Current Perspective on U.S. Government Deficits and Debt

1. Current Perspective on U.S. Government Deficits and Debt National Association of State Auditors, Comptrollers and Treasurers March 24, 2011 The Honorable Tom M. Davis Federal Government Affairs Director Deloitte LLP Robert N. Campbell III Vice Chairman and U.S. State Government Leader Deloitte LLP

2. Agenda 2

3. Estimates for 2020 U.S. debt will equal 100% of GDP - 200% of GDP by 2030 U.S. interest will equal $1 trillion While states continue to struggle financially > $150B projected FY11 shortfall after previous cuts The US government debt is the dominant issue of our time

4. The US federal debt should concern us all

5. The U.S. is on an unsustainable path Percentage of GDP Debt reaches WWII historical high at 109% of GDP 100% of GDP in 2022 5

6. Growing sovereign government debt will create competition for capital Source: US Central Intelligence Agency World Factbook. (2009); https://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html 6

7. Refinancing of short term corporate debt will further exacerbate the situation • Multi-national corporate concerns have gone short term to take advantage of recent low interest rates • Deloitte CFO Services estimates that $11.5 trillion in short term corporate debt will need to be financed over the next five years Source: Deloitte CFO Program, A Tale of Two Capital Markets, March 2011 7

8. Failure to address the U.S. federal debt has significant potential negative implications for states • Inability to invest in state infrastructure programs such as roads, bridges, schools, hospitals, and housing • Less funding from the federal government—more borrowing at the state level • Higher inflation as governments become more challenged in issuing debt • Decrease in innovation at the state and local level as borrowing becomes more expensive and risky • Reduced revenues for states as corporate uncertainty delivers decreasing tax revenues • Explosion of job exportation • Potential European-like debtor spiral 8

9. Perspective from the Hill & insight on the states’ financial crisis 9

10. Growth of government 10

11. Changes in spending 11

12. More on autopilot 12

13. Federal debt burdens 13

14. Historical deficit levels 14

15. Historical receipts & outlays 15

16. Federal debt per capita & the politicalparty in power 16

17. Comparative debt burdens 17

18. Future debt burdens 18

19. Growing U.S. foreign dependency 19

20. States are also coming up short 20

21. Current political climate • 3rd straight nationalized election for Congress • Country closely divided • Polarized political system making compromise more difficult • Resorting of the parties • Expanded influence of interest groups • New media Republican gains were the result of a protest vote, not support for the GOP 21

22. The race for 2012 started 11/3/2010 • Republicans must manage fractious base without alienating independents • House Democratic Caucus is now more liberal • 2012 Outlook • Republicans benefit from redistricting 202-39 • Senate lineup favors GOP: Democrats must defend 23 seats; Republicans only 10 • Current economic projects are tepid, but improving • International situation uncertain 22

23. Divided government is the norm Over the past 60 years, 38 years have seen a divided government 23

24. Independents hold the key • Independents make up a plurality of the electorate • Disillusionment with both parties • Voters react to their environment • Economy • War • Scandal 24

25. December 2010 bipartisan adjustments(The bipartisan pig-out before the diet) 25

26. The Economy • Unemployment • Deficit • Energy Prices • Interest Rates 26

27. Briefing on the work of the US Bipartisan Policy Center Task Force on the federal debt 27

28. The Bipartisan Policy Center Commission • The Bipartisan Policy Center is a non-profit established in 2007 by former Senate Majority Leaders from both sides of the aisle: Bob Dole, Howard Baker, Tom Daschle and George Mitchell • Commissioned the Debt Reduction Task Force • Membership: 18 government and business leaders including 2 former senators, 2 former governors, 2 former cabinet secretaries, 2 big city mayors • Mission: Set aside politics, look for solutions, and develop a plan that the Federal Government could act on • Goal: Develop plan to stabilize debt at 60% of GDP by 2020 * This was one of two national debt commissions working during 2010; the other being the White House Commission chaired by Senator Alan Simpson and Erskine Bowles • Report Released November 17th, 2010 28

29. Our mission: Set aside politics, look for solutions, and develop a plan that the federal government could act on A bi-partisan group with diverse backgrounds coming together to do what many thought wouldn’t be possible during these polarizing times 29

30. The plan is focused on simple, direct recommendations 1 2 3 4 30

31. The plan is focused on simple, direct recommendations 5 6 7 8 31

32. What are the projected financial impacts of the plan on the national debt? *The budget savings from covering newly-hired state & local workers under the Social Security program is included in the total, but not in any of the subtotals because it is a coverage provision. 32

33. What others are saying “We commend the BPC’s valuable contribution to the deficit reduction debate and thank co-chairs Senator Pete Domenici and Director Alice Rivlin…The report, along with the recommendations made by Erskine Bowles and Alan Simpson of the President’s Deficit Commission, is a powerful reminder of three things: the tremendous harm we are inflicting on our economy by failing to get the deficit under control; the unconscionable burden we are passing on to future generations; and that practical solutions can be found when public leaders work together on a bipartisan basis and with the long-term interests of the country in mind.” U.S. Chamber of Commerce Senior Vice President and Chief Economist Marty Regalia “The report released today by the Bipartisan Policy Center’s Debt Reduction Task Force is a blueprint that demonstrates that America can succeed in overcoming its long-term fiscal challenges. The report represents an example of how both parties can come together to develop and agree on a comprehensive solution that puts our nation on a sustainable fiscal path.” Michael A. Peterson, Vice Chairman of the Peter G. Peterson Foundation 33

34. The media’s reaction to the plan has been positive The Bipartisan Policy Center plan would save even more money than Bowles and Simpson proposed — nearly $6 trillion through 2020, nearly $30 trillion through 2030, and nearly $85 trillion through 2040. Rival debt plan: Tackles Medicare, Social Security; raises taxes, November 17, 2010 CNNMoney said the BPC proposal went beyond the federal debt reduction plan, offering “one better -- offering a plan that would save $6 trillion by 2020.” New Deficit Plan Would Cut $6 trillion, November 17, 2010 The Times editorial page wrote, in a piece titled, Now, for Some Leadership. “We believe the Bipartisan Center’s plan amplifies the strong aspects of the commission’s draft while correcting for some of its shortcomings. Both tell hard truths about the choices ahead – more than we heard from the politicians in this year’s campaign.” Now, for Some Leadership, November 20, 2010 In the Atlantic, Derek Thompson calls the proposal “the best deficit reduction plan I've seen yet.” The Best Plan Yet? A Summary of the New Bipartisan Deficit Reduction Scheme, November 17, 2010 The Washington Post applauded the Bipartisan Policy Center’s (BPC) landmark Debt Reduction Task Force report, Restoring America’s Future, calling it a “thought-provoking plan,” and urged elected officials to demonstrate leadership on the issue of the nation’s growing debt. Another angle on deficit reduction, Washington Post, November 23, 2010 Reuters highlighted the proposals tactics, calling it “an ambitious plan to slash the deficit and the fast-mounting national debt” Soda pop, sales tax targeted to cut US deficit 34

35. The potential impacts to the states of implementing federal changes 35

36. What can the states expect? • Net $ Reduced (ARRA last gasp) • Fewer Earmarks • More Unfunded mandates • Tax system overhaul unlikely in short run • Accountability for results • Waivers more in vogue • Healthcare • Energy • Education • Transportation • P3 36

37. Plan recommendations that will directly affect State governments • Apply managed care principles in all states to aged SSI beneficiaries • Begin large-scale testing of systemic reforms including safe harbors, specialized courts and administrative proceedings to resolve disputes • Cover newly-hired government workers under the Social Security System • Freeze domestic discretionary (non-defense) spending for 4 years and cap at GDP thereafter • Enforce the freeze through statutory spending caps, enforceable through automatic across-the-board cuts • Reduce farm program spending by eliminating all farm payments to producers with adjusted gross income over $250,000 37

38. Implications for States if a comprehensive plan is adopted – regardless of whether they are “blue” or “red” • Stabilizing the U.S. federal debt will turnaround what would otherwise be catastrophic longer-term economic conditions by: • Reducing the corporate tax burden to attract more companies and maintain domestic presence (offset by the phase-out of employer health care benefits) • Growing the number of employed Americans thereby expanding the tax base and state revenues and decreasing dependence on state health and human services • Providing hiring incentives through payroll tax reductions • Increasing consumer confidence and stability in the stock market • Providing a positive investment environment for companies to drive innovation and growth • Encouraging an environment whereby private organizations seed investments for local infrastructure such as education, housing, and health care Note: The debt plan does not address capital funding for aged infrastructure including transportation and distribution systems 38

39. Questions 39