the current fiscal crisis and state budgets jeffrey h. dorfman the university of georgia october 7,...
TRANSCRIPT
The Current Fiscal Crisis and State
BudgetsJeffrey H. Dorfman
The University of Georgia
October 7, 2008
Outline
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 Mortgage / Real Estate Mess
Real estate bubble started with dot.com bust.
Free markets mean booms and busts.
How We Got Here The Mortgage Market Mess
Economic Incentives Encouraged Bad Loans 4 steps to the process: originator, aggregator,
broker, investor. First 2 made approval decision, but bore no risk.
How We Got Here
0
500
1000
1500
2000
2500
3000
Bil
lion
$
2003 2004 2005 2006 2007 2008.1 2008.2
Consumer Debt
RevolvingNon-RevTotal
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.
States used poor economic forecasts and waited too long to see this slowdown coming (GA ex.)
Where Are We? 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.
Unemployment up to 6.1% (from 4.7% one year ago).
Job losses 159,000 last month.
Where Are We – Retail Sales This is $4 trillion / year and very important
to states since it translates directly to sales tax collections.
Up 2.1% year over year, but only +0.2% in last quarter.
Source: US Census Bureau
Where Are We – Stock Market Back to levels from 4 years ago.
$4 trillion in lost wealth.
Source: NASDAQ
Where Are We – Real Estate Nationwide 20% price drop (Case-Shiller)
Many states are not that bad.
10-14 million homeowners now have zero or negative home equity.
Where Are We - Consumers
0
20
40
60
80
100
120
Jan-
06
Mar
-06
May
-06
Jul-0
6
Sep-
06
Nov
-06
Jan-
07
Mar
-07
May
-07
Jul-0
7
Sep-
07
Nov
-07
Jan-
08
Mar
-08
May
-08
Jul-0
8
Sep-
08
Consumer Confidence
Source: Conference Board
Where Are We – Manufacturing
30
35
40
45
50
55
60
65
97.1 98.1 99.1 00.1 01.1 02.1 03.1 04.1 05.1 06.1 07.1 08.1
PMI
Source: Institute for Supply Management
Where Are We – State Borrowings California is worried about borrowing $7B.
Mass. pulled a $400M bond offering.
New Mexico delayed a $500M bond offering.
How Bad Will It Be? Look at 4 sources of revenue and economic
growth: Consumer Spending Personal Income Corporate Profit and Investments Government Spending
How Bad Will It Be? - Consumers Consumer spending will be slowed by
Wealth effect from stock market decline - $100B
Wealth effect from home value decline - $60B
Spending drop from drop in refinancings - $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 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 Corporate profits down 7.1% in last 12
months (Jim Jubak, MSN Money)
Estimated change in business investment is 30% decline.
Together, could drop GDP 3%
How Bad Will It Be? - Government
Federal spending is increasing Stimulus, plus all other programs Probably enough to boost GDP 2%
State and local government spending will drop. May be offset for federal govt, may be more.
How Bad Will It Be? - Summary Estimated changes in
Sales taxes: -6% Income taxes: -6% Corp. taxes: -7% at a minimum Federal dollars: ????
Most states seem likely to experience 7% decline in main revenue sources.
State Budget Picture 8 states used rainy day funds in FY08.
AL, GA, VA
20+ states with revenue below projections. AL, FL, GA, KY, MD, TN
Most states still have good reserves Problems: AR, KY, MS, SC
Source: National Governors Association
State Budget Picture
< 0% 0 – 3% 3 – 6% 6+%
AL, FL GA, MS AR, MD LA, MO
KY, SC OK NC
TN, TX
VA, WV
Expected State Revenue Growth 2008-2009
Source: National Governors Association
State Budget Picture
0% 20% 40% 60% 80% 100%
ALARFLGAKYLA
MDMSMONCOKSCTNTXVAWV
Sales TaxIncomeCorp Tax
Source: National Governors Association
Future Improvements for Recessions
Project state revenues by category. Sales tax, income tax, corp tax, (cap gains tax).
Realize that corp income tax and cap gains taxes can turn south very quickly. Try to pair them with programs that can be cut
quickly.
Set revenue target at lower limit of 95% CI.
Future Improvements for Recessions The idea for revenue forecasting would be that
95% of the time, you would end up with extra revenue. Predicted State Revenues
0 2 4 6 8 10 12
Conclusions We are in or going into a recession.
It will probably be a reasonably severe one.
I’m glad I’m not a state legislator right now.