate that led to extreme late‐budget enactment due to disagreement rooted in ideological clash between branches of government controlled by opposing political parties over how to close budget gap.
Pennsylvania
Debt
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How S&P calculates debt
72
• Debt analysis remains a primary area of focus in S&P Global Ratings overall credit evaluation of states.
• Of particular importance is the annual cost of servicing debt compared with current and future tax and revenue streams.
• Our debt ratio calculations for states aggregate all tax-supported obligations, including GO bonds, appropriation obligations, and special-tax bonds, such as sales, personal income, and gas tax bonds.
Debt Calculation
Special Tax
GOAppropriation
Aggregate state debt levels
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• The state and local government sector has long exhibited sustainable debt trends.
• According to the Securities Industry and Financial Markets Assn. (SIFMA), the total amount of new debt (excluding refinancing debt issuance) issued from 1996 through 2015 increased at an annual rate of 1.2%, well below the average annual GDP growth rate of 4.3%
• In addition, there has been a pronounced pullback since the onset of the Great Recession. - From 1996 through 2010, state and local governments issued an average of $234 billion annually
in bonds (excluding refinancing issues). Following the end of the recession, however, they have issued a much lower average of $151 billion annually in new capital bonds, according to SIFMA data.
State and local government debt trends are sustainable
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Growth in new money municipal bond issuance relative to GDP
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Source: SIFMA
‐60.0%
‐50.0%
‐40.0%
‐30.0%
‐20.0%
‐10.0%
0.0%
10.0%
20.0%
30.0%
199619971998199920002001200220032004200520062007200820092010201120122013
%
GDP growth (YOY)
Linear (Growth in newmoney U.S. Municipal bondissuance (YOY))
Note: Black line represents trend line for U.S. Municipal Bond New Money Issuance
U.S. municipal bond new money issuance is stable
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0.0
50.0
100.0
150.0
200.0
250.0
300.0
(Bil. $)
U.S. MunicipalBond NewMoneyIssuance
Source: Bond Buyer
• In our view, assessing whether a state's debt levels or its debt trajectory is sustainable depends largely on its economic -- and relatedly, its revenue -- capacity to repay its debt obligations.
• Consider two hypothetical states:
Debt sustainability, not balance outstanding is the key factor
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State A State BIncreasing debt load Flat debt trends
Economic and population base that is growing at a faster rate than its debt burden
Economic base is stagnating and suffering below average rates of GDP and population growth
In our view, State A may have a more sustainable debt profile than the latter despite faster growth in the overall amount of debt.
Growth in tax supported debt versus GSP growth
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• On the fiscal side, it's difficult to argue that aggregate state budget deficits, estimated to have reached $174 billion in fiscal 2010 -- equal to more than 25% of projected general spending -- didn't constitute a crisis. - State budget gaps -- projected and after budget adoption -- totaled $518 billion through the five
fiscal years through fiscal 2013.
• But as for their debt positions, the situation fell short of the threshold we consider necessary to have considered it a crisis.
During the recession: states had fiscal crises, not debt crises
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• As we see it, at least one of two ingredients is necessary for there to be a debt crisis.
• To our knowledge, the U.S. states experienced neither of these on any sustained basis throughout or in the aftermath of the Great Recession.
• Overall, we believe U.S. states' current appetite for issuing new debt reflects their fiscal experience in the wake of the Great Recession more than anything to do with their debt levels. - States have managed their debt levels prudently, in our view.
States had fiscal crises, not debt crises
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1 An obligor's ability to fund its principal and interest payments as they come due must be uncertain.
2 A loss of market access ‐‐ the ability to reliably sell debt on the capital markets at a reasonable price.
• Bonded debt is just one portion of a state's overall debt and liability profile. - There are also pension and other postemployment benefits (OPEB) liabilities.
• Funding debt and retiree benefit liabilities consumes a material share of the states' annual budgets, often in the range of 15%.- This share would likely be even higher if states funded all the retiree benefits at their actuarially
recommended levels.
• Focusing just on bonded debt paints a relatively sustainable picture.- As of fiscal 2014, total tax-secured state debt was moderate, in our view, equaling 2.9% of total
U.S. economic output as measured by GDP.
State debt levels are only part of the liability picture
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Infrastructure
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• Certain infrastructure projects can result in operating efficiencies and thus, fiscal savings. But, they also implicitly commit to new and ongoing O&M expenditures. - Analysis by the Congressional Budget Office (CBO) suggests that more than half (50% to
55% from 2000 through 2007) of total public spending on transportation and water infrastructure has been for O&M. These estimates may even be understated because they exclude spending on public power, equipment, or buildings.
• We believe the pullback of state debt issuance in response to fiscal conditions reflects at least, in part, a rational near-term approach to fiscal policymaking by lawmakers.
Infrastructure costs go well beyond the initial investment
83
• If state policymakers took it upon themselves to fund the ASCE's estimate of necessary infrastructure at their historic proportionate share, we can approximate the impact it would have on their debt ratios.
States can't solve the infrastructure gap with debt financing alone
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85% state and local government share of infrastructure investment $3.06 billion in needed funding
39% state share of infrastructure investment $1.9 trillion in debt through 2020
State debt ratios would increase to 7.6% of GDP form 2.9%.
Aggregate tax‐supported debt burden as ‘high’ versus ‘moderate’ burden
today.
• Individually, the states could contribute to reducing the deficiency of infrastructure nationally.
• According to our assessment, however, states won't be able to solve the problem solely through the issuance of traditional tax-supported debt without it having a negative impact on credit quality.
• A mix of traditional debt, public-private partnerships, and additional federal engagement is likely required.- We don't currently anticipate a large increase in
federal funding support.
What will it take to meet infrastructure needs?
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Federal Engagement
Traditional Debt
P3
States can't solve the infrastructure gap with debt financing alone
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• We anticipate that states will increasingly consider alternative financing strategies.
• Public-private partnerships (P3s) are one such avenue.- P3 is frequently issued as taxable securities, a
disadvantage.- P3s offer states a way to fold O&M expenses
into the overall cost of financing a project, and interest in P3s by states is growing
• We expect the number of states with legislation authorizing the use of P3 will increase.• However, the P3 model can be complex and in
certain cases, states attempting P3 projects have encountered political opposition.
Alternatives to consider
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P3
• 60,000 structurally deficient bridges• $80 billion backlog of repair needs for public transit• U.S. Corps of Engineers construction backlog totaling $62 billion• 240,000 water main breaks annually and poor pipe conditions lead to
the discharge of 900 million gallons of untreated sewage each year• Each driver loses $571 and wastes 26 hours sitting in traffic each year• Each American household pays $232 more for goods due to delays in
freight movement caused by poor infrastructure
U.S. infrastructure ranked 16th in the world
Sources: Federal Highway Administration, 2014, http://www.fhwa.dot.gov/bridge/nbi/no10/defbr14.cfm.;Federal Transit Administration, National State of Good Repair Assessment, 2011.; Nicole T. Carter and Charles V. Stern,
“Army Corps Fiscal Challenges: Frequently asked Questions,” Congressional Research Service, August 18, 2011.
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An increase in spending of 1% real GDP (roughly $160B over 4 quarters)
would equal:
• $270B over the following 3-year period
• 730,000 new jobs
- 61,000 new jobs per month
Source: S&P Commentary “Global Infrastructure Timing is Everything”, January 2015.
U.S. multiplier effect
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• A risk-sharing partnership—consisting of a government and a private
business—that builds, finances, and operates an infrastructure project
Availability & Volume Risk
Design, Build, Finance, Operate & Maintain
• Roles and responsibilities of both the private-sector and government
participants are typically specified in a contract
• S&P treats the U.S state and local governments’ payment obligations as
debt, as contingent liability, or neither
What is a P3? (public-private partnership)
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Collapsing Oil Prices Seep Into State Credit Profiles, 1/21/16History of U.S. State Ratings, 7/28/16U.S. Public Finance 2016 Credit Conditions Outlook: Expect Growth But Hold The Cheer, 1/11/16U.S. State Debt Levels May Be More Sustainable Than The Condition Of The Nation's Infrastructure, 10/19/15U.S. States Have Strong Credit Quality Though Low Oil Prices And Budget Management Will Test Some, 1/11/16U.S. State And Local Government Credit Conditions Outlook: Economic Growth Outlook Dims Amid Rising Global Uncertainty, 7/27/16
Supporting information:
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