ARIZONA MONTHLY FISCAL HIGHLIGHTS June 2004 General Fund revenue collections were $851.5 million in June. Total FY 2004 revenue collections were $6,690.1 million. This amount is 7.6% over FY 2003 collections. Excluding one-time revenues and Urban Revenue Sharing, FY 2004 revenues were 10.4% over the prior year. The FY 2004 revenue collection amount of $6,690.1 million was $135.7 million over the forecast in the enacted FY 2005 budget. The budget includes “triggers”, which dedicate revenue collections above the forecast for specific purposes. The additional FY 2004 revenue collection of $135.7 million enacts three sets of triggers. The first two sets of triggers add a total of $102 million in funding for School Facilities Board Building Renewal and Deficiencies Correction, Child Care, State Employer Health Insurance charges, Department of Public Safety communications system improvements, and the Budget Stabilization Fund. In addition, the remaining $33.7 million will be divided evenly between the General Fund and the Budget Stabilization Fund. On August 2, 2004, JLBC Staff and the Office of Strategic Planning and Budgeting released a more detailed discussion of the funding included in the triggers (see attachment). This report also includes a summary of the June 29th JLBC meeting. General Fund Revenues Compared to Revised FY 2004 Forecasts and FY 2003 Collections ($ in Millions) FY 2004 Difference From Difference From Difference Collections 1/04 Forecast 1/ 5/04 Forecast 2/ From FY 2003 3/ June $ 851.5 $ 5.4 N/A $ 58.1 Year-to-Date $ 6,690.1 $ 229.7 $ 135.7 $ 645.0 1/ Revised FY 2004 forecast (January 2004). 2/ Revised FY 2004 forecast (budget signed by Governor). 3/ Excludes federal cash assistance grant, URS, judicial enhancement and amnesty deposit. Sales Tax revenue in June increased by 7.7%, bringing the year-to-date growth rate to 8.6%. Sales tax collections ended the fiscal year $57.4 million over the FY 2005 enacted budget forecast. • Retail Sales Tax receipts grew by 6.8% for the month of June, and 7.6% for the fiscal year. • Restaurant and Bar Tax collections grew by 6.2% for the month, and 8.2% for the year. • Contracting Tax increased by 13.3% for the month, and a total of 13.9% for the year. • Use Tax grew by 22.8% for the month, and 22.4% for the year. Individual Income Tax collections in June were 4.3% above last year. Withholding tax collections increased by $1.7 million or 0.9%. Estimated and final payments were up $14.3 million. Refunds were $6.1 million greater than last June, partially offsetting the increased payments. The overall individual income tax revenue growth rate of 4.3% for June brings the year-to-date growth rate to 9.9%. For the year, withholding tax collections increased by 1.2% over last year, estimated and final payments increased by 18.2%, and refunds decreased by (7.6)%. Individual income tax collections ended the fiscal year $93.6 million over the enacted budget estimate. Growth for the category has been led by significantly higher than anticipated levels of estimated and final payments during this year’s tax season. Corporate Income Tax revenue increased by 8.1% compared to June of last year. Year-to-date corporate income tax revenue is 26.9% above last year’s results. Corporate income tax collections ended the year $18.8 million above the FY 2005 budget forecast. Recent Economic Indicators: Recent statistics showed signs of moderating economic growth. U.S. Gross Domestic Product (GDP) growth slowed in 2004’s second quarter from the breakneck pace set during the previous 12 months. Investment in equipment and software and medical care expenditures were among the largest contributors to the second quarter results. The U.S. Index of Leading Economic JLBC This report has been prepared for the Arizona Legislature by the Joint Legislative Budget Committee Staff on August 5, 2004. This report can also be found on our Website at http://www.azleg.state.az.us/jlbc.htm Page 1 Joint Legislative Budget Committee Monthly Fiscal Highlights – June 2004 Indicators took a turn for the worse in June, falling by (0.2)%. The first decline since March 2003 was instigated by reductions in building permits, average weekly manufacturing hours, money supply, and the interest rate spread. U.S. Semiconductor Billings (three-month moving average) advanced 2.8% in June to almost $3.3 billion, a 29.7% yearover-year increase. Global semiconductor sales soared by more than 40% from a year ago, led by a 61% gain in the Asia-Pacific market. The pace of price inflation moderated in June. The U.S. Consumer Price Index (CPI) (three-month moving average) climbed 0.4% from the previous reading, and while energy costs remained a concern, the core CPI, excluding fuel and energy costs, increased by just 1.9% from a year ago. The latest data on consumer sentiment reflected buoyant expectations. The Conference Board’s Consumer Confidence Index jumped 3.2% in July and stood 37.8% higher than a year ago. This was the highest level reported since June 2002. The Arizona economy continued to perform well in spite of seasonal job losses. The state’s unemployment rate dropped to 4.7% (seasonally adjusted) in June, which was almost a full percentage point below the national jobless rate. Non-farm employment increased by 2.4% on a year-over-year basis, with construction accounting for more than 30% of the jobs created. In 2004’s first quarter, Arizona personal income increased 1.8% from the last three months of 2003, which ranked 6th among the states. Wages and salaries grew even faster, while dividends, interest and rent lagged behind. The Arizona Tourism Barometer rebounded to 97.0 in May, a 5.8% improvement from April. Hotel and motel retail sales, along with air traffic, were among the factors leading the increase. Meanwhile, the Arizona Index of Leading Economic Indicators edged up 0.2% in May, with inventories and employment providing positive contributions. The latest Arizona Business Conditions Index (BCI) posted strong results in July, reaching 67.2, the best result since February. The state’s supply chain managers reported a jump in purchasing activity that was the driving force behind the increase. In FY 2004, AHCCCS caseload growth was less than in recent years, and the number of Proposition 204 clients showed trends similar to the regular AHCCCS population. Both populations experienced several months of declining enrollment from October 2003 through May 2004 before rising sharply in June. June’s totals were above the levels assumed in the FY 2005 AHCCCS appropriation. The number of TANF recipients (3-month average) declined to 117,467, a (4.5)% drop from the previous three-month period. The caseload was (5.8)% below last year’s level. From May through July, the Department of Corrections’ inmate population (three-month average) grew by 71 inmates per month. This growth rate was below the budgeted rate of 115 net new inmates per month. RECENT ECONOMIC INDICATORS Indicator Arizona -Unemployment Rate -Jobs -Contracting Tax Receipts (3 month average) -Retail Sales Tax Receipts (3 month average) -Arizona Tourism Barometer -Leading Indicators Index -Business Conditions Index (>50 signifies expansion) -Arizona Personal Income -AHCCCS Recipients (3 month average) Regular Proposition 204 -TANF Recipients (3 month average) -DOC Inmate Growth (3 month average) U.S. -Gross Domestic Product -Consumer Confidence Index -Leading Indicators Index -U.S. Semiconductor Billings (3 month moving average) -Consumer Price Index (3 month moving average) Time Period Current Value Change From Prior Period Change From Prior Year June June April-June April-June May May July 4.7% 2.317 million $50.4 million $137.2 million 97.0 124.5 67.2 (0.4)% 1.3% 9.6% (0.6)% 5.8% 0.2% 2.0% (1.1)% 2.4% 18.0% 9.3% 19.0% 3.5% 16.7% 1st Quarter 2004 $156.8 billion 1.8% 7.2% April-June April-June May-July 564,106 167,975 117,467 31,970 2nd Quarter 2004 July June April-June $10.778 trillion 106.1 116.2 $3.288 billion April-June 186.3 (0.2)% (1.9)% (4.5)% 71 inmates 0.3% 4.2% (5.8)% 1,036 inmates 0.8% 3.2% (0.2)% 2.8% 4.8% 37.8% 3.8% 29.7% 0.4% 2.9% Page 2 State of Arizona General Fund Revenue: Change from Previous Year and January Revised Forecast June 2004 Current Month FY 2004 YTD (Twelve Months) Change From Actual June 2003 June 2004 Amount Change from Actual Revised Forecast Percent Amount Percent June 2004 June 2003 Amount Revised Forecast Percent Amount Percent Taxes Sales and Use $286,028,384 $20,428,048 $3,294,788,319 $260,910,604 8.6 % $70,508,419 Income - Individual 239,484,015 9,895,689 4.3 2,807,989 1.2 2,306,176,340 208,421,472 9.9 125,817,440 5.8 - Corporate 90,570,308 6,776,769 8.1 6,779,282 8.1 494,044,869 104,638,523 26.9 31,394,569 6.8 Property 9,503,430 12,142,392 Luxury 5,033,826 Insurance Premium Estate Other Taxes Sub-Total Taxes (88,605) 7.7 % -(1.7) $3,429,029 7,181,477 (36,050) 1.2 % 2.2 % -- 39,587,710 13,897,867 54.1 1,987,710 5.3 (0.7) 61,301,018 (3,285,932) (5.1) 1,301,018 2.2 60,075,132 25,496,817 73.7 3,686,767 6.5 308,967,921 82,319,121 36.3 11,583,621 3.9 2,131,642 (6,140,852) (74.2) (1,095,791) (34.0) 38,818,431 (55,399,488) (58.8) (1,181,569) (3.0) (5,907,882) (68.0) (1,981,251) (41.6) 46,545 $692,873,282 (3,291) $68,506,967 (6.6) 11.0 % (462,710) $22,289,993 -3.3 % 2,781,549 $6,546,466,157 $605,594,285 10.2 % $239,429,957 3.8 % Other Revenue Lottery License, Fees and Permits Interest 0 (1,435,000) (100.0) 0 2,524,496 (261,154) (9.4) 136,379 (11,061,296) (10,162,836) Sales and Services 9,795,566 3,171,413 47.9 Other Miscellaneous 9,695,577 (1,354,192) (12.3) Disproportionate Share (11,386,417) 31,000,000 25,510,207 -- 12,337,188 0 (597,325) (518,115) 0 0.0 (2.3) 0.0 1,103,698 4.5 (50.7) (4.0) (12,662,812) 4,453,185 83.4 52,980,736 5,658,180 12.0 5,031,310 10.5 789,568 8.9 48,978,961 24,888,637 103.3 15,806,296 47.6 2,912,625 2.2 6,504,125 5.4 2,912,625 2.3 132,742,825 12,129,312 10.1 1,516,068 (6,792,116) (81.8) (13,805,900) (90.1) 10,726,069 2,376,118 28.5 0 (81,018) (100.0) -- 187,594 (4,522,258) (96.0) Sub-Total Other Revenue 139,588,049 (10,410,778) (6.9) % (16,900,560) TOTAL BASE REVENUE $832,461,331 $58,096,189 7.5 % $5,389,433 Transfers and Reimbursements 127,117,638 -- -5.7 BSF Transfer for Alt. Fuels 0 (10.8) % 314,463,580 39,414,549 14.3 % 0.7 % $6,860,929,737 $645,008,834 10.4 % (110,271,931) 187,594 (97,893,220) $141,536,737 --(23.7) % 2.1 % One-Time Revenue Urban Revenue Sharing (30,422,097) Tax Amnesty Budget Balancing Transfers 0 5,457,824 (15.2) 0 -- 0 0.0 (365,065,164) 65,493,889 (15.2) 47,123,527 47,123,527 -- 123,527 54,500,000 (290,363,175) (84.2) 0 -- 49,500,000 (211,225,313) (81.0) 0 (87,234,115) (100.0) 0 -- 87,265,900 31,785 -- 0 -- 5,389,300 5,389,300 (64) (0.0) % Federal Cash Assistance 0 Judicial Enhancement 0 Sub-Total Transfers In 19,077,903 (293,001,604) (93.9) % $851,539,234 ($234,905,415) (21.6) % TOTAL REVENUE (64) 0 $5,389,369 0.0 0.6 % (170,786,437) $6,690,143,300 VP% = Percent change from comparable period in prior year VF% = Variance from forecast F% = Forecast percent change for the fiscal year. R% = Average percent change from comparable period in prior year which must be attained over remaining months to realize the forecast for year. (172,324,674) $472,684,160 0.0 -- (64) 0.0 -0.0 87,265,900 -- 804,575 -- -- % 88,193,938 -- % 7.6 % $229,730,675 3.6 % Joint Legislative Budget Committee JLBC MEETING At its June 29th meeting, the Joint Legislative Budget Committee considered the following issues: Department of Economic Security – Review of FY 2004 and FY 2005 Expenditure Plan for Excess Workforce Investment Act Monies – The Committee gave a favorable review of the Department of Economic Security’s (DES) FY 2004 expenditure plan for $1.8 million in excess Workforce Investment Act (WIA) monies. A footnote in the FY 2004 Appropriation Act requires JLBC review before excess WIA monies can be spent by the agency. The $1.8 million will be used to fund new and expanded programs pertaining to women’s issues, youth programs and a nursing initiative. The Committee further recommended that DES submit performance measures for these new and expanded programs. The Committee also gave a favorable review of the Department of Economic Security’s (DES) FY 2005 expenditure plan for $2.5 million in discretionary WIA monies. The expenditure plan submitted by DES represents core functions typically funded by WIA monies. The Committee further recommended that DES provide its perspective on the findings of a Morrison Institute report on streamlining workforce development services. The report indicated that workforce development activities provided by the state suffer from a lack of coordination. Department of Economic Security – Transfer of Appropriations from the Day Care Subsidy SLI to the Transitional Child Care SLI – The Committee gave a favorable review of a transfer of $400,000 from the Day Care Subsidy Special Line Item (SLI) to the Transitional Child Care SLI in order to address a shortfall in the Transitional Child Care Program. Department of Economic Security – Report on Child Protective Services Issues – The Committee received a report by JLBC Staff on Child Protective Service (CPS) performance measures and FY 2004 supplemental appropriations. JLBC Staff recommended adding 5 performance measures to the financial and program accountability report. The additional measures will evaluate employee satisfaction within the Division of Children, Youth and Families (DCYF), as well as the decision-making process within DCYF. The report also provided an update on the $16.6 million 2nd Special Session supplemental appropriation for CPS. DES has filled 88 of the 131 new positions it had planned to fill by the report date. All of the 80 caseworker positions have been filled, but only 8 of the 51 support positions. Monthly Fiscal Highlights – June 2004 Department of Public Safety – Review of the Statewide Interoperability System Design Expenditure Plan – The Committee gave a favorable review of the Department of Public Safety’s (DPS) Statewide Interoperability Design expenditure plan to develop design standards for a statewide interoperable communication system. An interoperable system enhances the ability of various public safety agencies to coordinate their actions in the event of a large-scale emergency. The expenditure plan includes a timeline for hiring staff, developing the conceptual design and completing the detailed design. Conceptual design work would be completed by mid-2006 with final design acceptance in FY 2008, at a total cost of approximately $8 million. Department of Revenue – Review of Ladewig Expenditure Plan – The Committee gave a favorable review to the Department of Revenue’s administrative expenditure plan of $3 million for the FY 2005 Ladewig project. The vast majority of the expenditure plan is for printing, postage and mailing warrants and form 1099’s for taxpayer payments. Department of Health Services – Review of Capitation Rate Changes – The Committee gave a favorable review of the Department of Health Services (DHS) Children’s Rehabilitative Services (CRS) program capitation rate adjustments beginning July 1, 2004. The approved changes would cost $(1.5) million General Fund less than the FY 2005 budgeted amount. The weighted average rate change is (4)% below FY 2004. In comparison, the FY 2005 budget assumed a 6% capitation rate increase. The Committee also gave a favorable review to the Behavioral Health Capitation Rate changes. The approved rates cost $1.7 million General Fund more than the capitation adjustment assumed in the FY 2005 budget. The weighted average rate of the increases is 12.8% above FY 2004. The preliminary capitation rate numbers reported by DHS, which were the basis for the FY 2005 budget, assumed an 11.4% capitation rate increase. The Committee also requested that DHS and DES report by October 15, 2004 with an estimate of how much funding is freed up in DES' Children Services and Comprehensive Medical & Dental Program line items as a result of shifting treatment from DES to DHS. Attorney General – Review of Allocation of Settlement Monies – The Committee gave a favorable review to the allocation of monies received from 2 settlement agreements totaling approximately $1.1 million. The first case involved Medco Health Solutions which allegedly did not provide accurate information about its prescription drug interchange program, which resulted in the switching of prescription drugs to the less expensive drug. Under the settlement, Arizona will receive $200,000, which will be deposited in the Consumer Fraud Revolving Fund. The state is also expected to receive at least $600,000 in other Page 4 Joint Legislative Budget Committee Monthly Fiscal Highlights – June 2004 funds, which will be passed on to the Attorney General to benefit low-income, disabled or elderly consumers of prescription drugs. The Attorney General does not have a distribution plan for this $600,000. The Committee requested that the Attorney General report back when it has developed a specific plan for these monies. The second case involved Warner-Lambert allegedly encouraging doctors to prescribe Neurontin for the treatment of bipolar disorder, although there is no evidence that Neurontin is effective in treating this condition. Under this settlement, Arizona will receive $278,000 to be deposited in the Consumer Fraud Revolving Fund. Department of Administration – Report on Implementation of Self-Insurance for State Employee Health Insurance – The Committee received a report on the implementation of self-insurance. ADOA has moved forward on awarding various contracts for state-employee health care benefits. Contracts were awarded by geographic area and type of plan. • • • • • Employees in Maricopa, Gila, Pinal, Pima and Santa Cruz Counties have a choice between 3 non-integrated and 1 integrated plan. Employees in all other counties have only 2 nonintegrated plans to choose from. Employees will be required to pay $10 more per month if they select an integrated plan (ADOA had originally proposed a $15 differential) than a non-integrated plan. Walgreen’s Health Initiative will be the pharmacy manager. Walgreens, however, is contracting with nonWalgreen pharmacies throughout the state. Patients will be able to see more specialists without first seeing a primary care physician than under the current contract. Arizona Community Colleges – Report on Dual Enrollment and Appointing Ad Hoc Committee – The Committee received a report by the Arizona Community Colleges on dual enrollment courses offered in FY 2003 and the achievements of students dual enrolled in FY 2002. The report indicated that, in FY 2003, 32,582 students were dual enrolled. Of that total, 29,504 students earned a C or better, qualifying those students for both high school and community college credit. AHCCCS – Review of KidsCare Behavioral Health Capitation Rate Changes – The Committee gave a favorable review to the proposed capitation rate increase of 1.7% above FY 2004 rates for the KidsCare (including parents) program. For children in KidsCare, the approved rates represent an increase of 12% above the FY 2004 rates, while the parents rate increase represent a (12.6%) decrease. The recommended rates represent increases above FY 2004, but are within budgeted levels for FY 2005. Page 4 OFFICE OF THE GOVERNOR JOINT LEGISLATIVE BUDGET COMMITTEE OFFICE OF STRATEGIC PLANNING AND BUDGETING 1700 West Washington, Suite 500 Phoenix, Arizona 85007 (602) 542-5381 z FAX: (602) 542-0868 STAFF 1716 W. Adams Phoenix, Arizona 85007 (602) 542-5491 z FAX: (602) 542-1616 GOVERNOR Janet Napolitano David P. Jankofsky Director, OSPB Richard Stavneak Director, JLBC Staff August 2, 2004 The Honorable Janet Napolitano Governor 1700 W. Washington, 9th Floor Phoenix, AZ 85007 Senator Ken Bennett Senate President 1700 W. Washington, Room 204 Phoenix, AZ 85007 Representative Jake Flake Speaker of the House of Representatives 1700 W. Washington, Room 114 Phoenix, AZ 85007 Dear Governor Napolitano, Senator Bennett, Representative Flake: Section 67 of Laws 2004, Chapter 275 established a FY 2004 General Fund revenue forecast of $6,548,821,000. Section 67 provides that, by July 31, 2004, the staff director of the Joint Legislative Budget Committee (JLBC) and the Governor’s Office of Strategic Planning and Budgeting (OSPB) shall jointly notify the Governor, the President of the Senate, and the Speaker of the House of Representatives whether the FY 2004 revenue collections, excluding the beginning balance, exceed the FY 2004 forecast, and, if so, by how much. These estimates are to be used to fulfill the requirements of Chapter 275 relating to FY 2005 conditional appropriations, or “triggers”. The FY 2004 estimate includes one-time revenue of $2,644,100 for judicial collections, and $129,830,200 for disproportionate share revenue. Section 67 provides that the FY 2004 estimate may be adjusted to reflect actual judicial collections and disproportionate share revenue. Based on actual judicial collections of $5,389,300 and disproportionate share revenue of $132,742,800, the FY 2004 General Fund revenue forecast has been adjusted upward by $5,657,800 to a total of $6,554,478,800. It is estimated that, excluding the beginning balance, FY 2004 General Fund revenue collections total $6,690,143,300. This total is $135,664,500 greater than the adjusted forecast for the fiscal year. The $135,664,500 in FY 2004 revenues above the budget forecast activates the triggers in Chapter 275. That chapter also requires public notice by the Governor formally stating the amounts appropriated from the State General Fund at the levels indicated in this letter. The first $50,000,000 trigger provides $30,000,000 in additional funding for School Facilities Board Building Renewal, $5,000,000 for Child Care, and $15,000,000 for the employer share of state employee health insurance premiums. The second $52,000,000 trigger provides $10,000,000 in additional funding for School Facilities Board Building Renewal, $8,000,000 for the employer share of state employee health insurance premiums, $6,000,000 for the Budget Stabilization Fund, $25,000,000 for the School Facilities Board Deficiencies Correction Fund in lieu of bonding, and $3,000,000 for Department of Public Safety communications systems improvements. In addition to the first two triggers, any additional surplus is to be divided evenly between the General Fund and the Budget Stabilization Fund. With $135,664,500 in total surplus revenues and $102,000,000 in the first two triggers, $33,664,500 remains to be distributed. Of this amount, $16,832,250 will be distributed to the General Fund, and $16,832,250 will be distributed to the Budget Stabilization Fund. Section 67 also provides that any additional revenue above the budgeted forecast in the first six months of FY 2005 beyond the first two triggers will be divided evenly between the General Fund and the Budget Stabilization Fund. The attached table summarizes the distribution of FY 2004 revenue collections above the budgeted forecast. Sincerely, ____________________________________ Richard Stavneak, Director, JLBC Attachment RS/DJ:jb _________________________________ David Jankofsky, Director, OSPB FY 2004 General Fund Revenue Actual Collections Compared to Forecast Budgeted FY 2004 Revenue Forecast $ 6,548,821,000 Adjustments Judicial Enhancements Disproportionate Share 2,745,200 2,912,600 Adjusted FY 2004 Forecast 6,554,478,800 Actual FY 2004 Revenue Collections 6,690,143,300 FY 2004 Revenue Above Forecast $ 135,664,500 $ 30,000,000 5,000,000 15,000,000 50,000,000 Distribution of Revenue Above Forecast 1st Trigger SFB Building Renewal Child Care State Employer Share-Health Insurance Subtotal 2nd Trigger SFB Building Renewal State Employer Share-Health Insurance Budget Stabilization Fund SFB Deficiencies Correction in lieu of Bonding DPS Communications System Subtotal 10,000,000 8,000,000 6,000,000 25,000,000 3,000,000 52,000,000 Additional Trigger General Fund Budget Stabilization Fund Subtotal 16,832,250 16,832,250 33,664,500 Total Distribution $ 135,664,500