ABEC Annual Conference

December 9, 2016

JLBC

JLBC 2

Presentation Summary

Revenues

Spending

Cash and Structural Balances

Revenues

JLBC

JLBC

Fund Source $ in Millions

Sales and Use Tax 4,458.1

Individual Income Tax 4,117.5

Insurance Premium Tax 515.8

Corporate Income Tax 433.5

Other Ongoing 531.4

One-Time Revenues 79.4

Total Revenue 10,135.7

4

’17 General Fund Revenue – Where It Comes From

Sales and Use Tax45%

Individual Income Tax

40%

Insurance Premium Tax

5%

Corporate Income Tax

4%

All Other6%

*

*$663.6 M is distributed to cities

JLBC

Current Expansion Exceeds Historical Average

90

3745

39

24

106

36

58

12

92

120

73

132

0

20

40

60

80

100

120

140

# o

f m

on

ths

Length of US Economic Expansions

Expansion Average

5

Now

’20

Calendar Year

Expansion: time period without 2 consecutive quarters of GDP decline

JLBC

Current Recovery is Weakest in Post WWII Economy- May Permit Longer Expansion

6

JLBC 7

October Forecast vs. Enacted Budget- Both Based on 65% Probability

*Excludes one-time revenues, tax law changes, and urban revenue sharing** Enacted ’17 budget did not include a ’20 estimate

**

JLBC

TPT shifted from contracting to retail in 2015

Magnitude of shift cannot be determined

Contracting decline likely caused by shift

8

’16 Sales Tax Growth by Category

’16 Growth by Category

Retail 5.6%

Contracting (10.0)%

Use 0.8%

Restaurant/Bar 5.5%

Utilities 1.7%

Other 3.3%

Total 2.9%

*Reflects net growth after tax law changes

*

JLBC 9

Sales Tax

Yield: $1.1 billion per 1 cent (non-shared)

What is the dollar value of major sales tax exemptions?

Category Value

Health Care Services $2.1 billion

Professional, Scientific & Technical Services $1.0 billion

Financial Services $976 million

Administrative and Business Support Services $720 million

Prescription Drugs & Medical Oxygen $604 million

Commercial Leases $437 million

Food for Home Consumption $356 million

JLBC 10

DOR reduced its collection/audit staff from 332 FTEs in ’16 to 224 FTEs in ’17

Revenue impact is unknown

78 FTEs and contracted collectors added in ’11 were budgeted to increase revenue by $53 M

DOR says it is focusing on improving voluntary compliance

Will DOR Staffing Decision Reduce Revenues?- Forecast Has Not Been Adjusted

JLBC 11

’20 CIT Projected to be $281 M- Primary Reductions are 2% Rate Cut and 100% Sales Factor

551 535 533 549

986

809

592

413

560

644 662

575

663

571

454

353284 281

0

200

400

600

800

1,000

1,200

'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

Co

rpo

rate

Inco

me

Ta

x $

in M

Net Collection

4-Sector Forecast

Statutory Changes

Given taxpayer confidentiality, timing of tax reductions highly uncertain

JLBC 12

Insurance Taxes Surpassing Corporate Taxes- AHCCCS-Related Premiums Built into Federal Reimbursement

-

100

200

300

400

500

600

700

'10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

$ in

M

IPT(Non-AXS)

IPT(AXS)

CIT

IPT

JLBC

’18 ’19 ’20

Base Revenue Growth (4.0%/4.4%/5.0%) 401 455 534

One-Time Fund Transfers (79) 0 0

Previously Enacted Tax Legislation (119) (78) (31)

Urban Revenue Sharing (12) (7) (13)

Total 191 370 490

% Change 2.0% 3.8% 4.9%

13

Adjustments Reduce Growth Rate to 2.0% in ’18

$ in M

JLBC 14

Phase-In of $228 M of Enacted Tax Reductions

Corporate Rate Reduction/Sales Factor

Corporate/IPT School Tuition Indexing

Bonus Depreciation Full Conformity

Manufacturing Electricity Exemption

Other

Total

’18

(74)

(12)

(8)

(12)

(13)

(119)

$ in M*

’19

(52)

(15)

(0)

(0)

(11)

(78)

’20

(0)

(18)

(0)

(0)

(13)

(31)

*By ’20, revenue base is $(228) M lower than in ’17

JLBC 15

Current State of Tax Credit Policy- ’16 Actual Credits Taken

Credit IIT CIT IPT

School Tuition Organizations 99 30 26

Public School Extracurricular 46 0 0

Research & Development 12 97 0

Charitable Organizations 37 0 0

Renewable Energy / Solar 5 10 0

New Employment 0 5 4

Other 16 6 4

Total 215 148 34

*Excludes $148 M for IIT paid to other states and $32 M for Prop 301 credit

*

$ in M

JLBC 16

Forecast Reaches Pre-Recession Level in ’18

Excludes balance forward and other one-time revenues. Includes tax law changes and urban revenue sharing.

General Fund

4-Sector Forecast

Spending

JLBC

Baseline reflects changes to active statutory and other funding formulas - no discretionary additions

Continues annual suspension of $493 M of inactiveformulas (including $372 M for K-12)

Continues $931 M in K-12 “rollover” payments

Assumes spending classified as one-time or expiring in ’17 budget does not continue

1818

’17 – ’20 Baseline Spending Projections

JLBC

$9,639

0.0%

$9,887

2.6%

$10,260

3.8%

19

Projected Spending Changes- $200 M In ’18 Statutory Spending Offset By Elimination Of 1-Times

Total Spending

% Change

K-12 – Formula

K-12 – Expiring Statutory Provisions

AHCCCS

DES

Corrections

Universities

DCS

SFB

DPS – Border Task Force Equipment

Counties – Cost Sharing Offset

Capital – $8 M ADOA/$10 M Vets Home

Capital – ADOT Highway Projects

Other

Total Spending Changes

$ in M Above Prior Year

’18

110

(43)

60

22

7

(15)

0

(1)

(15)

(8)

(18)

(87)

(11)

1

’19

134

0

118

27

1

0

0

(35)

0

0

0

0

3

248

’20

167

0

144

30

2

(3)

0

32

0

0

0

0

1

373

JLBC

Public School Funding Overview- ADE Only Versus Total K-12 Resources

State$4,839 M

Federal$1,270 M

Local$4,292 M

General Fund

$4,069 M

Land Trust$220 M

Prop 301$551 M

Federal $1,175 M

Other$67 M

20

K-12 ADE & Local Resources - $10.4 B(’17 Estimated)

ADE Only - $4.1 B GF / $6.1 B Total(’17 Estimated)

Cash and Structural Balance Forecast

JLBC 22

’18 Forecast – Little Discretionary Flexibility

The projected ’18 cash balance is $101 M, but the structural balance is only $24 M

Numbers will shift by January, but expect general theme to be the same

With $460 M Rainy Day Fund, projected cash reserve is $560 M

5.8% of revenues; rating agencies recommend 8-10%

JLBC 2323

General Fund Balance Improves Over Time, But…

9.6610.03

10.52

9.649.89

10.26

9.749.64

7

8

9

10

11

$ in

Bill

ion

s

Base Revenue Cash Balance / One-Time Ongoing Expenditures

’18 ’19

EndingBalance

ExpExp

StructuralBalance

$101 M $146 M

$24 M $146 M

’20

$264 M

$264 M

Exp

Projected ending balances assumed to be allocated as part of the budget process

RevRevRev

JLBC 24

Structural Balance Estimates Are Volatile- Risks of Developing Budget Around ’19 or ’20 Estimates

1% variance in revenue estimates yields $625 M over 3 years

Assumes no discretionary changes in next 3 years

Lower revenues and higher spending reduced projected ’18 balance from $148 M to $24 M in 9 months.

148

325

24

146

0

100

200

300

400

'18 '19

$ M

illio

ns

Jan Baseline Oct FAC

JLBC 25

New Non-K12 Initiatives

Repeal / Replace Affordable Care Act ?

Prop 206 Minimum Wage Impacts ?

University Resident Student Formula 78

$234 M by Year 3

New Tax Reductions ?

$ in M