Transcript General Fund Budget Outlook

GENERAL FUND
BUDGET OUTLOOK
November 9, 2007
Highlights
• There have been significant revenue surpluses for the last
three fiscal years. This was due in part to a strong state
economy and the cautious revenue forecasts in light of
sizable portion of the surplus coming from volatile
sources.
• The biggest risk surrounding the 2007-08 forecast is the
continuing real estate slump plus the financial sector
upheaval.
• These risks should be adequately covered by a moderately
cautious overall revenue forecast of only 3.8% baseline
growth for 2007-08 (actual was 9.2% for 2006-07).
• The revenue surplus in recent years has essentially
eliminated the structural budget gap.
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How Do 2007-08 Revenues Look So Far?
• The first quarter of the fiscal year is the least
important from an indicator point of view.
– Major receipts in these months (sales, withholding
tax) closely track the experience of the last few
months of the prior fiscal year
– Volatile revenue sources (corporate income, nonwithholding), which have led to large surpluses in
recent years, do not show up until the second half
of the fiscal year.
2
How Do 2007-08 Revenues Look So Far? (cont.)
• With these caveats in mind, we can report that the first quarter
General Fund revenue came in about $70-$75 million ahead of
a $4.5 billion target for the period.
– In other words, collections are running 1.7% above
expectations. The target growth rate for the first quarter
was 5.0%, which is higher than total growth expected for
the full fiscal year.
– Total General Fund growth for the year is expected to be
3.8%. The slowdown is not expected to weaken revenue
collections until later in the fiscal year and this is reflected
in the targeted growth rates.
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How Do 2007-08 Revenues Look So Far? (cont.)
It is clear from looking at economy-based taxes that the mid-cycle
economic slowdown is underway. Sales tax growth for July-September
was 4.7%, well below the long-term average growth of 5.8% and the
8-10% rates earlier in the recovery. It is, however, above the budgeted
first quarter growth rate of 3.7%.
Sales & Use Tax Collections
(adjusted for tax law changes)
Quarterly Collections (% change over prior year)
10%
8%
Average
Growth 5.8%
6%
4%
2%
0%
-2%
-4%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
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How Do 2007-08 Revenues Look So Far? (cont.)
Withholding continues to be surprisingly resilient with growth of 7.8%
through September, which is essentially the same rate as 2006-07. It has
slowed slightly from the 9-10% rate during 2005 and part of 2006, yet
remains above historical growth of 6.3%. This suggest withholding has
not been significantly impacted by the real estate recession.
Withholding Tax Receipts
Net withholdings, 4 quarter average change
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92
19
93
19
94
19
95
19
95
19
96
19
97
19
98
19
98
19
99
20
00
20
01
20
01
20
02
20
03
20
04
20
04
20
05
20
06
20
07
15.0%
12.5%
10.0%
7.5%
5.0%
2.5%
0.0%
-2.5%
-5.0%
-7.5%
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How Do 2007-08 Revenues Look So Far? (cont.)
The real estate slump has significantly reduced real estate conveyance
tax collections, though not at much as in many other states (California,
Florida, Virginia). Collections were down 4.1% compared to JulySeptember of last year. Though this tax does not go to the General Fund,
it is a good economic indicator and real estate activity affects retail
sales.
Real Estate Conveyance Collections
% change from prior year, quarterly collections
75%
50%
25%
0%
-25%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
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2007-08 Revenue Estimates
• Estimates reflect consensus outlook of Governor’s Budget Office and
Fiscal Research Division.
• Forecast philosophy recognizes that much of recent extra revenue has been
concentrated in volatile items (non-withholding portion of personal income
tax, corporate income tax), adding to forecast uncertainty.
• In addition, the projections provide a hedge against worsening residential
real estimate market. Fiscal Research has been more bearish on housing
outlook than most economists for last year. In our view, the unwinding of
market “bubbles” is usually more severe and longer lasting than most
observers believe.
• Baseline General Fund Revenue Growth and budget forecasts are shown
below.
01-02
02-03
03-04
04-05
05-06
06-07
07-08
08-09
-6.3%
-0.4%
5.7%
9.4%
12.1%
9.2%
4.0%
4.6%
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Revenue Forecast Assumptions
• The residential real estate market slowdown will continue into 2008 and
continue to be the biggest drag on the economy.
• The effects of the slowdown have begun to show up in a major way in
North Carolina’s housing data (see page 6).
• The loss of household wealth from the real estate slowdown plus tighter
consumer credit will lower consumer spending growth. This means that
state sales tax growth, excluding tax law changes, will slow to 2.9%
(4.5% in 06-07 and 9.2% in 2005-06).
• Modest job growth in North Carolina, due to real estate problems and
economic slowdown, will eventually lead to lower growth of income tax
withholding. However, the State should continue to exceed the national
experience. The specific 2007-08 forecast envisions withholding gains
of 5.3% (7.7% in 06-07).
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Revenue Forecast Assumptions (Cont.)
• Following years of very high growth, volatile sources of revenue
(corporate income tax and non-withholding portion of the personal
income) should experience minimal progress
– Non-withholdings portion of income tax projected to increase 4.0%,
versus 19.3% in 06-07.
– Baseline corporate income taxes will decline 3.5% as corporate
profits begin to dwindle because of the national and global economic
slowdown (6.9% positive growth in 06-07) .
• The continuation of the real estate slowdown and the difficulties in
the financial lending markets suggest that many of the effects of
the slowdown will spillover into 2008 and keep a lid on 2008-09
revenues.
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National Economic Outlook
• Below normal economic growth is expected for the remainder of 2007 and
2008: 1% to 2 % inflation-adjusted growth instead of 3%.
• A slowing economy will mean below average growth in employment and
consumer spending
• Partly to blame is the housing slowdown where the median housing price
declined for the first time in 16 years.
• Sub-prime lending will continue to implode and affect financial sectors,
prolonging the impact of the housing slump.
• Exports to developing countries has been a major support for economic
growth in recent years. A slowdown in the international trade sector would
raise recession fears in the U.S.
• The Federal Reserve has responded aggressively to lowered inflation
expectations and problems in real estate with a 50 basis point cut in the
banks’ lending rate. The Fed will be monitoring the financial sector
upheaval closely for fear of spillover into other parts of the economy.
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Additional Thoughts on 2007-08 Outlook
• In general, the economy will remain in choppy waters for the
next couple of years as the nation’s businesses and consumers
work through the housing market slump.
• To date, the resilient job market in the North Carolina is
putting enough extra dollars in consumers pockets to offset the
economic slowdown resulting in only a mild slowdown in
economy based taxes.
• The biggest impact to the state’s economy from the mid-cycle
slowdown, along with the housing and financial sector slump,
is projected to occur in 2008.
• Several risks are associated with the slowdown that will need
to be monitored as we move into 2008. While these risks exist,
their occurrence is not anticipated and the economic slowdown
is projected to be significant, but relatively mild.
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How is N.C. Economy Doing Relative To U.S.?
3
% Change in Employment
2.5
2
1.5
1
0.5
0
-0.5
-1
-1.5
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
(est.) (est.)
N.C.
U.S.
CALENDAR YEAR
After the usual deeper decline during the recession, N.C. has been surging ahead of U.S.
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Long-Term Budget Outlook
• Barring any major surprises, the cautious nature of the 2007-08 and
2008-09 consensus revenue estimates should help in meeting 200809 and future year spending needs.
• Budget availability for later years is highly dependent on health care
costs (State Health Plan, Medicaid). During the last three decades,
high growth in these areas has crowded out spending on other
budget priorities.
• A tight budget situation can still occur if the improved outlook leads
to an increase in commitments (expansion budget requests, tax cut
proposals, catch-up pay raises). In addition it is still possible the
economic slowdown could turn into a full-blown recession or
Medicaid expenses could accelerate.
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Long-Term Budget Outlook (Continued)
• Fiscal Research has not estimated 2008 session
budget availability. However, an outside group
projects $645 million of budget resources to fund:
– Pay raises for teacher and state employees ($100 million
for each 1%)
– $100-125 million in incentive compensation for
outstanding teachers
– Any additional dollars needed for state health plan and
higher education enrollment increases above tentative
budget amounts
– New public school initiatives (Pre-K Programs, class size
reduction)
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Turnaround in State Budget Reserves
• During the last decade a combination of natural disasters, tax
lawsuit payouts, and economic woes depleted the state’s financial
reserves. This was a major reason for temporary loss of our Triple
A bond rating by Moody’s.
• The strong economic performance in recent years, coupled with
stock market and real estate gains and cautious revenue estimates,
has helped to restore budget reserves.
• The current reserves are the highest in more than a decade.
– Rainy-day fund amounts to almost $800 million
– Repairs/renovations funding of $145 million can be pulled back in
emergencies
– Capital appropriations can be reverted if necessary
– Governor can force agencies to revert more authorized spending
– Cautious revenue estimates for 2007-08 should provide a final cushion
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Why Is North Carolina Budget News
Better Than Other States?
• Recent news reports indicate budget shortfall problems in a
number of other states. This could include special sessions,
executive spending cutbacks, and concerns about the
upcoming budget being out of balance.
• States with revenue concerns include Arizona, Florida,
Virginia, South Carolina, Tennessee, Nevada, Rhode Island,
Massachusetts, California. There very well may be others.
• There are a number of reasons why North Carolina is
experiencing a revenue surplus while other states are having
problems
– For one, our revenue estimates for the last couple of years have
been more cautious
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Why Is North Carolina Budget News
Better Than Other States? (cont.)
– Our job growth in North Carolina is at least one percentage
point higher than the national experience and has not slowed
during last 12 months. This is important because withholding
tax collections represent 40% of total revenues.
– Residential real estate slowdown in North Carolina compares to
an outright housing recession in many of the markets that
experienced a pricing bubble.
– In at least two states (Virginia, Florida) real estate conveyance
taxes are part of the General Fund revenue base. In N.C., the
proceeds go to a special fund for dedicated purposes.
– Healthy income growth and a milder real estate slowdown
means that our sales tax growth is more stable.
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Related Budget Issues in The News
• Medicaid Swap
• Transportation Funding
• Leandro Litigation
• Tax Reform
• Lottery
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