A State & Local Finance Market Briefing

Trends. Drivers. Opportunities.

governing.com

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FLICKR / Phil Roeder

Critical Imperatives Facing State and Local Government • Despite mend, prolonged

effects of downturn are still present

• Deteriorating transportation infrastructure

• Shrinking middle class and increased stress on social service programs

• Massive overcrowding and rising costs of correctional facilities

• Unreliable water supply

• Aging workforce and shrinking tax base

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FLICKR / Rob Shenk

State and Local Government Self Perception of Financial Health

72%Excellent or Good

9%Poor or Very Bad

19%Average

Source: Governing Institute

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Why Do They Feel This Way? • State taxes increased 2.2%.

• It is the 4th consecutive annual increase.

• Things are getting better…

State Tax Revenues on Rise5%

0%

-5%

-10%

-15%2006 2007 2008 2009 2010 2011 2012 2013 2014

RECESSION

Source: Pew Trust

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FLICKR / Sam Beebe

But It’s a Mixed Picture By State

State Tax Revenues

Source: U.S. Census

15% or more below

0 to 15% below

0 to 15% above

15% or more above

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Revenue & Expenditures • Projected state spending growth for 2015 is 3.3%.

• The majority of states (43) enacted budgets with general fund increases in 2015.

General Fund Spending: FY 2008–FY 2015

$750$ IN BILLIONS

$687

$661

$623

$645

$667

$695

$729

$752

FISCAL YEAR

$700

$650

$600

$5502008 2009 2010 2011 2012 2013 2014 2015

Source: NASBO

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FLICKR / tallkev

States Are Not Yet Out of the Woods • Nearly half faced at least 2 of 4 major budget

stressors in 2014.

• A lot of states missed their revenue forecast and had to tap reserves.

• Budgeters will approach the current year more conservatively.

Source: NACO, Governing Institute

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FLICKR / markheyboFLICKR / Kevin Dooley

Local Government: Not Yet Out of the Woods Either • Out of 3,000 counties only 65 have fully recovered

to pre-recession levels.

• Only 33% of cities recovered past their pre-recession revenue peak by 2012.

• State aid is likely to continue to decline.

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FLICKR / Kevin Case

Tax Policy • The pressure on taxes is more than ideological — it stems

from stagnant wage growth and lack of trust.

• Neither of those is going to change soon, so the only way to meet demands for core services and infrastructure is to improve efficiency.

Our Out-of-Whack Tax System • SLG tax structures are disconnected from the economy.

• By 2011 80% of the national GDP was service-based.

• SLG can broaden sales tax structures by extending it to service delivery and knowledge creation.

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The Issues: Public Pensions • GASB’s new rules will become visible for 1st time ever on

government balance sheets.

• Stricter view of unfunded liabilities will encourage talk of reforms in states that are struggling to fund their pensions.

The Issues: Public Pensions Stress SLG

3,000

3,500

2,500

2,000

1,500

1,000200619991997 200720001998 20082001 20092002 20102003 20112004 20122005

ASSETS

LIABILITIES

$ B

illio

ns

Source: Pew Trust, Governing Institute

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FLICKR / m01229

Municipal Bonds Outperformed in 2014

Investment-Grade Municipal 9.05

High-Yield Municipal 13.84

Local General Bond Obligations 8.51

Treasuries 5.05

Investment-Grade Taxable 5.97

High-Yield Taxable 2.45

TOTAL RETURN (%)

Past returns are not a reliable indication of future results. Data reflects the following Barclays indices: Municipal Bond; Municipal Bond High Yield; Municipal Bond Local GO; U.S. Treasury; U.S. Aggregate; U.S. High Yield. It is not possible to invest directly in an index.

Source: Charles Schwab

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The Issues: Credit Spread

Source: Charles Schwab

Bas

is P

oint

s A

bove

AA

A In

dex

13

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The Issues: Government Workforce • The average age of a government worker is 44 years old.

• Silver Tsunami: A number of states expect to be hit with a large wave of retirements.

Projected Public-Sector RetirementsIn 2014, 19 percent of the 2012 public administration workforce reached age 61, the average retirement age. By 2018, this figure rises to 28 percent of those working in 2012.

20%

25%

30%

15%

10%

5%

0%2014 2015 2016 2017 2018

Source: ACP Research Institute

% o

f 20

12 e

mpl

oyee

s ag

e 61

and

old

er

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The Issues: Rising Healthcare CostsAccording to The Center for State and Local Government Excellence: • Most local governments have seen healthcare costs rise

6% to 15% over the past five years.

• The top driver of rising costs is increased claims costs (64%).

Source: ACP Research Institute

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The Issues: Rising Healthcare CostsAccording to The Center for State and Local Government Excellence: • The most popular approach is wellness programs to reduce costs.

• However, one state, Maryland, has taken a carrot and stick approach.

OFFERS IS CONSIDERING

IS NOT CONSIDERING

DID NOT ANSWER

Wellness program(s) 69% 14% 2% 15%Disease management program(s) 57% 8% 8% 27%On-site physicians 7% 8% 33% 53%On-site clinics 15% 13% 26% 46%Reliance on pharmacists for chronic care assistance 5% 5% 35% 56%

Reliance on nurses and physicial assistants for primary care 10% 9% 28% 53%

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The “New” NormalWhile 2015 doesn’t appear to be a year

of shrinking budgets, the growth — if any — is certainly minimal.

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Health and Human Services • Expansion of healthcare with new eligibility mandates • Integrating systems and IT infrastructure • Looking to lower healthcare costs

2015 Projected Change +14%

Source: Governing Institute, U.S. Census

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Transportation • Integrating technological advancements

in intelligent infrastructure • Greater use of public-private partnerships • Expansion of internet of things

2015 Projected Change +2.6%

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Administration • Address workforce recruitment, retention

and retirement issues • Modernize core technology systems related to tax collection

2015 Projected Change -2.7%

Looking ForwardThe shape of public policy will be the result of the collision between what legislators and governors want to deal with and what they have to deal with.

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Source: GOVERNING Institute

What does it all mean for companies doing business

with states and localities and advocacy groups trying to

influence policy?

Drivers • Must have a quick return on investment

• New systems and procedures scaled up

• Ideally be self-funded

• Cross integrate across departments and increase efficiency

• Reduce fraud, redundancy, and waste

Source: Governing Institute

September 23 & 24, 2015 Washington, D.C.

COST OFSUMMIT ON THE

GOVERNMENTAn intimate, high-level gathering of state and local treasurers, CFOs, finance and budget officials.

Source: GOVERNING Institute

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Governing covers politics, policy and management for state and local government leaders. Recognized as the most credible and authoritative voice in its field, Governing provides non-partisan news, insight and analysis on budget and finance; transportation and infrastructure; workforce and economic development; health and human services and more.

Governing is a division of e.Republic, the nation’s only media and research company focused exclusively on state and local government and education.