Transcript The Current Fiscal Crisis and State Budgets

The Current Fiscal
Crisis and State
Budgets
Jeffrey H. Dorfman
The University of Georgia
October 7, 2008
Outline
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How We Got Here
Where Are We?
How Bad Will It Be?
State Budget Picture
What to Do to Prevent this in the Future
How We Got Here
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Mortgage / Real Estate Mess
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Real estate bubble started with dot.com bust.
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Free markets mean booms and busts.
How We Got Here

The Mortgage Market Mess
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Economic Incentives Encouraged Bad
Loans
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4 steps to the process: originator, aggregator,
broker, investor.
First 2 made approval decision, but bore no risk.
How We Got Here
Consumer Debt
3000
Billion $
2500
2000
Revolving
Non-Rev
Total
1500
1000
500
0
2003
2004
2005
2006
2007 2008.1 2008.2
Source: Federal Reserve
How We Got Here

State Government Role

Spending has increased a good bit last few
years.

States have not been raising taxes.
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States used poor economic forecasts and waited
too long to see this slowdown coming (GA ex.)
Where Are We?
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Economy
Retail Sales
Stock Market
Real Estate Values
Consumer Confidence
Manufacturing
State Borrowings
Where Are We - Economy

GDP grew 2.8% in Q2, mostly due to
stimulus checks.
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Unemployment up to 6.1% (from 4.7% one
year ago).
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Job losses 159,000 last month.
Where Are We – Retail Sales
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This is $4 trillion / year and very important
to states since it translates directly to sales
tax collections.
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Up 2.1% year over year, but only +0.2% in
last quarter.
Source: US Census Bureau
Where Are We – Stock Market
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Back to levels from 4 years ago.
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$4 trillion in lost wealth.
Source: NASDAQ
Where Are We – Real Estate
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Nationwide 20% price drop (Case-Shiller)
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Many states are not that bad.
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10-14 million homeowners now have zero
or negative home equity.
-08
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Where Are We - Consumers
120
100
80
60
40
20
0
Consumer Confidence
Source: Conference Board
Where Are We – Manufacturing
65
60
55
50
PMI
45
40
35
30
97.1 98.1 99.1 00.1 01.1 02.1 03.1 04.1 05.1 06.1 07.1 08.1
Source: Institute for Supply Management
Where Are We – State Borrowings
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California is worried about borrowing $7B.
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Mass. pulled a $400M bond offering.
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New Mexico delayed a $500M bond
offering.
How Bad Will It Be?
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Look at 4 sources of revenue and
economic growth:
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Consumer Spending
Personal Income
Corporate Profit and Investments
Government Spending
How Bad Will It Be? - Consumers
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Consumer spending will be slowed by
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Wealth effect from stock market decline
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Wealth effect from home value decline
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- $60B
Spending drop from drop in refinancings
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- $100B
- $200B
That means we could see 6% drop in retail sales.
That is a 1.8% drop in GDP.
How Bad Will It Be? – Income
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Unemployment up 1.4% and climbing.
Capital gains will be very low in 2008-09.
Raises and bonuses will be low.
Interest and dividends will be down.
Total effect could be 6-7% drop.
That is about 4% drop in GDP.
How Bad Will It Be? - Businesses
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Corporate profits down 7.1% in last 12
months (Jim Jubak, MSN Money)
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Estimated change in business investment
is 30% decline.
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Together, could drop GDP 3%
How Bad Will It Be? - Government
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Federal spending is increasing
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Stimulus, plus all other programs
Probably enough to boost GDP 2%
State and local government spending will
drop.
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May be offset for federal govt, may be more.
How Bad Will It Be? - Summary
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Estimated changes in
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Sales taxes:
Income taxes:
Corp. taxes:
Federal dollars:
-6%
-6%
-7% at a minimum
????
Most states seem likely to experience 7%
decline in main revenue sources.
State Budget Picture
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8 states used rainy day funds in FY08.
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20+ states with revenue below projections.
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AL, GA, VA
AL, FL, GA, KY, MD, TN
Most states still have good reserves
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Problems: AR, KY, MS, SC
Source: National Governors Association
State Budget Picture
Expected State Revenue Growth 2008-2009
< 0%
0 – 3%
3 – 6%
6+%
AL, FL
GA, MS
AR, MD
LA, MO
KY, SC
OK
NC
TN, TX
VA, WV
Source: National Governors Association
State Budget Picture
WV
VA
TX
TN
SC
OK
NC
MO
MS
MD
LA
KY
GA
FL
AR
AL
0%
Sales Tax
Income
Corp Tax
20%
40%
60%
80%
100%
Source: National Governors Association
Future Improvements for Recessions
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Project state revenues by category.
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Realize that corp income tax and cap gains
taxes can turn south very quickly.
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Sales tax, income tax, corp tax, (cap gains tax).
Try to pair them with programs that can be cut
quickly.
Set revenue target at lower limit of 95% CI.
Future Improvements for Recessions
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The idea for revenue forecasting would be that
95% of the time, you would end up with extra
Predicted State Revenues
revenue.
0
2
4
6
8
10
12
Conclusions
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We are in or going into a recession.
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It will probably be a reasonably severe one.
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I’m glad I’m not a state legislator right now.