fy 2013 state budgets

7/31/2019 FY 2013 State Budgets

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SPECIAL COMMENT

US PUBLIC FINAJULY 3, 2012

Table of Contents:

LATE BUDGETS REFLECT POLITICALDISCORD AND/OR SUPERMAJORITY

VOTING REQUIREMENTS 2NO GOVERNMENT SHUTDOWNSFOR FISCAL 2013 3ESTABLISHED PROCEDURES ENSURETIMELY DEBT SERVICE PAYMENTS INLATE BUDGET SITUATIONS 3ECONOMIC AND REVENUE GROWTHHELP STATES TO OVERCOME THEPOLITICAL STALEMATE THAT MARKEDMUCH OF THE DOWNTURN 4MOODYS RELATED RESEARCH 6Analyst Contacts:

NEW YORK +1.212.553.1653

Kimberly Lyons +1.212.553.4673

Assistant Vice President Analyst

[email protected]

Nicholas Samuels +1.212.553.7121

Vice President Senior Analyst

[email protected]

Emily Raimes +1.212.553.7203

Vice President Senior Analyst

[email protected]

Timothy Blake +1.212.553.0849

Managing Director Public Finance

[email protected]

Robert A. Kurtter +1.212.553.4453

Managing Director Public Finance

[email protected]

Trend of On Time State Budgets Continuesas Revenues Improve

Every state adopted a budget on time for fiscal 2013. The adoption of timely budgets in thelast two cycles (most state fiscal years begin July 1) reflects moderate improvement in statefiscal conditions, and the fact that states have largely avoided the political showdowns that

marked the peak of the recession.

The trend of on-time budget passage underscores the willingness of state officials to makedifficult fiscal decisions. While the economic recovery remains tepid and fiscal challengesremain, revenues are growing and budget gaps are markedly lower. According to the Centerfor Budget and Policy Priorities (CBPP), state budget gaps totaled $191 billion in fiscal 2010and $130 billion in fiscal 2011. A separate study by the National Association of StateBudget Officers estimated total budget gaps of $110 billion for fiscal 2012.

This special comment discusses the current budgetary environment for all states, the trend inmeasures used to balance state budgets and the institutional mechanisms in place for states toaddress late budgets, particularly with respect to debt service payments. Our findings reflect:

Every state enacted a budget on time for fiscal 2013.

By comparison, four states

enacted their budgets late in fiscal 2009, five in fiscal 2010, three in fiscal 2011 and one

last yearMinnesota;

Improving revenues have helped states overcome much of the political intractabilitythat led to late budgets during the downturn.

Through the spring, more than half the

states report that fiscal 2012 revenues exceeded budgeted forecasts and most others were

on target.


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2 JULY 3, 2012 SPECIAL COMMENT: TREND OF ON TIME STATE BUDGETS CONTINUES AS REVENUES IMPROV

Late Budgets Reflect Political Discord and/or Supermajority Voting Requirements

The strength of financial governance and the efficiency of state budget procedures is an importantcredit consideration. Late budgets primarily reflect political disagreements, and in extreme cases lead togovernment shutdowns. In some states the requirement that a legislative supermajority approve the

budget can exacerbate existing political disagreement. However, even when budget enactment isdelayed, most states resolve their issues in a relatively short period, with no long-term impact on theirfiscal health or credit.

Eight states have experienced at least one late budget in the last five years, and four of those eight stateshave experienced more than one late budget in the same time period (Exhibit 1). The states that tendto be late typically have established practices in place to ensure that disbursements for debt service andother expenses continue, even in the absence of full year spending plans. These practices are establishedby state constitution, statute, or by policy.

Most states begin their fiscal year on July 1 (four states have different fiscal years: Alabama andMichigan begin October 1; New York on April 1; and Texas on September 1). For fiscal 2013, the

legislatures in Massachusetts and South Carolina passed budgets late in the legislative session, butbefore the beginning of the new fiscal year. In both states, budget laws grant the governor a period toreview the measures, 10 days for Massachusetts and five for South Carolina. Because the spendingmeasures were passed so late, neither governor signed the budget by July 1. We do not consider thesebudgets late, however, since the full-year spending measures were passed and in both cases, the statesenacted interim spending measures that cover operations and debt service.

EXHIBIT 1

Improving Trend for Budget AdoptionStates that missed the start of the fiscal year

State G.O. Debt Rating FY2012 FY2011 FY2010 FY2009

California A1/Stable X XConnecticut Aa3/Stable X

Illinois A2/Stable X X

Minnesota Aa1/Negative X

New York Aa2/Stable X X

North Carolina Aaa/Stable X

Ohio Aa1/Stable X

Pennsylvania Aa1/Negative X X X

Source: Moodys Investor Service


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No Government Shutdowns for Fiscal 2013

Underscoring how the resolution of significant budget shortfalls can heighten ideological differencesand lead to political stalemate, the Minnesota government shutdown for 20 days at the start of fiscal2012, the longest state shutdown in recent history (Exhibit 2). During the 2011 legislative session,

Governor Mark Dayton's original executive budget recommendation included new taxes forecasted togenerate approximately $3 billion of recurring revenues. Disagreement over the proposed new taxes forthe fiscal 2012-2013 biennium resulted in a budget impasse, with the state legislature staunchly againsany additional taxes. The state failed to enact a new biennium budget in time for fiscal 2012,prompting an immediate shutdown of government operations pursuant to statute, which prohibitedthe state from spending without a legislatively approved budget. Debt service was not affected:mechanisms were put in place to ensure that all of the states bonds continued to be paid on time.EXHIBIT 2

Only a handful of State Shutdowns Last Ten Years

State G.O. Debt Rating Length of Shutdown Year of Shutdown

Michigan Aa2/Stable 2 hours 2007Michigan Aa2/Stable 4 hours 2009

Pennsylvania Aa1/Negative 1 day 2007

New Jersey Aa3/Stable 7 days 2006

Minnesota Aa1/Negative 8 days 2005

Minnesota Aa1/Negative 20 days 2011

Source: Moodys Investor Service

Established Procedures Ensure Timely Debt Service Payments in Late BudgetSituations

While many states have mechanisms to ensure timely debt service and maintenance of operations inthe event of late budget adoption, some states have no established contingency plans for late budgets.In states that have no formal statutory or constitutional contingency plans but have a history of latebudget adoption, procedures have historically been put in place to address government payments andmanage cash flow during periods of budget delays. Some states have contingency plans that allow themto operate under an executive order, a continuing resolution, or an emergency spending bill. Thesemeasures ensure that the state can continue government operations, including the payment of debtservice obligations. For bonds that require legislative appropriation, such as lease-backed debt, moststates set debt service payment dates well beyond the start of the a states fiscal year to avoid possibledelays in the event of a late budget adoption.

Even with contingency plans or established mechanisms, late budget adoption at the state level candisrupt the flow of state payments to vendors and employees, as well as school districts, cities, publicuniversities and other political subdivisions such as transit systems that rely in part of state funds. Adelayed state budget could also result in late debt service payments but states have historically madespecial accommodations to allow debt service payments to be made on time.


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Economic and Revenue Growth Help States to Overcome the Political Stalematethat Marked Much of the Downturn

The prevalence of timely budgets reflects the improvement in state revenue trends. While the tradeoffare still difficult, the magnitude of necessary budget cuts is smaller than in the depths of the recession

and attaining budget consensus has been easier and faster. Based on our analysis, through the spring,revenues in more than half the states exceeded forecasts and most others were in line with estimates(Exhibit 3). Revenues in some states, however, continue to miss budgeted targets and others haverevised their forecasts downward, opening gaps that states will need to close. New data from theCBPP show that the shortfalls closed in fiscal 2013 budgets totaled $54 billion, still large but abouthalf the size of the gaps they closed going into fiscal 2012.

Two states with historically late budgets, New York and California, have both reversed trend in recentyears, passing timely budgets for fiscal 2012 and now 2013. New York passed its budget on time forfiscal year 2013 with seemingly little of the infighting of the past. Californias governor signed abudget just days before the end of the fiscal year, assisted in part by a constitutional amendmentapproved by voters last year that eliminates the legislatures pay for each day it is late passing a budget.

Californias budget relies on a temporary tax increase which must be approved by voters in NovemberIf the ballot measure fails, spending cuts to K-12 education will be triggered.

Continuing the recent trend of anti-tax governance environments, some states enacted tax reductionsfor Fiscal 2013. The state of Kansas passed sweeping tax reductions in its 2012 legislative session. Thestates personal income tax rates will be consolidated at 3% and 4.9%, replacing the current top rates of6.45% and 6.25% and the low rate of 3.5%. In addition, the states sales tax rate will decline to 5.7%from 6.3% in fiscal 2013 as previously planned. Georgia also enacted tax reductions, most notably atwo year sales tax holiday and eliminated the state property tax fee associated with car registrations.

In North Dakota, which continues to have the highest economic growth of all states, a measure torepeal property taxes within the state was placed on the June ballot. Proponents of the measure citedthe states trend of revenue over-performance as a driver for property tax relief, but voters ultimatelyvoted against the measure.


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EXHIBIT 3

Year to Date Revenue Performance versus Forecast

State G.O. RatingFY 2012 Rev

YOY (%) Rev vs Estimates

Alabama Aa1/Stable 2.6% ExceedingAlaska Aaa/Stable 29% Exceeding

Arizona Aa3/Stable* 5.3% ExceedingArkansas Aa1/Stable 2.9% In Line WithCalifornia A1/Stable -10% LaggingColorado Aa1/Stable* 7.8% ExceedingConnecticut Aa3/Stable 4.7% LaggingDelaware Aaa/Stable -5.5% LaggingFlorida Aa1/Stable 3.1% ExceedingGeorgia Aaa/Stable 5.1% ExceedingHawaii Aa2/Stable 12% In Line WithIdaho Aa1/Stable* 6.3% ExceedingIllinois A2/Stable 11.3% In Line WithIndiana Aaa/Stable* 9.0% In Line WithIowa Aaa/Stable* 6.2% ExceedingKansas Aa1/Negative* 8.4% In Line WithKentucky Aa2/Negative* 3.7% In Line WithLouisiana Aa2/Stable 1.2% Lagging

Maine Aa2/Negative* 2.5% ExceedingMaryland Aaa/Negative 6.7% ExceedingMassachusetts Aa1/Stable 2.0% ExceedingMichigan Aa2/Stable 1.7% ExceedingMinnesota Aa1/Negative 4.1% ExceedingMississippi Aa2/Stable 4.3% ExceedingMissouri Aaa/Stable 3.4% In Line WithMontana Aa1/Stable 8.2% ExceedingNebraska NGO** 5.6% ExceedingNevada Aa2/Stable 4.8% ExceedingNew Hampshire Aa1/Stable -1.8% LaggingNew Jersey Aa3/Stable 3.7% LaggingNew Mexico Aaa/Negative 2.4% ExceedingNew York Aa2/Stable -3.3% ExceedingNorth Carolina Aaa/Stable 1.2% In Line With

North Dakota Aa1/Stable* 62% ExceedingOhio Aa1/Stable 7.8% ExceedingOklahoma Aa2/Stable 9.2% ExceedingOregon Aa1/Stable 0.8% In Line WithPennsylvania Aa1/Negative 2.5% LaggingPuerto Rico Baa1/Negative 0.9% In Line WithRhode Island Aa2/Negative 3.8% ExceedingSouth Carolina Aaa/Stable 5.5% ExceedingSouth Dakota NGO** 7.4% In Line WithTennessee Aaa/Stable 3.4% ExceedingTexas Aaa/Stable 12% ExceedingUtah Aaa/Stable 2.7% ExceedingVermont Aaa/Stable 0.9% In Line WithVirginia Aaa/Negative 5.9% In Line WithWashington Aa1/Negative 1.3% In Line WithWest Virginia Aa1/Stable 1.0% In Line With

Wisconsin Aa2/Stable 2.0% ExceedingWyoming *** NGO** 8.4% ExceedingAverage Revs YOY 5.6%

ExceedingLaggingIn Line

* Issuer Rating

** No General Obligation Debt

*** Moody's does not currently maintain a public rating on debt supported by the state


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Moodys Related Research

Special Comment:

Rating Changes for the 50 States from 1973, July 2012 (143616)Outlook: Outlook for U.S. State Governments Remains Negative in 2012, February 2012 (139230)To access any of these reports, click on the entry above. Note that these references are current as of the date of publication othis report and that more recent reports may be available. All research may not be available to all clients.
http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM143616http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM143616http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM139230http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM139230http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM139230http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM143616


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Report Number: 143551

AuthorKimberly Lyons

Senior Production AssociateDiana Brimson

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fy 2013 state budgets

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