Understanding Missouri State Budget and Revenue Sources - Insights by James R. Moody & Associates

James R. Moody & Associates Missouri State University March 2015

Outside Data Sources A presentation entitled The New Normal by Tom Gillaspy and Tom Stinson. Missouri Population Pyramid slides from the State Demographer site, Missouri Division of Budget & Planning, Office of Administration. James R. Moody & Associates

Presentation OVerview Missouri General Revenue Overview 101 Education Funding History The New Normal (Our Aging Population) Legislative Changes To Our Tax System James R. Moody & Associates

COMPOSITION OF MISSOURI STATE BUDGET ALL FUNDS Fund Percentage 32.2% 31.3% General Revenue Federal Funds 36.5% Other Funds James R. Moody & Associates

Revenue Sources for General Revenue Source Percentage Individual Income Tax 67.5% Sales Tax 21.5% Corporate Income/Franchise Tax 5% Insurance Premium Tax 2.3% All Other 1.1% James R. Moody & Associates

Sales Tax HAS Been Flat For Over A Decade Net Sales Tax $2,500,000 $1.925B $1.75B $2,000,000 $1,500,000 $1,000,000 Net Sales Tax $500,000 $0 1999 2012 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2013 2014

Missouri Income From Capital Gains and Dividends $9 $8 Combined Over $12 Billion $7 Dividends $6 Billions $5 Capital Gains $4 $3 $2 Combined Only $4 Billion $1 $0 James R. Moody & Associates

Where Does General Revenue Spending Go? Elementary and Secondary Education $2.94 billion Higher Education $856 million Corrections & Public Safety $687 million Human Services $2.46 billion Judiciary $200 million General Assembly & Elected Officials $90 million All Other $1.05 billion James R. Moody & Associates

K-12 Foundation Formula Funding Since FY 2008 Fiscal Year 2008 2009 2010 2011 2012 2013 2014 2015 ** Foundation Formula Appropriation $2,869,115,911 $2,983,312.456 $3,004,388,410 $3,004,388,410 $3,004,388,410 $3,009,388,411 $3,075,271,737 $3,175,471,739 **(Governor s Released Amount)

Higher Education Funding Since FY 1996 FY 1996 to FY 2015 1000000 950000 900000 850000 800000 GR Funding (in thousands) 750000 700000 650000 600000

February 2015 Fiscal Year To Date General Revenue Receipts Category YTD Gross % Increase YTD Net % Increase (net of refunds) Individual Income Tax +6.3% +5.0% Sales Tax +3.3% +4.9% Corporate Income/Franchise +4.0% +11.8% Insurance Premium Tax +3.3% +10.1% Total Year To Date +4.9% Source: FY 2015 Consolidated Revenue Report Net Increases are net of refunds paid James R. Moody & Associates

Our Aging Population Circa 2010 Circa 1989 James R. Moody & Associates

Tom Gillaspy on AGing There is a new theory in demography. It s one of those math theories. Most of us age one year every twelve months. It s a pretty regular process .We are poised on a very enormous retirement boom unprecedented in history We are an aging society. This has never happened before. -Tom Gillaspy, retired Minnesota demographer James R. Moody & Associates

The New Normal Probably Means Creative destruction/disruptive innovation will change the way we deliver services Chronic government deficits & cuts in service Worries about how to pay for past promises A whole new set of opportunities

The Number Of Americans Turning Age 65 Increased Sharply (25%) In 2012 Millions 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 US Census Bureau ACS; The New Normal

From 2015 To 2025 The US Will See Large Increases Age 60s And 70s Change in Thousands 85+ 1,018 80-84 2,269 75-79 4,853 70-74 5,207 65-69 3,944 60-64 2,002 55-59 -1,732 50-54 -2,497 45-49 -459 40-44 1,879 35-39 2,970 30-34 2,430 25-29 227 20-24 -934 15-19 32 10-14 1,026 5-9 1,682 0-4 1,064 -3000 -2000 -1000 0 1000 2000 3000 4000 5000 6000 Census Bureau projections, 2012; The New Normal

By 2020 The United States Will Have More People 65+ Than School Age 90,000 80,000 70,000 Thousands 60,000 50,000 40,000 65+ 30,000 5-17 20,000 10,000 0 Census Bureau forecast 2012; The New Normal

US Labor Force Growth Will Be At Record Low Levels By The End Of This Decade Annual Percent Change 3.0% 2.6% 2.5% 2.0% 1.7% 1.6% 1.5% 1.3% 1.1% 1.0% 0.8% 0.7% 0.6% 0.5% 0.3% 0.0% 50-60 60-70 70-80 80-90 90-00 00-10 10-20 20-30 30-40 US Bureau of Labor Statistics forecast; The New Normal

Missouris Aging Population Between 1950 and 2000, the 65 and over population grew by 85% to 755 thousand persons. Between 2000 and 2030, this group is expected to grow an additional 87%, to 1.4 million persons. In 1950 in Missouri those over 85 represented one-half of one percent of the population 21,000. By 2000 those over 85 were 99,000 persons or 2% of the population. By 2030, those over 85 will represent 2.5% of the population, or 176,000 persons. James R. Moody & Associates

What Is A Reason The Average Population Age is Increasing? Fewer Teen Pregnacies Teen births in 2013 (274,641) were the lowest number ever reported in the U.S. Lower Overall Fertility Rate The birthrate for younger adult women fell to a record low of 81.2 births per 1,000 women aged 20-24. The new record-low teen birthrate (26.6 births per 1,000 women age 15-19) is a 10% decline since 2012 and a 57% decline since 1991. The general fertility rate slipped to a record low of 62.9 births per 1,000 women aged 15-44. James R. Moody & Associates

The Rectangular AGe Pyramid in 2030 Year 2030 By Age Group Preschool Percent of Population Cumulative Percent of Population 6% 6% Kindergarten to 8th 11% 17% Grades 9 to 12 5% 22% Age 18 to 24 9% 31% Age 25 to 44 25% 56% Age 44 to 64 22% 78% Over 65 21% 100% Cumulative is rounded to equal 100% Source: Missouri Office of Administration James R. Moody & Associates

Missouri Population Population Pyramid of Missouri 1900 85+ Male and Female Combined 80 - 84 75 - 79 70 - 74 65 - 69 60 - 64 55 - 59 50 - 54 45 - 49 40 - 44 35 - 39 30 - 34 25 - 29 20 - 24 15 - 19 10 - 14 5 - 9 0 - 4 6 5 4 3 2 1 0 1 2 3 4 5 6 Percent of Total Population Missouri Office of Administration, Division of Budget & Planning

Missouri Population Population Pyramid of Missouri 2000 85+ Male Female 80 - 84 75 - 79 70 - 74 65 - 69 60 - 64 55 - 59 50 - 54 45 - 49 40 - 44 35 - 39 30 - 34 25 - 29 20 - 24 15 - 19 10 - 14 5 - 9 0 - 4 6 5 4 3 2 1 0 1 2 3 4 5 6 Percent of Total Population Missouri Office of Administration, Division of Budget & Planning

Missouri Population Population Pyramid of Missouri 2030 85+ Male Female 80 - 84 75 - 79 70 - 74 65 - 69 60 - 64 55 - 59 50 - 54 45 - 49 40 - 44 35 - 39 30 - 34 25 - 29 20 - 24 15 - 19 10 - 14 5 - 9 0 - 4 6 5 4 3 2 1 0 1 2 3 4 5 6 Percent of Total Population Missouri Office of Administration, Division of Budget & Planning

State Taxes Paid by a Married Couple Before and After Retirement (Minnesota example; The New Normal) Income Tax Sales Tax Income Total Change Pct Working $35,000 $1,236 $782 $2,018 $65,000 Retired @ 70 % $3,387 $1,295 $4,682 $25,000 $0 $559 $559 -$1,459 -72% $45,000 $1,091 $896 $1,987 -$2,695 -58%

Seemed Like A Good Idea At the Time!!! Missouri s experience will be worse than the Minnesota example. House Bill 444, passed in 2007, phased out the state income tax on Social Security and public pensions over a six year period, ending in 2012. As our population ages, Missouri will receive virtually no individual income taxes from elders receiving Social Security and public pension. These same elders in their later years also purchase less goods that are subject to state sales tax. The population pyramids spell bad news for future state budgets. James R. Moody & Associates

MO Healthnet Enrollees & Expenditures MO HealthNet SFY-2012 100% In SFY-2012, seniors and persons with disabilities comprised more than 27% of enrollees, however, they accounted for nearly 66% of MO HealthNet expenditures. 18.7% 90% 80% 8.7% 48.5% ($3,398.0 M) 70% 12.1% 60% Number of People SFY-2012 (Average Monthly) 50% Persons With Disabilities (167,367) Seniors (77,460) 17.4% ($1,218.6 M) 40% 60.5% 30% 8.9% ($626.1 M) 20% Pregnant Women & Custodial Parents (108,325) Children (540,824) 25.2% ($1,762.1 M) 10% Total (893,976) 0% Percent of Enrollees (893,976* Average Monthly Enrollees) Percent of Expenditures ($7,004.8 M) Missouri Department of Social Services

What Services Does Medicaid Pay For Because Medicare Does Not? Skilled Nursing Care In-Home Services, such as personal hygiene care, homemaker and chore services These services are normally required for elderly people. James R. Moody & Associates

Tax Cut Legislation Senate Bill 509 will be implemented over roughly the next 15 years. It s implementation will coincide with enormous demographic shifts due to the aging population. With SB 509 in place, revenue growth would be very limited. The aging of the population will make revenue growth even more limited. James R. Moody & Associates

The Basics of Senate Bill 509 SB 509 includes a 25% reduction in business income in five increments of 5%, based upon triggers of $150 million growth . Business income includes partnerships, S-Corps and LLCs. SB 509 has no change in the tax rate for C-Corps. SB 509 reduces the top individual income tax rate from 6% to 5.5%, with five increments of .1% each. This reduction is also based upon a trigger of $150 million growth . The first reduction is deferred until 2017. James R. Moody & Associates

Senate Bill 509 Senate Bill 509 has been characterized by its proponents as broad-based tax relief . Is that true? Let s examine which income segments pay the most income tax in Missouri. James R. Moody & Associates

Who Pays The Missouri Individual Income Tax? Missouri AGI % of Taxpayers % of Taxes Paid Under $50,000 66.8% 13.6% $50,000 to $75,000 14.2% 13.9% $75,000 to $100,000 8.6% 13.2% Over $100,000 11.5% 59.1% James R. Moody & Associates

The Way SB 509 Would Really Work Drafters of the bill suggest that taxes would only be cut after growth. This theory ignores the probability that growth would occur after a drop in revenue from previous downturns in revenue, such as after recent recessions. Missouri s revenues at one time were fairly stable. Not any more. Assuming that FY 2014 revenues are negative, Missouri would have had five negative fiscal years in the last thirteen fiscal years. James R. Moody & Associates

Recent Net General Revenue Growth Net GR (in billions) 8.5 Negative 8 Negative 7.5 Billions 7 Negative 6.5 Net GR (in millions) 6 5.5 5 James R. Moody & Associates

Revenues Since FY 1998 If SB 509 Were In Effect Net GR (in billions) 9 Tax cut triggered Triggers tax cuts 8.5 8 7.5 Triggers tax cut 7 Billions 6.5 6 5.5 5 FY 98 FY 10 FY 99 FY 00 FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 11 FY 12 FY 13 FY 14 FY 15 Fiscal Year Actual Net GR If SB 509 In Effect James R. Moody & Associates

Summary The future of Missouri government will not be pretty. Missouri has adopted ill-advised new tax policies at a particularly bad time. The aging population will mean fewer workers paying taxes to support government programs. Governmental revenue growth will be very limited, which means government will shrink. The aging population will require more governmental services at a time when government spending will shrink. James R. Moody & Associates

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