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Initiative 601: Experience and Context. Presentation to the House Finance Committee by the Office of Financial Management Victor Moore, Director Irv Lefberg, Chief of Forecasting February 1, 2005. Major Provisions of I-601.

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initiative 601 experience and context

Initiative 601: Experience and Context

Presentation to the House Finance Committee

by the

Office of Financial Management

Victor Moore, Director

Irv Lefberg, Chief of Forecasting

February 1, 2005

major provisions of i 601
Major Provisions of I-601
  • Establishes annual limits on General Fund state expenditure growth based on three-year averages of inflation and population growth, called “fiscal growth factors.”
  • Under original I-601, the expenditure limit was reduced when program costs or revenues were shifted from the General Fund to other state accounts; but the limit could not be raised when such program costs or revenues were shifted back to the general fund.
  • A new provision adopted in 2000 in HB 3169 allows adjustments in both directions. It establishes that the state expenditure limit can be adjusted upward when program costs or revenues are transferred to the General Fund from another state fund or account.
  • Requires a 2/3 majority of both houses of the Legislature to increase revenues.

Office of Financial Management

components of expenditure growth

Budget Drivers =

Specific Population Growth

Specific Inflation

Change in Utilization

+

+

+

Policy Change

EXAMPLE: MEDICAL ASSISTANCE

Ages 18 – 39 Females and other age groups

Medical Services Inflation

Factors Affecting Enrollment (e.g., Economy)

Changing Eligibility Criteria

I-601 Spending Limit =

Adjustments due to Fund Shifts

General Population Growth

+

General Inflation

+

Components of Expenditure Growth

Office of Financial Management

structural difference between revenue growth and i 601

Average Projected Growth 2005 – 2009 (assumes average economic growth)

The I-601 Calculation

  • Inflation

2.5 %

3.8 %

  • Population Growth

1.3 %

  • Real Per Capita Personal Income

Growth (Productivity)

2.0 %

5.8 %

PERSONAL INCOME GROWTH =

1.2 Point Difference

To forecast revenue, economists multiply personal income growth by a factor of between 0.85 and 0.95, since revenue grows more slowly than personal income.

5.0 %

REVENUE GROWTH = 5.8% x 0.87 =

Structural Difference Between Revenue Growth and I-601

Office of Financial Management

growth in state general fund expenditures

13.6%

I-601 takes effect

10.8%

10.0%

9.3%

9.1%

8.0%

7.6%

6.5%

6.5%

5.9%

5.7%

5.3%

4.0%

3.6%

2.8%

2.4%

2.0%

1.9%

1.2%

0.5%

0.3%

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Fiscal Year

Strong economy, increased spending on health care and education

Smaller growth in government spending due to economic slowdown

Economy recovers, Initiative 601 takes effect, slowdown in spending, tax reductions

Growth in State General Fund Expenditures

Office of Financial Management

slide6

I-601 takes effect

6.7%

7%

6%

5.7%

5.4%

5%

4%

3%

2%

1%

0%

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

State spending as a percentage of total state personal income has declined since Initiative 601 took effect.

Office of Financial Management

slide7

$23,000

$22,000

Revenue without tax changes

$21,000

$20,000

$ millions

Initiative 601 Spending Limit

$19,000

$18,000

Revenue with tax changes

$17,000

$16,000

1993-95

1995-97

1997-99

1999-01

Tax reductions passed between 1994 and 2001 had the effect of reducing annual General Fund revenues to approximately the Initiative 601 spending limit.

Office of Financial Management

slide8

Expressed in terms of 1999-2001 Biennium Impact

Transferred to Other Accounts

Tax Reductions

$1.8 Billion (62.2%)

$495 Million (17.1%)

Emergency Reserve Account

$598 Million (20.7%)

$2.9 billion of unspent General Fund revenues was returned in the form of tax cuts, transferred to other accounts, or deposited in the rainy day fund.

Office of Financial Management

six factors that helped spending growth stay within i 601 constraints through 99 01 biennium
Six factors that helped spending growth stay within I-601 constraints (through 99-01 Biennium)
  • Welfare reform, which substantially reduced caseload growth in the state’s public assistance programs.
  • Temporary reduction in medical services inflation and other cost savings in health care due to the introduction of managed care practices.
  • Slowdown in salary growth for state employees.
  • Additional, unexpected one-time revenues (e.g., the “tobacco settlement”) which helped fund health care programs outside the general fund.
  • Favorable investment climate which (at least temporarily) reduced public contributions to state pension funds.
  • Flat growth in K-12 enrollment.

Office of Financial Management

projected change in budget driver populations 2003 2007

Budget Share

Juvenile Rehabilitation

0.7%

Ages 12 - 17

Corrections

4.9%

Males Ages 18 - 39

Medical Assistance

10.6%

General Population

Long-Term Care

4.6%

Ages 85+

TANF

3.7%

Children Ages 0 - 17

Higher Education

12.0%

Ages 17 - 29

K-12 Education

43.1%

Ages 5 - 17

Projected Change in Budget Driver Populations2003 - 2007

Total Population Growth: 5.8%

Source: OFM November 2004 State Population Forecast

Office of Financial Management

however k 12 enrollments are forecast to surge again after 2008

Annual Change in School-Age Population

(Population Age 5 – 17 Years)

forecast

However, K-12 enrollments are forecast to surge again after 2008.

Office of Financial Management

percent change in employer medical costs per employee

Actual Change

U.S. CPI

IPD

Percent Change in Employer Medical CostsPer Employee*

Percent

2004 Predicted 13.0%

1987

1990

1995

2000

2004

*Companies with 10 or more employees

Sources: Mercer National Survey of Employer-Sponsored Health Plans 2003, Global Insight, Office of Financial Management

Office of Financial Management

slide13

Juvenile Rehabilitation

Long-Term Care

Prison

Higher Education

TANF

6.8

0.8

5.3

12.3

4.6

High

High

Low

Low

Low

---------

---------

---------

---------

High

---------

---------

---------

---------

High

Percent of Budget

Demographic Pressures

Inflation Pressures

Policy Pressures

High (class size, COLAs)

K-12 Education

43.5

Low*

---------

High (aging of the population)

Medical Assistance

9.5

Very High

High

*Demographic pressures for K-12 will begin to accelerate in FY 09.

In addition to health care “inflationary” pressures, policy pressures across several major programs are high.

Office of Financial Management

fiscal outlook 2004 2009

(Builds on 2003-05 Supplemental Budget as passed in April 2004)

Scenario 1

Scenario 2

X

X

Employee COLAs IPD

Caseload growth – based on official

caseload forecasts where available OR

X

X

Growth in associated population group

X

X

Higher education maintains its 03-05

General inflation (goods and services):

IPD – 2.2 %

participation rate.

X

X

X

X

No other policy adds are included.

IPD 2.2%

10%

Annual growth in per capita health care costs:

Growth in pension contributions:

IPD 2.2%

State Actuary’s

Estimate*

*not including gain-sharing

Fiscal Outlook2004 – 2009

Office of Financial Management

slide15

PROJECTION

2005

2006

2007

2008

2009

2004

$11,882

$12,077

$12,698

$13,190

$13,824

Total Revenues & Resources

$11,531

$11,994

$12,400

$12,759

$13,118

$13,369

Total Expenditures

$11,452

($113)

($323)

($60)

$72

$455

DIFFERENCE

$79

($257)

($397)

($440)

($121)

TOTAL RESERVES/DEFICIT*

Result: Revenue almost keeps pace with budget pressures.

Scenario 1: All programs, including health care costs and pension contributions, grow based on caseload/specific population growth and general inflation. Revenue grows 5% annually.

Office of Financial Management

slide16

PROJECTION

2005

2006

2007

2008

2009

2004

$11,882

$12,077

$12,698

$13,190

$18,824

Total Revenues & Resources

$11,531

$11,994

$12,834

$13,462

$14,293

$14,899

Total Expenditures

$11,452

($113)

($757)

($764)

($1,102)

($1,076)

DIFFERENCE

$79

($690)

($1,534)

($2,751)

($3,962)

TOTAL RESERVES/DEFICIT*

Result: Revenue does not keep pace with budget pressures. Deficit is difficult to manage.

Scenario 2: Same as Scenario 1 except health care annual cost per case growth is 10 percent and pension contributions are based on State Actuary’s estimates.

Office of Financial Management

projected annual growth
Projected Annual Growth

Personal Income

5.8%

Six-Year Outlook – Spending

5.5%

(including current trend in health care inflation, COLAs, class size reductions, and pensions)

Revenues

5.0%

Inflation + Population Growth

3.8%

(I-601 factors)

Office of Financial Management