Budget Overview
Greater Phoenix Chamber of Commerce
July 13, 2005
General Fund Revenues � the Recent Good News
� Combined April & May collections exceeded the forecast by over $250 M. � April's $1.1 billion of receipts represented the single highest month of collections. � Combined April/May individual income tax collections grew by 75%. � Nationwide, Spring tax revenues were higher than expected -- although Arizona's growth was near the top of the list.
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What is the State of the Arizona Economy?
Blue Chip Consensus Projects Continued Growth - Projections Have Not Changed Significantly in Last 6 Months - Estimates Are Probably Not Capturing Real Estate Impacts
-
12% 10%
8.3% 8.1% 8.4% 7.6% 6.6% 6.1% 5.4% 6.8% 7.4% 9.5% 9.7%
7.4%
6.8%
Percent Change
8% 6% 4% 2% 0% '95 '96 '97 '98
4.9%
4.5%
4.3% 3.7%
4.7% 3.6%
4.6% 3.1%
Dec.
4.1% 3.8%
3.8%
1.0% 0.0% 1.0%
3.7%
'9 9
'00
'0 1
'02
'0 3
'04
'05 *
'06 *
Calendar Year
Pe rs onal Income
* May '05 Arizona Blue Chip Consensus Forecast
Employme nt
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Year-to-Date FY 05 Revenue Growth is 17.7%
-Revenues are growing much more quickly than personal income - Current expansion has outpaced 90's, at least for `05
20%
Percentage Change from Prior Year 17.8% 12.6% 10.8% 17.7% 11.8% 7.2% 9.6% 8.1% 4.4% 3.8% 7.8% 5.8% 3.7% 1.0% 0 . 3 % -0.4% 10.5% 7.6% 6.4% 7.6% 11.3%
15% 10% 5% 0% -5%
-6.4%
-10% '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05
Actual Growth
Bas e line Growth*
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*Baseline growth reflects growth rate prior to tax changes, but does not account for dynamic impact of these changes.
Major Tax Collections are $1.1 Billion Higher than Last Year
- Individual and Corporate Especially Strong
$700
$624.3
� �
10.6% - Sales Tax Growth
$ in Mllions i
$600 $500
30.2% - Individual Income Tax Growth 49.8% - Corporate Income Tax Growth
$400
$320.4
$300 $200 $100 $0
Sale s Tax Individual Income Tax Corporate Income Tax $201.0
�
May YTD - '05 Above `04
5
Business Profitability and Real Estate Fuel Growth
� Business profitability affects both corporate and individual income tax collections -- small businesses increasingly pay the individual tax. � If small businesses are experiencing same growth as corporations, they could account for 50% of the increase in individual income tax final payments. � Businesses may have taken advantage of bonus depreciation at the federal level, but there is no state benefit. � Investor real estate and stock market capital gains also boosted individual collections � for example, Microsoft had a $32 billion dividend distribution. � Another outcome of real estate boom -- contracting sales tax receipts are up 19.5% compared to last year.
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Short-Term Gains May Not Translate into Long-Term Revenues
� Corporate and non-withholding individual income collections are historically volatile -they dropped a combined $400 million in last recession. � Real estate unlikely to maintain its current pace -- thereby making some recent revenues onetime. � Recent tax package will have a significant longterm impact on revenues.
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Tax Reductions Total $18 M in '06
- Could
Grow to Over $200 M When Fully Implemented
� The new tax reductions total $18 M in '06, including:
� Elimination of the marriage penalty on certain tax credits. � Inflation adjustment for income tax standard deduction. � IRS tax code conformity.
� Reduction in business property tax will be phased in over 10 years at an ultimate cost of $140 M. � The new corporate tax sales factor calculation could reduce existing revenues by $120 M in 2011. � New motion picture tax credits are capped at $70 M by 2010, but difficult to project activity in advance. � Overall long term tax package impact will depend on level of new economic activity generated by lower taxes.
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How Did We Forecast FY 06 General Fund Revenues?
-- Use of a Consensus Process -- Executive Estimates were originally lower, then adjusted to Consensus level.
"Big 3" tax forecast equally weights: � � � � Finance Advisory Committee UofA model - base UofA model - low JLBC Staff forecast
FAC 25% JLBC 25% UA - Low 25%
Remaining revenues (6% of total) are staff forecast
UA - Base 25%
In FY 04, these 3 revenues grew by 10.4%. The UofA base model, which forecasted 7.8% growth, came closest to predicting actual growth.
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How Much Revenue Will Be Available?
Consensus Rate of 7.4% in '06 Will Need to be Revisited in Light of '05 Performance
20%
16.9% Percentage Change from Prior Year
15%
10.4%
10%
7.4% 6.3% 5.4%
5%
0.7%
0% '03 '04 '05 Fis cal Year
(excludes urban revenue sharing)
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'06
'07
'08
FY 2006 Spending Changes
Education Spending Increases by $389 M
� Fully funds K-12 enrollment formula and 3.2% inflation. SFB new school construction is cash rather than debt financed. University and Community College formulas are fully funded. Phoenix Medical School receives $7 million
200
1 7 4 .0 1 5 8 .5
�
150 $ in Millions
100
�
50
4 8 .5
8 .4
�
0 K-12 SFB Univ CC
12
'06 General Fund Increases above `05
Health and Welfare Spending Increases by $233 M
150
1 2 1 .0
�
�
Adds $11 M GF and $17 M Other Funds for 175 CPS staff and related services.
$ in Millions
Funds 2.5% AHCCCS caseload growth and 6% inflation.
100
8 7 .8
50
2 4 .1
0 AHCCCS D HS D ES
13
'06 General Fund Increases above `05
Criminal Justice Spending Increases by $75 M
75
5 9 .0
�
Adds 1,000 new prison beds. Adds 28 new Highway Patrol to DPS.
$ in Millions
50
�
25
1 2 .7 3 .2
0 Corre ctions D PS Courts
14
'06 General Fund Increases above `05
FY '06 Budget Includes $43 M State Employee Pay Package
� 1.7% state employee pay raise to offset 1.7% retirement contribution increase. � In addition to 1.7%, DPS officers receive an average of $1,900 and assistant attorneys general receive $4,500. � In lieu of 1.7%, correctional officers receive $1,410 increase.
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Budget Stabilization Reserve Will Be 2.1% of General Fund by the end of `05
� Prior to '05, the fund was almost depleted. � By end of '05, $170 M will be in the fund. � Governor vetoed use of new excess '05 revenue collections for BSF. � Fund will still receive '06 excess revenues.
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State General Fund Budget is $8.22 B
- Overall Growth in State Spending Varies Depending on Measurement
1,000
�
Overall spending is increasing by 7.2%.
$ in Millions
891
800 600
�
Excluding conversion to cash financing of school construction, increase is 4.0%. Permanent spending is up 12.2%.
556
400 200
306
�
0 Ove rall Ove rall w/o Cons truction Pe rmane nt
'06 General Fund Increases above `05
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What Does Recent Revenue Surge Mean for the State Budget?
� State has returned to a position of a structural balance -permanent revenues exceed permanent spending. � As enacted, FY '06 budget was projected to have an ending cash balance of $32 M. � With recent surplus April/May revenues, '06 balance will probably be more like $250 M. � '06 revenues may grow faster than 7.4% consensus rate - but need to monitor possible one-time impacts of real estate boom. � Any new '06 surplus revenue already slated for the Budget Stabilization Fund.
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Will There Be Surplus Revenues to Spend in the Next Budget?
� � � � � � � We need to monitor progress of the economy prior to the next session. In developing a '07 budget, the State will first need to replace $345 M in one-time monies used to balance '06 -- $250 M would only partially cover that cost. Surplus will depend on whether new '07 revenues are sufficient to cover $400 M - $600 M in '07 statutory spending obligations. In '07, there is a $40 M increase in the final Ladewig Litigation payment. State Employee Pay will be an issue again -- Most employees will have no "take home" increase in '06 and there will be another 1.7% retirement increase in `07. There are unresolved issues from the last budget:
� Flores Litigation � Corporate Tuition Tax Credit
Given the possibility of one-time nature of current revenues, there may be focus on one-time spending, such as:
� Elimination the K-12 "rollover" payment to school districts. � Increasing the current 15% funding of State's building repair program.
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