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Wednesday, November 23, 2016

NOTES FROM THE SENATE, NOVEMBER 23, 2016

Last week Georgia State University had two different Centers present on budget and economics. Dr. Carolyn Bourdeaux, who is head of the Center for State and Local Finance and former director of the Senate Budget & Evaluation Office, presented a briefing on Georgia's budget, while Dr. Rajeev Dhawan, of the Economic Forecasting Center, gave an assessment of the upcoming economic picture.

THE BIG PICTURE OF GEORGIA'S BUDGET - DR. CAROLYN BOURDEAUX

With both an overview of historical revenues and expenditures, Dr. Bourdeaux presented the trajectory of revenues and analysis on expenditures before offering an outlook for the upcoming session. In 2016 Georgia's real per capita General Fund Revenues hover around 1997 levels after adjustment.

Dr. Bourdeaux also gave an optimistic budget outlook for FY17 Amended. She believes the strong growth in FY16 only requires 1.28% growth to make the current FY17 budget, versus the original 3.8% for FY17 over the FY16 Amended estimate. This position will allow the state to keep the funding in FY17 with possible additions in Medicaid, K-12 Education and economic development.

For FY18, nationally and regionally, many states are expecting fiscal stress. Nationally underlying stress is variously being driven by some states' tax reliance on oil and gas, federal reductions or sequestration or the weak stock market or capital gains issues in 2015. From previous budgets, state revenue growth topped 4%, and, if replicated, 4% growth over the current FY17 budget for FY18 would produce $900 million in additional funding. While close to a billion dollars seems significant, and it is, the assumed growth in K-12 funding, higher education, Medicaid, behavioral health and pension contributions would consume most of that gain. While the budget picture appears positive, the needs of our growing state continue to add complexity.

GEORGIA'S ECONOMIC FORECAST - DR. RAJEEV DHAWAN

In the last meeting of the year for the quarterly economic forecast, Dr. Dhawan presented a forecast revised from the results of the election, entitled "Georgia Growth Hiccup: A Temporary Pause?" He forecasts that the state's employment growth will be 54,300 jobs in 2017, down from 86,700 in 2016, increasing in 2018 with 72,200 jobs forecasted for the year. One trend worth watching is that while job growth continues, the gap in growth between lower paying jobs and higher paying jobs has widened so far in 2016, which could impact personal income growth. While our job growth history in the state had been trending above the national average, the third quarter for the first time in 11 quarters has a lower rate of job growth than the nation at 1.2% versus the national 1.7%. Other states are trending down too, including Tennessee, North Carolina, Alabama, California, Texas, and Illinois among others. Other trends Dr. Dhawan pointed out that could have an effect in Georgia is a slowdown in imports as well as U.S. Vehicle Miles Driven, where port traffic slowdown is leading to less truckers on the road.

Dr. Dhawan forecasts personal income to grow 5% in 2016, 4.7% in 2017 and 5.1% in 2018. Inside Georgia's sectors, manufacturing and corporate news has been good, with positive announcements across the state, however Dr. Dhawan estimates that if tariffs occur in 2017, manufacturing and corporate sector companies with large international ties could be affected. Healthcare and technology sectors are forecasted for growth as the domestic situation should remain advantageous. Dr. Dhawan also pointed out there has been good news for Georgia's Transportation Industry showing signs that it could end its current downturn in growth rate after posting a positive third quarter of 2016.

DR. DHAWAN LOOKS INTO STATE REVENUES

Total tax growth grew by 3.6% in the first quarter of FY17, both from the deceleration in growth in both sales and income tax collections. Some of the income tax growth slowdown can be explained by the precautions taken by the Department of Revenue from last February's breach at the Internal Revenue Service, although job growth was 2.6% in the same period. As Dr. Dhawan states, the majority of employment created in lower-paying sectors such as retail and hospitality which he connects to overall consumer spending and translating to lower gross sales receipts. The forecast for personal income growth at 4.7% in 2017 and 5.1% in 2018 should keep income tax collections strong. Overall Dr. Dhawan's forecast mirrors other observations in that the economy continues to grow but there are some key indicators to keep an eye on.

LOOKING AHEAD - CAUTIOUSLY

With only six weeks until Session 2017, the current situation appears far less precarious than in prior years, however we learned in hindsight of 2007 to never take good times for granted. In a growing state, we have many needs, although with conservative leadership and solid support to grow our state, we've been able to build great momentum. It will be more evident in the upcoming Top 10 Reasons to be Optimistic in 2017. The future is bright - at least for now.

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