MIXON AND ASSOCIATES

Revenue Estimating Conference Post-Session Update On May 23, 2012 the Revenue Estimating Conference met to issue an update to the revenue outlook statements for several revenue sources, including the Educational Enhancement Trust Fund (EETF), the Principal State School Trust Fund (PSSTF), and General Revenue (GR). The purpose of the update was to adjust revenue outlook statements to reflect the effect of the actions of the Legislature and the Governors vetoes from the 2012 regular session. It is important to remember what was not done during this conference. New revenue projections were not compiled and adopted. The revenue projections made on December 9, 2011 for the EETF and the PSSTF, and the revenue projections for GR made on January 12, 2012 have not been modified or updated, except to the extent that bills that were passed and approved by the Governor or vetoes by the Governor moved revenue around inside the fiscal year (FY) 20112012 or the FY 2012-2013 General Appropriations Acts. There were minor changes in both the EETF and the PSSTF as a result of Legislative or Executive actions. However these fund sources are relatively small components of the overall state budget. The changes that were made were very minor and will have no significant impact on the FY 2011-2012 or the FY 2012-2013 state budgets. There were larger changes in the General Revenue outlook statements as a result of actions from the 2012 regular Legislative session. The charts below summarize those changes. FY 2011-2012 General Revenue Funds Available Funds Available January 12, 2012 Recurring: $23.1218 Billion Non-Recurring: $1.2594 Billion Total: $24.3812 Billion Funds Available May 23, 2012 Recurring: $23.092 Billion Non-Recurring: $1.2594 Billion Total: $24.3514 Billion Difference ($29.8 Million) 0 ($29.8 Million)

The impact of actions related to the 2012 regular session of the Legislature on General Revenue Available in FY 2011-2012 was relatively minor. There were larger impacts on the FY 2011-2012 effective appropriations as a result of actions from the session. FY 2011-2012 Effective Appropriations January 12, 2012 Effective Appropriations Recurring: $22.7993 Billion Non-Recurring: $588.0 Million Total: $23.3874 Billion
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May 23, 2012 Effective Appropriations Recurring: $22.7992 Billion Non-Recurring: $949.9 Million Total: $23.7491 Billion
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Difference ($1 million) +$361.9 million +$361.7 Million

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After the adjustments from the session, the total revenue available for FY 2011-2012 is still $602.3 million higher than the total effective appropriations. This means that the current fiscal year should end without any further adjustments and with a carry forward of $602.3 million into the FY 2012-2013 General Revenue budget. The May 23, 2012 General Revenue outlook statement added the effective appropriations to the information provided in the January 12, 2012 General Revenue projection. Having that information provides insight into two issues. By comparing the FY 2012-2013 projected revenue to the FY 2012-2013 effective appropriations we can see what safety margins exist to buffer the state budget, and therefore the district budget, from economic changes that might adversely impact the states fiscal position. It also provides some insight into how much general revenue might be available to be carried forward into the FY 2013-2014 budget when that process begins. FY 2012-2013 General Revenue Available Funds Available January 12, 2012 Recurring: $24.2526 Billion Non-Recurring: $1.3429 Billion Total: $25.5955 Billion Funds Available May 23, 2012 Recurring: $24.1042 Billion Non-Recurring: $1.9490 Billion Total: $26.0532 Billion Difference ($148.4 Million) +$606.1 Million +$457.7 Million

Measures affecting revenue reduced projected recurring General Revenue by about $148 million. This is the fiscal impact of various changes in the law, such as decreasing the corporate profits tax, providing for sales tax holidays, etc. Trust fund transfers primarily drove the nonrecurring General Revenue increases. FY 2012-2013 Effective Appropriations Effective Appropriations Recurring: $24.5605 Billion Non-Recurring: $372.3 Million Total: $24.9328 Billion Available Revenue Recurring: $24.1042 Billion Non-Recurring: $1.9490 Billion Total: $26.0532 Billion Difference ($456.3 Million) +$1.5676.7 Billion +$1.120.4 Million

Based on these data it appears that the budget for FY 2012-2013 includes a significant buffer in the working capital fund of over $1.1 billion.

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HBEC Group Inc.

Implications For The Future Not included in any of these data are the results of the revenue collections to date for FY 20112012. To date collections of General Revenue for FY 2011-2012 are $202.4 million higher than the GR projections that were made on January 12, 2012 and reported above. If the rate of General Revenue collections continues to exceed the projections for the months of May and June at the same rate that they have exceeded projections for the months of January through April, the revenue will be more than $300 million higher than the projections for FY 2011-2012, and the working capital fund will grow to about $1.4 billion. The new revenue estimating cycle will begin in the summer. In July or August the revenue estimating conference will meet to analyze the data and modify projections for FY 2012-2013 and the years beyond. They will also develop a retrospective outlook statement for FY 20112012 that incorporates year-end information. The current total G.R. projection for FY 2013-2014, which was made on January 12, 2012, is $27.0932 billion. The current GR effective appropriation for FY 2012-2013 is $24.9328 billion. The difference is about $2.16 billion. This could be the beginning point for the FY 2013-2014 budget process. If these figures were to be the ones produced by future revenue estimating conferences and used for the appropriations process, the Legislature would have about $2.16 billion of G.R. available beyond the FY 20122013 budget to use for constructing the new budget. If the members choose to retain about $1 billion for reserves, about $1.16 billion would be available for the new FY 2013-2014 budget. If the FEFP were to receive its historical share of that revenue, which is about 36.5%, only about $407.3 million in new revenue would be available for the FY 2013-2014 FEFP. This is an austere picture. It is made more difficult because many other budget areas, such as the state university system, had significant impacts in the FY 2012-2013 budget, while $1.063 billion were used to fill FEFP budget holes. Those other budget areas will compete for new resources in FY 2013-2014. In addition, the Legislature recently has been reluctant to allow revenue increases to be realized from local school property taxes. If the FEFP received an increase of $407.3 million, it is uncertain that the cost of student growth and other increases in state required expenses would be covered by that amount. Possible Impacts Of Recent Revenue Trends As noted earlier, the GR collections for FY 2011-2012 are exceeding the most recent projections by about $202.4 million. As was stated above, if the revenue collections for May and June 2012 are as much above the projections as the average collections for January through April have been, the fiscal year will close out with an additional $300 million in General Revenue. That would increase the funds available beyond effective appropriations to about $1.4 billion. If that same trend continued through FY 2012-2013, the GR collections would grow about $624 million beyond current projections. Together that would increase the projected carry forward from FY 2012-2013 into FY 2013-2014 from about $1.1204 billion by about $924 million to about $2.04 billion.
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In addition, if that trend was applied to the January 12, 2012 projection for FY 2013-2014, without any compounding effect, the projected revenue for FY 2013-2014 would grow from $27.0932 billion to about $27.7172 billion, plus an additional $924 million in carry forward funds for a total of available GR of about $28.6412 billion. That would be about $3.7084 billion more than the current effective GR appropriation for FY 2012-2013. If the Legislature then chose to establish a reserve of $1 billion and use the remaining $2.7084 billion in the same historical proportions, the FEFP share of 36.5% would yield about $988.6 million. This is a slightly optimistic, but not unjustified projection. To provide some prospective, this is what an FEFP increase of that amount would mean. The current projected total potential funding for FY 2012-2013 is $17,178,682,935. An increase of $988.6 million would yield a total of $18,176,282,935. The small table below provides some interesting comparisons. First Calculation Date Projected for FY 2013-2014 March 6, 2012 April 30, 2007 May 2, 2006 Unweighted FTE Student Projections 2,709,583 2,694,617 2,642,321 2,689,974 Total Potential Funding $18,176,282,935 (projected above) $17,178,682,935 $19,304,238,487 $18,264,071,151 Class Size Reduction Funding Not Available $2,983,788,477 $2,708,412,008 $2,151,230,571

It is clear that even if the FEFP receives another increase of nearly $1 billion, the districts will still be over $1 billion short of the point from which cuts began after the 2007 regular session of the Legislature. In fact districts will still be about $100 million short of the FY 2006-2007 prerecession revenue spike, and there is nearly $1 billion ($832,557,906) more spending required just to meet Constitutional class size caps than was required that year. There is also projected to be 20,000 more students to serve than were projected in FY 2006-2007. It may be instructive to see what has happened to General Revenue since the start of the recession. The table below shows some comparisons. Fiscal Year and Report Date FY 2006-2007 July 12, 2007 FY 2007-2008 July 12, 2007 FY 2012-2013 May 23, 2012 Recurring Funds Available $26.6549 Billion $27.5685 Billion $24.1042 Billion Non-Recurring Funds Available $5.3952 Billion $3.6052 Billion $1.949.0 Billion Total Funds Available $32.0501 Billion $31.173.7 Billion $26.0532 Billion

During the same time GR funds were decreasing, total local funds available in the FEFP dropped from $9,405,486,287 in the Final Conference Report of April 28, 2008 for FY 20082009, to $7,625,433,481 in the Final Conference Report of March 6, 2012 for FY 2012-2013. These very early and very preliminary data argue for continuing a budget process to control costs and focus expenditures only on the highest priorities.

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HBEC Group Inc.

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HBEC Group Inc.