FY 2007 JLBC Update
JLBC Staff
January 10, 2006
JLBC
The FY 2007 JLBC Baseline Estimate
As a starting point for discussions on the FY 2007 budget, the JLBC has developed: ? An estimate of baseline revenues, reflecting a consensus economic forecast. ? An estimate of baseline spending, representing funding formula requirements and other obligations. ? An estimate of available resources after adjusting for baseline revenues and spending. The JLBC has also made recommendations for enhancing Legislative oversight of agency operations.
2
Revenue Overview
Setting the Context for the FY 06 and FY 07 Estimates FY 2005 General Fund Revenue Growth of 19.0% Was the Largest in 30 Years
25% 20% 15%
1 9 .0 %
? ?
? ?
Sales Tax = 11.1% Individual Income Tax = 21.6% (adj. for withholding) Corporate Income Tax = 42.1% April 2005 biggest collection month ever
Percent Change
1 0 .4 %
10% 5% 0% -5 %
- 6 .1 % 3 .7 % 0 .7 %
-1 0 % '01 '02 '03 '04 '0 5
Fis cal Year
4
What is the Economic Outlook for the Next 18 Months?
-- The Finance Advisory Committee Met in December to Discuss
? National economic outlook is positive and Arizona will post solid gains -- but not as high as FY 05. ? Arizona's real estate market has begun to slow -but no discussion of bursting bubbles. ? While not forecasting a recession during the FY 07 budget cycle, several members predicted that the next downturn is likely to be severe.
5
The Economic Consensus Forecasts Solid Growth
-- Personal Income Would Increase by $14 Billion to $191 Billion, -- 96,500 New Jobs Would Increase Employment to 2.5 Million
12% 10%
8.3% 8.1% 8.4% 6.6% 6.1% 5.4% 5.3% 3.8% 4.2% 3.4% 3.9% 3.7% 9.5% 9.7%
Personal Income
8.3%
8.0%
Percent Change
8% 6% 4%
Employment
4.9%
7.7%
7.4%
4.5%
4.3% 3.7%
4.7%
2% 0% '95 '96 '97 '98 '99 '00
1.0% 0.0%
1.4%
'01
'02
'03
'04
'05 * '06 * '07 *
Calendar Year Pers onal Income
*Arizona Blue Chip Consensus Forecast (November 2005) 6
Employme nt Growth
Real Estate Sector Has Helped Fuel General Fund Revenue Growth
- CY 04 Gains May Have Added $150 M to '05 Collections - Even Greater CY 05 Gains May Show Up in April 2006 Tax Filings
50%
Y ear Over Year Percentage Change
40% 30% 20% 10% 0% -10%
Source: Arizona Real Estate Center
34%
Median Sales Price of Single-Family Houses In the Greater Phoenix Area
12%
CY04
2002 2003 Cale ndar Year 2004
CY05
2005
2000
2001
Existing Homes
Ne w Homes
7
With Recent Rapid Growth - General Fund Revenue Is More Vulnerable During A Recession
? The Arizona economy expanded by 8% in FY 05, while General Fund revenue grew by 19%.
? As a result, some of the revenue gain was likely to be short-lived. ? High level of revenue growth could result in increased vulnerability during a downturn.
? Annual corporate income tax collections increased by more than $350 M since the last recession. ? Individual income tax collections increased by $668 M in FY05 -- $100 M of the increase is attributed to small business.
8
"Big 3" Tax Forecast Uses Four-Sector Consensus
-- Translates Broad Economic Projections into General Fund Revenues
Big 3 forecast equally weights: ? ? ? ? ? FAC average UofA model - base UofA model - low JLBC Staff forecast Remaining revenues (6% of total) are staff forecast
JLBC 25%
UA - Low 25%
FAC Consensus 25%
UA - Base 25%
In FY 05, these 3 revenues grew by 17.7%. The March JLBC Staff forecast component, which forecasted 12.5% growth, came closest to predicting actual growth.
9
How Much Revenue Will Be Available?
Forecast Growth of 12.3% in '06 and 7.0% in '07
? '06 YTD rate = 16.7% (thru November)
Percent Change 20 18 16
1 9 .0
? ?
'06 revised rate = 12.3% Extra '06 revenues above original budget = $741 M at 12.3% rate '07 consensus = 7.0% and $497 M in new revenue
14 12 10 8 6 4 2 0 '04 '05
1 0 .4
1 2 .3
7 .0 5 .2 6 .0
?
'06
'07
'08
'09
Fis cal Year
Consensus * 10
Reflects consensus forecast of Big 3 plus staff forecast for minor categories.
Urban Revenue Sharing Grows Significantly in FY 2007
-- City Distributions Will Increase 30% Based on Income Tax Collections 2-Years Prior
600 500
$ in Millions
430.6 365.1 373.1 425.2 551.3
400 300 200 100 0 F Y 03 *
F Y 04 *
F Y 05
F Y 06
F Y 07
* Distributions to cities for FY 03 and FY 04 were based on 14.8% of income tax collections 2-years prior rather than 15%.
11
Spending Overview
Potential FY 2006 Shortfalls
? AD E - $ 3 2 M
? '05 Student growth was 3.4% vs. budgeted 2.9%.
? DH S - $ 1 0 M
? DHS expanded mental health funding after the Legislature had rejected their request ? no supplemental is recommended.
13
Title 19 and Health & Welfare Programs
FY 07 Statutory Spending is $255 M Above FY 2006
180 172
FY 2007 Title 19 Growth Rates
Population June/June Cap Rate AHCCCS DHS DES 3.6% 3.6% 6.5% 6.0% 7.0% 3.0%
0 AHCCCS D HS D ES
14
$ in Millions
120
60
50 32
AHCCCS Growth Has Moderated
Caseload Growth
10% 8.4% 8% Percent Change 6% 4% 2% 0% D e c 2004 D e c 2005 FY 2007 1.3% 3.6%
? JLBC Staff has a new consensus caseload forecasting model. ? Model consists of: - JLBC Staff projection - UA econometric model - AHCCCS model ? Total FY 2007 caseload: 1.1 million
15
DHS Behavioral Health Total Funds Would Increase by $108 M in FY 2007
-- Despite 224% Increase in Funding Since FY 2001, Quality of Service Remains Unclear
$ 1 ,5 0 0
?
? ?
Maricopa RBHA failed to meet 75% of its performance standards. Auditor General review by 11/06. JLBC recommends expanded performance measures.
$ 1 ,2 0 0
$ in Millions
$ 1 ,1 0 8 $771
$900 $600 $342 $300 $0 '01
'04 Total Spending
'07
16
DES Spending Growth Is Projected at $32 M GF for FY 2007
? $20.9 M for caseload growth in Long Term Care. ? $6.3 M to complete a 2-year 25% rate increase for Adoption Subsidy and Foster Care payments. ? $4.8 M for CPS caseload growth in permanent placements. ? JLBC recommends enhanced legislative oversight to ensure limited use of temporary high cost CPS placements.
? Performance measures to track progress ? Limit transfer of funding without JLBC approval
17
Pending Federal Changes May Affect the State Budget
? The U.S. Senate has approved the following changes and the House will take up the bill upon reconvening: - Medicaid: increased cost-sharing and benefit package flexibility, and verification requirements. - TANF: increase in work participation rates may result in penalties to the state. - Child Care: additional $200 M/year nationally. - Child Support Enforcement: cost-sharing change would require $3.6 M in additional state monies. - Foster Care: federal reimbursements may also decrease, due largely to long licensing times in the state.
18
FY 2007 K12 Formula Growth is $225 M
-- Student Count Tops 1 Million for the 1st Time ? 3.25% enrollment growth ? new '07 consensus forecast of JLBC Staff and UA econometric model ? 2% inflation ? Base adjustment ? '06 shortfall ? 10% assessed value growth ? 4% TNT rate cut to offset property growth ? Business property tax phase-down ? JTED growth for continuing FY 06 session law ? Other Total
In addition, $30 M set aside for Flores litigation legislation.
$M $165 81 46 (138) 55 13 1 2 $225
19
JTED's Funding Has Grown Significantly
-- '07 Has Minimal Increases Based on Continuing '06 Provisions -- '08 Impact Could Be Much Higher
50
? ?
?
JLBC would continue '05 session law caps. '05 law allows Pima County to create JTED - probably will wait until `08. Without permanent changes, Auditor General estimates added costs of $85 M.
45 40 35
$ in Millions
30 25 20 15 10 5 0 '0 1 '0 2 '0 3 '0 4 '0 5 '0 6
Fis c al Year
State JTED Aid
20
School Facilities Board
FY 2007 Formula Growth is $21 M
? New construction costs estimated to be $315 M in FY 07, including $250 M from the General Fund.
? Would fund 22 new schools housing 22,000 students, plus 27 ongoing projects. ? Requires no increase above FY 06. ? Recent inflation adjustments will affect FY 08 estimates.
? Add $25 M to restore one-time payment holiday savings. ? Reduce $(20) M for completion of deficiency corrections program. ? Add $16 M to fully fund a revised building renewal formula of $86 M. ? Funds will be subject to appropriation.
21
Universities
Fund Formulas and Enhance Oversight
? University funding grows by $7.2 M, or 0.9%.
? ? ? ? Enrollment formula growth of 2.7% would cost $14.5 M. $(8.0) M reduction for 155 credit hour funding cap. $672 K to fund an additional 32 WICHE students. Retains $7 M Phoenix Med Campus funding in base.
? Enhance oversight of operations.
? Progress report on rural residencies and clinical rotation access. ? Require reports on ASU Downtown Campus plans. ? Performance measure on % of classes taught by professors -currently less than 50%. ? Require JLBC review of all tuition spending and JCCR review of indirect debt financing.
22
Department of Corrections
-- FY '07 Growth is $35 M -- Open 3,000 Private Beds in '08 to Address Bed Shortfall
3 ,0 2 6
? FY 07 increases include: ? $15 M to open 1,000 private beds. ? $4 M for population growth. ? $16 M to replace 1-time fed $. ? Enhance legislative oversight ? More detailed budget structure. ? JLBC review of RFP to privatize Perryville.
3 ,0 0 0
2 ,8 2 6 2 ,5 5 1
2 ,0 0 0
1 ,0 0 0
924
0 J une '04 J une '05 J une '06 June '07
Bed Shortfall
23
Department of Public Safety
-- Add New Officers and Enhance Oversight ? Provide $2.7 M from newly-enacted Parity Fund (VLT monies) for 3.1% Highway Patrol salary increase. ? Add 46 Highway Patrol positions with $4.8 M from HURF. ? In FY '06, DPS diverted new officers' funding to unauthorized pay raises. ? To ensure that legislative intent is fulfilled, require reporting on filling the new FY '07 positions.
24
MVD Wait Times Have Grown Significantly
Wait Times Have Risen, While Clerks Declined
? Wait time understated ? does not include total visit ? Wait time increased despite fewer in-person customers ? Enhance oversight through reporting and limit funding transfers.
1000 900 800
Clerks
40 866 33 35 30
Wait Time
25 20 15 10
700 600 500 14 ' 03 ' 04 ' 05 ' 06 680
25
Other Spending Adjustments
-- New JLBC Actuarial Resources Will Help Evaluate Future Health/Retirement Cost Increases
50
41
40
$ in Millions
30
25 24
20 10 0
1 2 % Employee Health Increase Empl oyer Retirement Increase Final Ladewig Payment - $99 M
26
Budget Stabilization Fund
-- Recommend Funding at 7% of GF Revenues -- $606 M in '06, Rising to $640 M in '07
Total Fund Balance
? Session law deposits excess '06 revenues to BSF ? Permanent statute caps balance at 7% of GF ? '06 deposit = $440 M + interest ? '07 deposit = $10 M + interest
700 606 600 500
640
$ Millions
400 300 200 100 0 FY05 FY06 FY07 161
27
FY 2007 JLBC Baseline Estimate
$850 M in Available Resources After Funding Formulas
REVENUE SPENDING K-12 Operating and Capital Formula $242 M Title 19/Health and Welfare Formula $255 M Corrections/DJC - $38 M Higher Ed - $15 M Employee Health/Retirement - $49 M Other - $5 M
New Revenue - $1,454 M
New Revenues of $497 M + Carry Forward of $610 M + Net One-Time Changes of $347 M
Net New Available $1,454 M
$850 M Available
Net New Spending $604 M
28
$850 M Would Be Set Aside for Legislative Initiatives
Tax Relief Employee Pay ($20.5 M GF per 1%) Border Enforcement Truth in Budgeting (Repay Fund Sweeps & Shifts, Rollover) ? New Capital Projects ? Education Reform ? Ending Balance
29
? ? ? ?
$850 M Available in '07, but Only a $368 M Structural Surplus
-- Structural Balance is the Difference Between Permanent Revenues and Spending
Total $ ($ in M) Permanent $ ($ in M)
? Total Revenues ? Total Formula Expenditures Available Resources % Spending Increase
$ 9,751 8,900 $ 850 2.5%
$ 9,145 8,776 $ 368 7.4%
30
To Prevent Overallocating Permanent Resources, the JLBC Would Distribute the $850 M as Follows:
On-going Initiatives: One-time Initiatives:
Up to $368 M At least $481 M
31
What is the Longer Term Structural Balance Through FY 2009?
? Revenue growth is based on consensus estimates:
? 5.2% in '08 and 6.0% in '09.
? Spending growth is based on JLBC '07 base plus formula growth in '08 and '09. ? Long term numbers are very sensitive to small % changes:
? A 1% change in revenues in '07-'09 would change the shortfall calculation by almost $600 M.
32
The Long Term Structural Balance Will Depend on Our FY 2007 Decisions
-- Budget is Structurally Balanced in '07 -- Use of One-Time Initiatives in '07 Improves '08 and '09 Balance
600 $449 400 $474 $368
If $0 in on-going '07 initiatives
$ in Millions
200 $0 0 ($151) (200) (400) (600) FY 02 ($579) FY 03 FY 04 FY 05 FY 06 FY 07 ($225)
$126
$95
If $368 M in on-going `07 initiatives
($242)
($273)
FY 08
FY 09
Structural Surplus (+) / Shortfall (-)
33
JLBC Staff Recommended Process Improvements
-- Focus on Operating Balances and Other Forecasting Improvements
2,500
? ? ? ? ?
$2 B operating balance much higher than ending balance. Recommend joint Executive/ Legislative review of balances. Expand and refine consensus spending forecasts. Implement actuarial reviews. Review SPAR results and outdated fund list.
2,000 Balance (in millions)
Operating Fund Balance
1,437 978 1,034
1,989
1,500
1,000 639 500 1 0 FY 02 FY 03 FY 04 FY 05 360 192
Ending Balance
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STAFF OF THE JOINT LEGISLATIVE BUDGET COMMITTEE
? ? ? ? ? ? ? ? Director ................................................................................................................................. Richard Stavneak Executive Assistant............................................................................................................... Linda Monsanto Assistant Directors ................................................................................................................ Lorenzo Martinez .............................................................................................................................................. Steve Schimpp .............................................................................................................................................. Stefan Shepherd Revenue Section Chief.......................................................................................................... Tim Everill Principal Economists ............................................................................................................ Brian Cary .............................................................................................................................................. Hans Olofsson Principal Research/Fiscal Analyst......................................................................................... Bob Hull Senior Fiscal Analysts........................................................................................................... Jake Corey .............................................................................................................................................. John Malloy Fiscal Analysts ...................................................................................................................... Kevin Bates .............................................................................................................................................. Matt Busby .............................................................................................................................................. Shelli Carol .............................................................................................................................................. Kimberly Cordes-Sween .............................................................................................................................................. Russell Frandsen .............................................................................................................................................. Steve Grunig .............................................................................................................................................. Carson Howell .............................................................................................................................................. Eric Jorgensen .............................................................................................................................................. Leatta McLaughlin .............................................................................................................................................. Jeremy Olsen .............................................................................................................................................. Tyler Palmer .............................................................................................................................................. Leah Ruggieri .............................................................................................................................................. Amy Strauss Assistant Fiscal Analysts ...................................................................................................... Chris Cranny .............................................................................................................................................. Nick Klingerman .............................................................................................................................................. Martin Lorenzo Senior Secretary/JLBC Clerk................................................................................................ Cheryl Kestner Administrative Assistant/JCCR Clerk................................................................................... Yvette Medina Senior Administrative Assistant............................................................................................ Sharon Savage
? ? ? ?
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