The State of the State Budgets

Corina Eckl presented a meticulously researched review of the projected changes in the States’ general fund revenues and expenditures for FY 2017. Her analysis found that expenditures are exceeding revenues, there is mixed revenue performance, and Medicaid spending is outpacing other budget categories.

Ms. Eckl, who extensively interviews State Budget Directors and delves deeply into State financial analytics, reported that overall State revenues are projected to grow by 2.9%, including a 4.3% projected growth in State general sales tax and a 4.0% increase in personal income tax collections. Meanwhile, appropriations are projected to increase 3.7% in FY 2017. But some States may fail to meet revenue expectations. As early as January 5, 19 States reduced their revenue forecasts. Currently, 12 States are below estimate on personal income tax collections, and 20 of them are below estimate on corporate income tax collections. Ongoing revenue growth is not adequate to cover ongoing spending growth, she advised.

Changing Commerce Trends

Even in the post-holiday season, 21 States were below estimate on general sales and use tax collections, Ms. Eckl reported. She attributed this decline to the growth of e-commerce, which is untaxed in some States, the change in consumer spending away from taxed goods toward untaxed services, and significant growth in gift cards, which are not taxed until they are redeemed.

Gerard Dehrmann of Wal-Mart Stores, Inc. echoed Ms. Eckl’s observations. “Today, people make purchases in many ways. Brick-and-mortar stores have to compete with digital and mobile buying channels. There is changing consumer sentiment on how, where, and when people are buying.” These changing trends are causing business to evolve as well, Mr. Dehrmann noted. For example, Wal-Mart maximized the combination of mobile + e-commerce + retail store by combining smartphone-enabled grocery shopping with “at the store” pickup. Amazon sought a competitive edge by promising rapid delivery. Smaller merchants are getting larger by establishing an online presence. In the midst of this changing landscape, sales taxes may not always be collected.

Another influential trend is demographics. Millennials are now driving the economy, according to research that Ms. Eckl reported. Many millennials are living at home with their parents. They are not buying homes and durable goods like prior generations did. And their purchasing is all online. “This affects the tax sources and sales tax revenues,” Ms. Eckl pointed out.

Slow Recession Recovery

Another factor weakening the States’ revenue outlooks is the sluggish rebound of some States’ economies after the 2007 recession. Ms. Eckl noted that the kinds of jobs that have been created are not equal to those that were lost, which reduces personal income tax collections and sales tax collections from consumer spending. She contrasted the speed of recovery of 5 major post-recession periods, starting with 1973. The red line on the graph shows the slow recovery after 2007. Eight years since the start of that recession, the cumulative change in the economy is only 7.9%.

 Economic Growth Since End of Recessions

Recessions Past

Citing data from the National Bureau of Economic Research, Ms. Eckl reported that post-World War II, the US has weathered 11 recessions, with an average duration (peak to trough) of 11.1 months. The average expansion (trough to peak) was 58.4 months. The current economic expansion has lasted 90 months, which leaves fiscal directors concerned about when the trend of expansion will turn downward.

Ms. Eckl summarized the challenges and concerns for State budgets:

Sluggish revenue growth

Unexpectedly slow and volatile growth in sales tax collections

Increased program spending, particularly for Medicaid

Mismatch between spending and revenue growth

Uncertainty about federal policy changes and the national economy

State-By-State Discussion

Reporting her research, Ms. Eckl characterized the States’ fiscal situations as strong and strengthening for 9 of them; Stable PLUS for 3 States, Stable for 14 States; Stable MINUS for 14 States, and Weak/Weakening for 10 States.

 State-by-State Economic Strength

Ms. Eckl asked the Senate leaders whether they agreed or not with the rating given to their State and if they could provide additional insights into their State’s fiscal health.

Louisiana

Ms. Eckl characterized Louisiana’s economy as Weak/Weakening. Sen. John Alario (LA) attributed the State’s $2 billion shortfall to declining oil and gas revenues, which represent 8% to 9% of overall revenue, and declining sales and income tax collections. For every dollar per barrel that the price of oil goes down globally, Louisiana loses $12 million, Sen. Alario said, and extreme storms have hurt the agriculture sector. He reported that 200,000 Louisianans have lost their jobs. On the upside, tourism is increasing and the low price of natural gas has improved prospects in the petrochemical sector, with new plants being built.

Further complicating matters is the challenge of finding common ground between a Democratic Governor and a Republican House and Senate. To date, Louisiana’s legislature has raised the sales tax by 1 cent, which raised $1.2 billion in revenue and made $500 million in program cuts. “The State does not tax food and utilities, so the additional tax did not fall on the most vulnerable populations,” Sen. Alario said.

Sen. Danny Martiny (LA) concurred with these comments, noting that Democratic Gov. John Bel Edwards’ budget is $300 million short. The deficit could be made up by cuts in higher education or healthcare, but the Governor will not agree to those cuts. The legislature will have a Special Session to find a solution. Scaling back tax exemption programs could be one solution. Or every program could be cut 2% and the deficit raised. The challenge is to get the legislature to focus on solving the problem, not fighting the Governor, Sen. Martiny observed.

Illinois

Illinois also earned only a “Weak” rating. Ms. Eckl reminded the group that the State’s Republican Gov. Bruce Rauner said he would only sign a budget that included property tax freezes and term limits. Sen. John Cullerton (IL) noted that the super-majority Democratic legislature must find a way to cross the chasm between its values and the Governor’s agenda. “We are $12 billion behind in paying bills,” Sen. Cullerton reported, “and we are only able to fund higher education by incurring $8 billion per year in deficit spending.”

Sen. Andy Manar (IL) concurred, reporting that Gov. Rauner has advocated many plans that include term limits, right to work laws, and redistricting reform, but lacks any strategy related to revenues and expenditures. “He is asking the Democrats to vote against the unions—our constituents, and our ‘reward’ is, we get to raise taxes,” Sen. Manar quipped.

Arkansas

Arkansas’ “Stable MINUS” rating is realistic according to Sen. Jonathan Dismang (AR), as all taxes are below estimates and additional income tax cuts have been proposed. He noted that the rapid transition from a Democratic to a Republican super majority in the legislature working with Republican Gov. Asa Hutchinson has opened up new opportunities. Reforming the tax code was a significant step. The State now has the most complicated tax system in the US, which uses 3 tax tables, each with separate brackets. A $100 million tax cut for the middle class passed in 2015, and the Governor has proposed a $50 million income tax cut for those earning less than $21,000. A long-term reserve plan has been established and the funds set aside. Arkansas will spend $200 to $300 million as a one-time investment to prop up the budget. But the biggest challenge is Medicaid, Sen. Dismang said. The State is committed to match Medicaid spending for one year, but what happens after that is unclear.

Delaware

Sen. David McBride (DE) agreed that Delaware’s rating as “Stable MINUS” reflected the $300 million budget deficit the State faces in FY 2017. He noted that 65% of all Fortune 500 companies are registered in Delaware and that lower corporate tax revenues have had a significant impact. Medicaid spending is the key challenge, he reported.

Rhode Island

Sen. Teresa Paiva Weed (RI) said the State’s rating should be “Stable” or “Stable PLUS.” “Rhode Island has turned the corner by investing in education and workplace training. People are mastering the skill sets to match the new economy, and this is what is making our economy stronger,” she said. This workforce development and a one-time $60 million incentive program have attracted industries such as GE, Virgin Pulse, and Johnson & Johnson to the State. In addition, hard fought pension changes helped address the state’s budget shortfall. Medicaid expansion remains a challenge, especially as States await changes from the federal level, Sen. Paiva Weed said. “But overall, Rhode Island has momentum and is moving in the right direction,” she concluded.

Sen. Hanna Gallo (RI) noted that Rhode Island has a large Millennial population, which has made the State’s focus on education and technical schools even more important. “We are making headway to coordinate corporate needs, training programs, and workers with the right skill sets to provide jobs for our millennials and keep them in-state. Implementing programs to close the skills gaps have been valuable investments.”

Texas

Sen. Larry Taylor (TX) proposed that Texas be rated “Stable PLUS.” “We have a $200 billion biennial budget and a conservative approach,” Sen. Taylor reported. “When oil prices dropped, we held back and did not spend the whole budget.” The State has no personal income tax and relies on sales tax revenue. Current 2017 sales tax revenue estimates are down $4 billion compared with record highs in 2015-2016, Sen. Taylor said, and all agencies (except Medicaid, healthcare, and education) have been asked to cut budgets by 4%. The biggest challenge is the growth in Medicaid, which may be $2 billion more than projected, even without expansion. “Still, Texas is on a rebound, especially as the price of oil continues to rise and we diversify our economy,” he concluded.

Indiana

Ms. Eckl’s research tagged Indiana as “Stable MINUS,” based on the fact that sales tax revenues, which comprise 42% of the total, are below forecast. But Sen. David Long (IN) argued for a “Stable PLUS” designation based on the State’s strong surplus and fiscal discipline. Some of the positive signs in Indiana are that it has high employment and the lowest unemployment rate in the US; the State is home to advanced manufacturing facilities and has significant exports, including being the largest steel-making State in the US. Lower personal income, corporate, and property taxes make the State attractive for business.

“Our biggest challenge,” Sen. Long said, “is workforce development. We have 1 million jobs opening up, and we need to get people trained to do those jobs.” To this end, the State has developed a network linking schools, corporations, and training programs that lead to jobs. “Growth is stable and is expected to rise in 2018, giving us a STABLE PLUS outlook,” Sen. Long concluded.

Sen. Brandt Hershman (IN) agreed that the State’s full employment and gains through productivity growth contribute to a “Stable PLUS” rating; however, he noted that Federal estimates of national growth have rolled back from 3% to a “new normal” of 2%, and Indiana also had to reset its growth expectations down from 3% to 1.5% anticipated growth. “As our economy grows, we need to allocate $1 billion per year to maintain our roads, but a gas tax increase is hard to sell.” A key concern, Sen. Hershman said, are federal policy changes that could impact the national growth rate over the longterm and cause volatility in the shortterm.

Michigan

Michigan’s rating as “Strong/strengthening” is well-earned coming after 6-7 years of struggling against extreme budget challenges, Sen. Tonya Schuitmaker (MI) reported. The long hard road out of the budget crisis required as many as 40 tough reforms, including adoption of a balanced budget, major funding cuts, outsourcing of teachers’ healthcare, and hybrid pension reforms. But even with these reforms, Sen. Schuitmaker says the State is staying vigilant because changes such as a downturn in the auto industry could have damaging effects on the nascent economy.

Minnesota

Minnesota earned a “Stable” designation in Ms. Eckl’s research because the State balanced its slower growth and decreased revenues by reducing spending. However, Sen. Michelle Fischbach (MN) suggested that rating could go to “Unstable” based on the political dynamics between Democratic Gov. Mark Daytonr and a Republican-controlled legislature. The Governor is proposing increased spending, while the legislature wants to enact tax cuts and offer increased health insurance rebates at a cost of $330 million.

Ohio

Ohio is one of the “Stable” States, but Sen. Bob Peterson (OH) noted that revenues are down from projections and Medicaid expansion is putting a dent in the budget, which shows a $800 million shortfall or 5% of the budget. Ohio’s response has been to spend less, which could keep the State in the “Stable” category.

Oregon

Sen. Ginny Burdick (OR) suggested that the State’s “Stable” rating was at risk due to the structural revenue deficit of $1.7 billion in a $19 billion general fund. “Oregon voters are making the decisions about spending through aggressive initiative campaigns,” she reported. “Voters have approved increased spending on veterans, vocational education, outdoor schools, improved salmon runs and parks, and mandatory prison sentences. But they turn down tax increases every time. No one is proposing an initiative to increase Medicaid spending,” Sen. Burdick said. “And changes at the federal level could make Medicaid spending a destabilizing factor.”

Nevada

Nevada’s “Stable” rating is realistic Sen. Aaron Ford (NV) observed, but there are challenges ahead. Revenues are increasing, but there is still a $200 to $400 million deficit versus planned program needs. Currently, the legislature is working with agencies to cut spending across the board, Sen. Ford said.

North Carolina

North Carolina is “strongly Stable” Sen. Harry Brown (NC) reported, with revenues exceeding projections. The State’s Rainy Day Fund holds $1.5 billion in assets, and $4 billion in tax cuts over the past 6 years have attracted businesses and led to an expansion of the tax base.  Despite these strengths, Sen. Brown noted that Medicaid costs, even without expansion, will grow from $1.8 billion to $4 billion in the next 6 years. State pensions and healthcare plans are also a challenge. Invested funds that were projected to earn 7% are now earning 4%, and that will affect the State’s stability, he forewarned.

Hawaii

Hawaii’s “Stable PLUS” designation is fueled by increasing building projects and record tourism, according to Sen. Ron Kouchi (HI). But the Senator remained cautious, noting that, even after 7 years of expansion, household incomes in the State have not recovered to post-recession levels. Furthermore, growth estimates have been revised downward from 5.5% to 3%, and every collective bargaining contract is up for renegotiation in the Aloha State, with nothing in the budget for increases.

Tennessee

“People are focused on all the dysfunction of the federal level,” Sen. Mark Norris (TN) observed. “They don’t recognize that most States, including Tennessee, balance their budgets every year.” Tennessee, rated as “Strong/strengthening,” now enjoys a $1 billion surplus, a result of downsizing government and eliminating 400 positions. The surplus has enabled the legislature to eliminate the gift and death taxes, as well as decrease the sales tax, Sen. Norris reported.

California

There are 3 main drivers of California’s “Strong/strengthening” economy, according to Sen. Kevin de Leon (CA): technology, tourism, and trade. The Golden State has $2 billion in reserves, $8 billion in its Rainy Day Fund, and its credit rating has improved. Sixty percent of its revenues come from personal income tax, 20% from sales taxes, and less than 10% from corporate taxes.

“It takes leadership to make investments in higher education, day care, and infrastructure,” Sen. de Leon said, “because these are the investments that will support economic growth.” Los Angeles County, for example, passed a tax for infrastructure development that will net $33 billion, he said.

California also has focused on building its renewable energy sector, with a target of having 50% of all electricity derived from renewables, wind, and solar by 2030. The goal is to reduce the cost of utilities for all residents. California utility costs are currently among the 5 lowest in the nation. Not only are utility costs down, but the renewables sector also brought new jobs to the State, Sen. de Leon observed.

Utah

Revenues in Utah have exceeded forecast for the last few years, Sen. Wayne Niederhauser (UT) reported, giving rise to its “Strong/strengthening” rating. But now the economy is normalizing and Sen. Niederhauser said you cannot make policy based on those high forecasts. “Starting up programs when the economy is good and then cutting them in a downturn is a poor way to run the government,” Sen. Niederhauser opined. “We need to plan ahead.”

"The State’s population will double in the next 30 years and be concentrated along the Wasatch Front. In order to plan for that population, we need to diversify the economy, which is evolving from an agricultural and mining focus to high-tech industries,” he said.

“There are challenges ahead that require careful planning,” Sen. Niederhauser said. “The sales tax fills our general fund, and untaxed Internet purchasing is decreasing our sales tax revenues. The consumer trend is moving to the untaxed service economy, such as medical services. We need new tax strategies to compensate for a narrowing tax base,” he concluded.

Sen. Wayne Niederhauser (UT) and Sen. Harry Brown (NC) continued the discussion of solutions to budget challenges in the break between the sessions.

Speaker Biography

Corina Eckl

Corina Eckl is director of State Services for the National Conference of State Legislatures (NCSL). In this capacity she manages NCSL’s core programs, which include Fiscal Affairs, Legislative Management and Leaders’ Services.

Prior to her current position, Corina served as director of NCSL’s Fiscal Affairs Program. She has written extensively on state budget and tax issues, and regularly provides information on state budget conditions and other fiscal matters to legislatures, trade associations and members of the national print and television media. She has been quoted in The Wall Street Journal, The New York Times, the Financial Times, USA Today and The Christian Science Monitor, among others. She has appeared on CBS, CNBC, FOX, ABC, CNN and the BBC. She has been interviewed numerous times for National Public Radio.

Corina serves as a consultant on NCSL’s evaluations of legislative organization and staff operations. She is the NCSL liaison to the Hawaii Legislature. She also has represented NCSL on assignments to Algeria, France, Germany, South Africa, Indonesia, Nigeria and Saudi Arabia.

An NCSL staff member since 1984, Corina has a bachelor’s degree in political science and a master’s degree in public administration from the University of Colorado.

Other Winter 2017 Forum Highlights articles:

Corina Eckl

Director

State Services

National Conference of State Legislatures

Expenditures are exceeding revenues, there is mixed revenue performance, and Medicaid spending is outpacing other budget categories.

Gerard Dehrmann

Senior Vice President Public Affairs &

State and Local Government Relations

Walmart Stores, Inc

 

There is changing consumer sentiment on how, where, and when people are buying.

The current economic expansion has lasted 90 months, which leaves fiscal directors concerned about when the trend of expansion will turn downward.

Sen. John Alario

(LA)

Sen. Danny Martiny

(LA)

Sen. John J. Cullerton

(IL)

Sen. Andy Manar

(IL)

Sen. Jonathan Dismang

(AR)

Sen. David McBride

(DE)

Sen. Teresa Paiva Weed

(RI)

Sen. Hanna Gallo

(RI)

Sen. Larry Taylor

(TX)

Sen. David Long

(IN)

Sen. Tonya Schuitmaker

(MI)

Sen. Michelle Fischbach

(MN)

Sen. Bob Peterson

(OH)

Sen. Ginny Burdick

(OR)

Sen. Aaron Ford

(NV)

Sen. Harry Brown

(NC)

Sen. Ronald Kouchi

(HI)

Sen. Mark Norris

(TN)

Sen. Kevin de Leon

(CA)

Sen. Wayne

Niederhauser

(UT)

Corina Eckl

Director

State Services

National Conference of State Legislatures

Senate Presidents’ Forum

Phone: 914.693.1818

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