Intergovernmental Dependency and Transparency

1. Intergovernmental Dependency and Transparency Joe Kull PwC January, 2012

2. We have been doing so much • for so long with so little, that soon we’ll be able to do everything • with nothing forever.

3. Budget Formulation, Budget Execution, and Financial Management—Per the Constitution (1787) • “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law;” • —Budget Formulation and Execution • “and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.” • —Financial Management • (Article I, Section 9)

5. Analysis of Federal Liabilities, Intragovernmental Debt, and Social Insurance Obligations Source of Data: 2010 Financial Report of U.S. Government $ Billions 2010 2009 Federal Liabilities: Publicly-held Debt $9,060* $7,583** Federal Employee & VA Benefits 5,720 5,284 Other 1,576 1,257 Intragovernmental Debt—Owed to Social Security, Medicare/Other Trust Funds Federal Social Insurance Obligations Social Security 7,947 7,677 Medicare—Parts A, B & D 22,813 38,107 Other 97 94 Total Liabilities, Intragovernmental Debt & SI Obligations $51,790 $64,393 Current-dollar GDP 3rd qtr 2010, 4th qtr 2009(Source: BEA) $14,750 $14,119 Liabilities and Obligations as % GDP 351% 456% * 62% of 2010 GDP **53% of 2009 GDP 4,577 4,391

7. 1940 1971 2007 Current $ $9.5B $210.2B $2,770B

11. President proposes; • Congress disposes. • Both sign on.

12. State Fiscal Situation • Largest revenue collapse on record • ARRA replaced about $140B • Recovery slow and lag times growing • Shortfalls continue • Using reserves, taxes hikes, federal funds • Pressure from education, healthcare, OPEB • States tend to lag national recovery • Housing is key

13. The Cliff: Temporary Federal Aid to States (FY ’11 totals include both ARRA & Education Jobs Funds) In Billions Fiscal Year Source: Recovery Act data come from GAO Report to Congress, September 2010

14. Significant Lag

15. Housing leverage • Link between housing, values, consumption and taxes • Turnover ‘05: 1.3M new @ $290K = $370B 7.0M exisiting @ $269K = $1.9T ‘08: .3M new @ $244 = $70B existing = $890B • Jobs: 2M on site lost since ‘06; 2:1 off/on site Translates to ~ $2T and 6M jobs • Unemployment/economic uncertainty, diminished wealth, fallen values depress consumption, taxes • Property taxes 4% below prior year

16. Spending Pressure • Medicaid and Health Care • K-12 and Higher Education • Demographic Changes • Corrections • Transportation • Infrastructure • Pensions

20. What are the Risks Associated with Intergovernmental Financial Dependency • Disruptions to current direct and indirect intergovernmental revenue flows • Impact on investment income, asset values • Build-up of unfunded pensions, post employment benefits • Deferred infrastructure • Volatility • shifting role of federal gov’t • estimated that 1/3 of $1T in cuts would hit states

21. What can we do? • Evaluate sustainability and dependency risks in your environment • States refusing federal funds, cutting services • Watch the world, and the world economy • Awareness that something has to give • Don’t raise taxes, don’t cut benefits • Infrastructure does not last forever • Catastrophes, conflicts happen • Spend your way out of debt - • Compromise by everybody winning • Show up • Provide simple, clear information-No MEGO stuff

22. “You can always count on Americans to do the right thing-after they’ve tried everything else.” PM Winston Churchill

27. Appendix Report of the U.S. Government http://www.fms.treas.gov/fr/index.html • The Federal Government's Long-Term FiscalOutlookwww.gao.gov • Intergovernmental Financial Dependency and Related Risks—Proposed Reporting By State and Local Governments • Available at no cost at—www.cbh.com/intergovernmentalreport