Money makes the world . . .

Wisconsin’s fiscal challengeAbout a lot more than budgets.

| 10.04.10

■ WISTAX: teaching, informing . . . angering

■ State economy drives all

■ State finances then and now

■ No help from the outside?

Overview

Economy

Revenues

Budgets Choices“It’s the economy, stupid..”

- Campaign ‘92

The economy drives all.

-7.4%

-2.6%

-0.1%

-6.1%

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

1980 1984 1988 1992 1996 2000 2004 2008

WI

Per Capita Personal Inc.: Wis. +/- US

> US

< US

Economy recapped in one slide

66.665.0

69.6

57.1

59.559.359.3

54.5

40

50

60

70

85 90 95 00 05

Wis.

U.S.

How did we manage in the 90s?

% Women working

96.7

99.8

3.0

90

92

94

96

98

100

102

104

106

2000 2002 2004 2006 2008 2010

0.0

1.5

3.0

4.5

6.0

7.5

9.0

10.5

12.0

US - WI difference

US

WI

Mfg. Jobs 6/07-6/10WI -14.8%-75KUS -16.1 -2,246KTot. Nonfarm 6/07-6/10 WI - 6.0% - 173KUS - 5.3 -7,236K

Closer look at the economy . . . jobs

Avg. Earnings/Worker & GDP/Worker (WI % < > US)

-3.8%-6.2%

-12.9%

-10.9%

-13.2%

-12.7%

-14.8%

-5.0%

-20%

-15%

-10%

-5%

0%1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008

Productivity:GDP/Worker

Avg. Earnings/Job

. . . wages and productivity

$45,823$43,992

$40,225$38,350$38,916$38,032

$36,723$37,146

$33,633

$36,195

$39,249$39,798

$30,000

$35,000

$40,000

$45,000

$50,000

Real wages growing, but slower

WI

US

U.S. Wis. E/I

Paper Manuf. -32.4% -28.9% Exp

Machinery Manuf. -16.3% -12.0% E

Elec. Equip./Appliance Manuf. -31.4% -21.3% E

Printing and related -28.8% 12.6% E

Fabricated Metal Prod. Manuf. -3.1% 14.0% E

Nonstore Retailers -7.9% 6.9% E

Wood Product Manuf. -15.1% -3.9% E

Plastics/Rubber Prod. Manuf. -6.7% 18.7% E

Primary Metal Manuf. -34.9% -21.0% E

Food Manuf. -2.4% 3.0% E

Wisconsin's Top 10 "Key" Industries

Where are our jobs?

1990-2009

Where aren’t our jobs?

Social Assistance 104.4% 156.6% ~Exp

Warehousing and Storage 95.9% 156.7% Imp

Ambulatory Health Services 87.3% 68.0% I

Admin. and Support services 78.9% 98.6% I

Museums/Hist. Sites/Zoos/Parks 78.4% 138.9% I

Educational Services 78.0% 71.0% I

Admin. and Waste Services 75.8% 96.9% I

Amusement, Gambling, and Rec. 74.4% 50.6% I

Securities/Comm. Cont's/Invest's 70.3% 60.7% I

Prof., Sci., and Tech. Services 61.4% 51.9% I

Fastest Growing Industries Nationally

1990-2009

U.S. Wis. E/I

Sector WI US WI USAll 9.1% 7.6% -3.0% 5.2%

Construction 6.6% 9.0% -14.8% -1.7%Manufact'g -2.4% -8.1% -5.4% -3.7%

All - Const'n 9.5% 7.4% -1.5% 6.0%All - Manuf'g 10.1% 8.4% -2.9% 5.6%

05-0901-05

Pct. Change in No’s of Private EstablishmentsThird Quarter of Ea. Yr. Shown (BLS)

> v

How are employers doing?

1993-99 Rank 2005-09 Rank 2009:4 Rank

US 5.6 5.5 5.6WI 4.5 43 4.7 40 4.3 44

1993-99 Rank 2005-09 Rank 2009:4 Rank

US 1.8 1.2 1.2WI 1.4 43 1.0 44 1.0 38

New Firms as Pct. Of All Firms

Employees of New Firms as Pct. Of All Employees

Are we creating new firms?

Firm Creat'n

Rate Wis. U.S.Wis. Diff.

High Firm Creation

StatesWis. Diff.

Construction 7.9% 4.5% 5.6% -1.1% 6.4% -1.9%Prof./Bus. Serv. 6.9% 11.4% 15.4% -4.0% 13.9% -2.5%Information 5.9% 2.1% 2.6% -0.5% 2.6% -0.5%Trade/Trans./Util. 5.7% 22.6% 23.1% -0.4% 23.8% -1.1%Leisure/Hosp. 5.4% 11.1% 12.2% -1.0% 14.8% -3.7%Fin. Activities 4.7% 6.9% 7.1% -0.2% 6.5% 0.4%Educ./Health Serv. 3.7% 16.9% 17.1% -0.2% 16.9% 0.1%Manufacturing 3.0% 19.3% 11.0% 8.2% 8.7% 10.6%

Share of Private Employment

New firms . . . where?

<

>

1994-2009

1.93%

1.90% 1.86%

1.77%

2.08%

1.77%

1.87%

1.70%

2.10%

1.50%

1.75%

2.00%

2.25%

1963 1971 1979 1987 1995 2003

MN

WI

Wis. % of US GDP

A marketing view . . . share

-80

-40

0

40

80

-60 -40 -20 0 20 40 60

^ wyak

ny

vaca

de

tx

ma

IA

WI

MI

MN

ILms

scky

"Stars"

"Dogs"

ar|id

WI98

GDP % chg

GDP pc

Strategic view . . . market position

State finances, then and now

Wis. Fin. Stmts ($b), GAAP

-2.46

-2.42-2.28

-1.27

-0.83

-1.21

-2.24

-1.93

-2.15

-2.44 -2.50-3.0

-2.0

-1.0

0.098 00 02 04 06 08 10e

- $2.71 billion

Other states?

State finances in context (GAAP)

Prepared for recession? (NASBO)

■ Surpluses % spdg. 2008 2009 ▪ Wisc vs. avg. 1.0% vs. 8.60.7% vs. 4.7 ▪ States > WI 49 41

■ Spending % inc. 2010 2011 ▪ Wisc. (pre-lapse) +5.3%+5.2 ▪ 50-state avg. -6.8% +3.8%

43 cut 22 < +2%■ 2010-11 tax increases ▪ Only five states > in raw amt. (inc. CA, NY)

55.99

26.27

62.19

26.67

0

20

40

60

GPR All-Funds

+1.5%

+11.1%

$b

2007-09

2007-09

< ?! >

2009-11

Budget decisions made, 2009-11

+1.5

+11.1

2,511+200

11 rev (+ 12)

Budget decisions postponed

1,232+200

Long history of structural imbalances.

“ … the pace of the recovery is expected to slow and will not return to pre-recession levels until 2013 . . .” − DOR, 8.20.10

Projected growth in personal income

CY WI-May WI-Aug US-Aug’10 3.0% 2.5% 3.2%’11 4.6 4.4 4.7’12 4.4 4.3 4.8’13 4.4 4.1 4.8

Why this matters.

Recovery dividend?

Structural deficits + slow growth =

■ GPR tax revenues (2010-11) $12.88 billion

■ Pers. income growth: 4.5% / yr.

■ 12.9 x 4.5% = $520 million

520 + (520 + 520)

■ Structural ‘deficit’ ~ $1.23b + $200m = $1.4b

395.9

1,084.9

854.8

776.4

546.6

735

464

217350

313

179

0

250

500

750

1,000

98 99 00 01 02 03 04 05 06 07 08 09

Total

Family/BC

Other

Participants (000)

Medicaid:

’98: 1/13’08: 1/5

MA deficits, fed help?

Options narrowed?

■ Corporate income e.g. comb. reporting, throwback

■ Individual incomeTop rate up, cap. gains newsCredits, but small, odd ‘mix’

■ Tobacco (but . . .)

PS: $3.0 billion new taxes/fees 2008-09-10-11

Low-hanging fruit picked?

How Wisconsin Taxes Compare NationallyRevenues as Pct. of Pers’l Income; FY 08: US Census

Revenue US

% Inc. % Inc. +/- US Rank Rk Chg. % Inc. Rank

Taxes 11.20 11.76 5.0% 13 Up 1 11.75 14

Property 3.45 4.26 23.5% 8 2 4.23 10Sales 2.56 2.20 -14.1% 33 0 2.24 33Tobacco 0.14 0.23 64.3% 12 12 0.16 24Ind. Income 2.56 3.20 25.0% 12 2 3.19 14Corp. Inc. 0.49 0.42 -14.3% 23 2 0.46 25Curr. Chgs. 3.15 3.22 2.2% 29 2 3.05 31

Own Rev's 16.37 16.71 2.1% 21 2 16.53 23Fed. Rev. 4.05 3.56 -12.1% 38 -1 3.60 37

Wis. Wis. '07

And, by the way . . .

Political reality: (electorate and elected)

■ Public mood

~70% state gov’t fair/poor job

~60% state priorities: jobs/econ. + tax/spendno others >~10%

■ Political dysfunction: ▪ 10-15 years of fiscal denial (R and D)

▪ careerism + power + special interest allies▪ protect status quo; major policy changes?▪ Wisconsin leader?

Possibilities and implications

■ Pendulum: 3D to at least 1R, perhaps

2R??

■ Polls: governor; modeling: legislature

■ Split governance: the good and the bad

■ Issue approaches?─ K-12 education (kids/unions vs. tax relief)─ Medicaid─ Higher education─ Prisons

164.7200.2

256.8

153.4

539.5

365.2

282.1

0

100

200

300

400

500

91 95 99 03 07

Correct'n s

MA (Fed+St)

*School Aids/Crs.

cpi

Does legislative make-up matter?

Now help from elsewhere

■ “. . . US government debt held by the public has grown rapidly . . . it is now higher than it has ever been except during . . . World War II.”

■ “. . . deficits will cause debt to rise to unsupportable levels.”

▪ Crowding out of private savings/investment ▪ Rising interest costs forcing program cuts▪ Higher marginal tax rates “would

discourage work and saving and further reduce output”

There is no rich Uncle (CBO, 7.27.10)

*The alternative fiscal scenario deviates from CBO’s baseline projections, beginning in 2010, by incorporating some changes in policy that are widely expected to occur and that policymakers have regularly made in the past

. . . And he’s in denial

CBOJune 09

US GDP

Federal Debt Held by the Public Under CBO’s Long-Term Budget Scenarios (Pct. GDP)

Your turn

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