FY10-11 State Budget Overview

FY10-11 State Budget Overview Dr. Howard Fleeter Education Tax Policy Institute February 13, 2009

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Income Tax Rates • Permanent Sales Tax Rate set at 5.5% • Cigarette Tax Increased to $1.25 per pack • Class 2 Rollback repealed • 5 year phase-in period (FY06-FY10)

Estimated Impact of HB 66 Tax Changes in FY10 (Net revenue reduction = $3.8 billion) Source: Driscoll & Fleeter, 2009

Impact of HB 66 on State GRF Tax Revenues (2007 Estimates) Source: OBM & Driscoll & Fleeter, 2008

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

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

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

FY09 GRF Revenues Under Different Economic Scenarios Source: OBM

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!

Actual and Estimated GRF Tax Revenues, FY03-FY11 Source: OBM and FY10-11 Executive Budget

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

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

$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 can’t 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

$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

Uh oh, what happens if we just lost a Billion $? • Besides, “the budget just got a lot worse”, I have no idea, and I’m not sure who does right now. • And don’t even ask me about the $200 million from the tobacco fund. • Or the grocer’s lawsuit against the CAT. (though we think they will ultimately lose)

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

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

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 don’t spend it)

But won’t this just create a problem balancing the next budget? • Umm…yes. • But that problem will almost certainly be even worse if we are still in a recession in FY12.

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.

FY10-11 State Budget Overview