Budget Woes• Thirteen states late in passing budgets in 2015; two states are still without operating budgets • Factors include:• Slowly recovering revenues •Aversion to tax and fee increases •Mandatory expenditures • Ideological opposition 

SOURCE: Governing 2015, 2016

Cheap Oil• Lower oil prices lower revenues for state and local government•Demand for public transportation reduced•Diffuse benefits include:•Consumer spending increased in other areas•Reduced burden on oil-dependent industries•Government fuel costs decrease

SOURCES: Trib Total Media/Bloomberg News 2015, Bloomberg News 2016

China’s Slowdown •China’s slowing growth has implications for U.S. state and local governments•China is not just an exporter•China is also a major importer of state goods

SOURCES: The Sacramento Bee 2015, United States Census Bureau 2015, Industry Week 2014

Top Exporting States

China’s Ranking as State’s Export Customer

Texas 4th

California 3rd

Washington

1st

Louisiana 1st

Michigan 3rd

Ohio 3rd

Georgia 2nd

Tennessee 3rd

Income Drops in Most Counties

SOURCE: The Pew Charitable Trusts 2016

State SpendingMedicaid, 16%

K-12, 25%

Higher Ed, 13%

All Other, 47%

FY 2015 State Spending

*Excludes federal funds

SOURCE: National Association of State Budget Officers (NASBO) 2015

• 4.1% spending increase overall• 43 states have

increased their spending for 2016• K-12 and

Medicaid are the high-spend verticals

Stability in 2016• January 2016: Fitch Ratings sees stability•Moody’s also reports seeing stability•Biggest reported worries are:• Slow growth for the states• Pension payments for localities

SOURCES: Fitch Ratings 2016, Moody’s 2015

Finding Revenues• Corporate tax revenues are in decline: • The average total state revenue has increased 90%

yet• Corporate tax revenue has only increased 44%

• The sharing economy presents a new challenge for revenue and licensing

SOURCES: Governing 2016, PricewaterhouseCoopers (PwC) 2015

1980s 3.5%

1990s 2.7%

2013-2015

1.9%

Corporate income tax as a

percentage of total annual state

revenues

Pensions Challenges• Total shortfall facing state and local government is over $1 trillion• Constitutional challenges are presenting obstacles to pension reform proposals•Mediation has helped some cities solve pension disputes• Connecticut’s comptroller has proposed splitting their pension liability between employees pre- and post-1984

SOURCE: Bloomberg Business 2015, The Pew Charitable Trusts 2015, The Hartford Courant 2016, Governing 2016

Accounting Rule Changes •Governmental Accounting Standards Board (GASB) 2013 accounting rule changes:•Revealed pension deficits larger than previously thought•Resulted in further credit downgrades

• In 2015 a comprehensive review was launched to review the GASB financial reporting model; this review is due to be concluded in 2016•More rule changes coming?

SOURCE: The Pew Charitable Trusts 2015, PLANSPONSOR 2016

City Fiscal Conditions•Modest improvements seen in 2015 and projected for 2016•Biggest constraints are infrastructure, pensions, and health care benefits•Cities are still struggling:• 300 cities are in distress• Less support is available from states• Fewer revenue options are available than to state government

SOURCE: National League of Cities 2015

Regulating the Municipal Bond Market • Securities and Exchange Commission (SEC) created the Office of Municipal Securities in 2012• The Office has not yet put forth any significant regulation; much broader regulation could be nearing • Possible contention could result between the SEC and the municipal bond market

SOURCE: U.S. Securities and Exchange Commission (SEC) 2016

Market Forecast•Overall - stable but very slow• Increasing diversity in financial capacity; increasing tensions between cities and states• Significant vulnerabilities are infrastructure, pensions, police-community relations• Innovation is an increasingly important path to better performance