FY10-11 State Budget Overview

1
FY10-11 State Budget Overview

• Dr. Howard Fleeter
• Education Tax Policy Institute
• February 13, 2009

2
How Did We Get Here?

• Part 1 HB 66 Tax Reforms (June 2005)
• Elimination of Tangible Personal Property (TPP)
  and Corporate Franchise Tax
• Creation of Commercial Activity Tax (CAT)
• 21 Decrease in State Income Tax Rates
• Permanent Sales Tax Rate set at 5.5
• Cigarette Tax Increased to 1.25 per pack
• Class 2 Rollback repealed
• 5 year phase-in period (FY06-FY10)

3
Estimated Impact of HB 66 Tax Changes in FY10
(Net revenue reduction 3.8 billion)
Source Driscoll Fleeter, 2009
4
Impact of HB 66 on State GRF Tax Revenues (2007
Estimates)

• Source OBM Driscoll Fleeter, 2008

5
Impact of HB 66 Tax Changes on State Revenues

• The estimates on the previous slide were from
  November 2007, when chance of recession was
  estimated at 10
• The chart shows that in 3 of the 5 years of the
  HB 66 Tax Reform Phase-out period GRF tax
  revenues were expected to decrease, even assuming
  moderate economic growth

6
Actual and Estimated GRF Revenues Assuming
Moderate Economic Growth, FY05-FY10

• Actual FY05 Revenues 19,089 million
• Actual FY06 Revenues 19,562 million
• Actual FY07 Revenues 19,468 million
• Estimated FY08 Revenues 19,659 million
• Estimated FY09 Revenues 19,564 million
• Estimated FY10 Revenues 19,348 million
• As a result of the HB 66 tax changes, GRF
  revenues in FY10 were estimated to be less than
  in FY06, assuming moderate economic growth.

Source FY08 and FY09 revenue estimates from OBM
FY08-09 budget as enacted. FY10 revenue estimate
by Driscoll Fleeter, 2007
7
How Did We Get Here?

• Part 2 Economic Recession
• As signs of an economic downturn appear, OBM
  revises revenue estimates 3 times in 2008.
• January 23, 2008 revisions result in 733 million
  in budget reductions
• Sept 11, 2008 revisions result in 540 million in
  budet reductions
• Dec 1, 2008 revisions result in 640 million in
  budget reductions
• Total budget reductions (FY08 and FY09) 1.9
  billion

8
FY09 GRF Revenues Under Different Economic
Scenarios
Source OBM
9
The Impact of the Recession on State Revenues

• 1.5 billion in anticipated FY09 tax revenue
  evaporated in 2008.
• Revenue estimates for FY10 and FY11 are even
  worse (17.219 billion in FY10 and 17.278
  billion in FY11)
• The FY10 revenue estimate in the Executive Budget
  is 2.1 billion less than we forecast just 15
  months ago.
• Revenues in FY11 are now forecast to be less than
  in FY04!

10
Actual and Estimated GRF Tax Revenues, FY03-FY11

• Source OBM and FY10-11 Executive Budget

11
The FY10-11 Executive Operating Budget

• In December 2008, OBM projected potential budget
  deficits as high as 7.3 billion for the
  FY10-FY11 biennium.
• The FY10-11 budget IS balanced, however.
• The HB 66 tax reforms are completely implemented,
  and no taxes have been increased

12
How did they balance the budget?

• Many programs and line items are funded below
  FY09 levels and at 80-95 of planning levels for
  FY10.
• State employee pay reductions from 0-6 and
  reduced benefit contributions save up to 200
  million per year
• 120 fee changes (most paid by business)
• 5 billion in one-time money

13
1.5 billion in State One-time Funding

• In FY11, 948 million will be drawn from the
  Budget Stabilization Fund (Rainy Day Fund)
• In FY11, 200 million will be borrowed from OSFC
  (this is money that cant be spent because the
  tobacco fund money needed to be spent first -
  that was before a judicial ruling on Tuesday
  froze that money, however)
• 200 million in FY10 and 120 million in FY11
  come from other sources

14
3.5 billion in Federal Funding from the Economic
Stimulus Bill

• 283 million enhanced FMAP (Medicaid)
• 821 million for special education
• 2.274 billion for state fiscal stabilization
  (60 to be spent on education 1.353 billion)
• These figures based on the House version of the
  stimulus bill
• Not clear how much less Ohio will receive as a
  result of the modified bill that was just agreed
  upon - possibly 1.2 billion less

15
Uh oh, what happens if we just lost a Billion ?

• Besides, the budget just got a lot worse, I
  have no idea, and Im not sure who does right
  now.
• And dont even ask me about the 200 million from
  the tobacco fund.
• Or the grocers lawsuit against the CAT. (though
  we think they will ultimately lose)

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So, how much are we spending?(Part I)

• Total GRF spending in FY10 26.1 Billion
• Total GRF spending in FY11 28.6 billion
• Total for the biennium 54.7 billion
• These figures include all Federally funded GRF
  expenditures (Medicaid, education, etc)
• This was initially thought to be a 4.4 increase
  over the FY08-09 budget (which was a 4.4
  increase over the FY06-07 budget)
• However, due to an accounting error in FY09, it
  is actually a 6.3 increase from FY08-09

17
So, how much are we spending?(Part II)

• Total State only GRF spending in FY10 18.295
  Billion
• Total State only GRF spending in FY11 19.733
  billion
• Total of 38.0 billion for the biennium
• About 3.5 billion more than projected GRF
  revenues of 34.5 billion in FY10 and FY11

18
Is spending more than we have a good idea?

• Economists overwhelmingly answer yes
• State fiscal needs always increase during a
  recession (particularly safety net programs)
• Expansive fiscal policy is especially necessary
  in this recession, as monetary policy has been
  ineffective (interest rates are almost at zero)
• The whole point of the Federal stimulus package
  is to spend the money (and Ohio will lose it if
  they dont spend it)

19
But wont this just create a problem balancing
the next budget?

• Ummyes.
• But that problem will almost certainly be even
  worse if we are still in a recession in FY12.

20
How do we fund the new education plan?

• OBM estimates that total revenue growth will be
  7.5 billion by FY17
• OBM also estimates that the education reform plan
  will cost an additional 6.1 billion by
  FY17
• So we can fund the new education plan if we
  devote 80 of expected revenue growth to primary
  and secondary education in FY17.