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You all take your seats and touch up now. Show some respect for the conference. That's right. We've got a real show. We've got a show around here. Let's go. Let's get this show on the road.

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Can y

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'all

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today,

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November 20th, this is the meeting of the State Funding Board. We have a quorum. I call the meeting to order.

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or the first item on the agenda is a report of the revenue, I go for revenues, Commissioner

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Martin.

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Mr. Comptroller, thank you.

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Good morning.

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It's always good to give a positive report.

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That's a good part of the job and certainly our revenue performance through the first three

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months of FY19 have been good. The first two months were very strong and they were driven

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by a sales tax growth which was very strong. In October we moved back to more normal growth,

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if you will. We still ended in October over our budget. Here the number was driven as much

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by anything as F&E, which is interesting because F&E in October, that's a big month,

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a reconcilement month. So that bodes well, I think, for us, as we go forward, as F&E was

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almost 15 percent above the budgeted number. So when you look at the three months collectively,

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again, a good beginning, a positive variance to the budget and it really gives us a good feeling

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about how FY19 will end with a good chance for a positive variance for revenue for the

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year. We need to continue, though, to be cautious in our spending and we will do so as we

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watch the economy, there's certainly been volatility in the market the last few weeks and the

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movement in the market into negative movement has an impact on consumer confidence, I'm

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sure we'll hear some discussion of that in more depth and in better material as we hear

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from the economists this morning, but if there is a downturn in the economy, that could

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have obviously a negative impact on consumer confidence, which would show up in our

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sales tax performance and sales tax we need to keep in mind is 61% of our tax revenue.

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But, again, the numbers through the first three months are positive and

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bode well for us to finish in the positive territory for FY19.

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Mr. Comptroller, that's my report.

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Any questions?

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We're here to do the revenue estimating and we'll have

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economists giving their views.

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use this board will make determination as to a range.

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We have members of the Hessman administration and I believe who are likely to be part of

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the lead administration here today and they will come up with a number for the budget.

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We also have, in far more important, four members of the general assembly and the other ones

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who actually determine what the number is.

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and so I'd like to welcome Representative Hayes Award in Williams until this end,

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and what's, you're the ones who make the elsewhere a decision, and we welcome you that.

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We'll begin with Professor Fox from the Boys Center for Business.

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No, we haven't done it. I've got my agenda, I guess,

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I've got an old agenda.

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We have the minutes from the September 13th meeting.

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I staff has reviewed them. They appear to be in order, any comments, corrections, or suggestions.

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All in favor, say aye.

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Minutes are approved.

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Dr. Fox, could you proceed?

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It's Chairman.

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Thank you very much.

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And members of the Funding Board, I certainly appreciate the chance to be with you again

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this year and to talk about the economy and where things stand from a fiscal perspective.

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What I'd like to do, if it's acceptable, is just talk through a few slides with you.

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And I'm going to focus mostly on Tennessee.

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I do have some slides on the U.S. economy here

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that I'll rush through.

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I know you're going to have other presentations on that.

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And I know that ultimately the issue is about tax revenues.

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My first slide shows you GDP performance.

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As you know, it's been very strong 3.5 percent

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in the most recent quarter, 4.2, the quarter before that.

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The two strongest quarters in a row

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going about four or five years, and this is going to be the strongest four quarters in

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four or five years, and so GDP has performed very well.

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I do expect from here it's going to slow.

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The fourth quarter will see growth that 2.5% or a little better than that, so we'll end

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out with the current calendar year, about 3% growth in GDP.

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As we go through 2019 and 2020, the things which have caused such fast growth in 2018 begin

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to play out.

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And so, as we think about these sources of growth, it's been, first of all, the tax cut,

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putting more money in businesses and people's pockets.

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That did create fiscal stimulus, the spending package in February of this year, which added

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additional stimulus to the economists, the effect of that plays out as we get to the end

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of 2019. Consumers are confident at the same time. As commissioners, as you noted, the

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market is very volatile. Again, even this morning, the initial look is it's going to be down

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again based on the preliminary numbers. And so I expect consumers to slow. My next chart,

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actually, sorry, my next chart, the third one is it shows you that consumers have led

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the last several quarters in terms of economic performance and so a good report in terms of GDP

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but slowing and by the time we get to the end of the window you're looking at here fiscal 2020

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we're going to be looking at GDP growth rates around 2% or a little less and so there's no bad news

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I'm not forecasting recession.

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I am, however, suggesting much slower growth than in the past, the last year.

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As we look at the length of this economic expansion, I had a chart, it was actually my second

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one here for you, it does show you that this current expansion will be the longest in the

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post-war time period by the middle of next summer.

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Just a couple of things about why the economy is slowing.

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First of all, in terms of housing, housing has never recovered in the way we expected over the past decade.

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It's been very much driven by demographics and particularly by millennials not forming households.

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And we can see it here in the data even right now with housing starts actually negative over the last several quarters.

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and residential fixed investment, also flat or negative, and similarly vehicle sales,

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which, as you know, are very important to Tennessee.

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Not, I mean, there's still an expansion levels, but they've been coming down every quarter

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and Commissioner, I know you and I have talked about it as well as the Secretary about how

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this is likely to play out more over the next decade, but even before we get to these longer

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longer term changes, slow downs in these big ticket items from a sales perspective.

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With those thoughts, I'm going to turn forward to my ninth slide and can leave space for

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others to talk about the national economy.

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Important to remember that while we think of the economy in real terms, and so when I'm

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talking about GDP, I'm talking about a net of inflation, in fact, we tax nominal dollars,

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real dollars. And so inflation matters to us as we think about the number of

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And we do see the inflation rate going up. It's around 2% right now. It's likely to average over 2% over the next couple of years. So we will have some additional tax revenues simply from the inflation component of what's taking place. Of course, interest rates coming up as well. And I know we'll hear from the Fed on this in just a moment. But the expectation of myself and many economists is that we're going to

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We'll continue to see the Fed funds rate going up over the next 18 months or so,

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against slowing the economy and getting it back into trend levels to keep the inflation rate from rising too rapidly.

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My 10th slide shows you employment growth for Tennessee and for the U.S.

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This was drawn through September last Thursday after we had sent these to Nashville.

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bill, the October release took place. Employment growth for October was 2 percent, still very

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good and exceeding the national average. This is well above our population or labor

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force growth rate. It continues to push down the unemployment rate as a result, as we're

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all keenly aware and proud to hear. Amazon is going to bring 5,000 jobs to this area along

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with a lot of other good news. And so this is putting a lot of pressure on Tennessee's

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labor force, we've counted on a lot of in migration of population and that will certainly

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remain important as we look forward.

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Chart 11 illustrates how many jobs have been created in Tennessee and again this is

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something I think to be very proud and excited about.

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We bottomed out in the recession having lost about 200,000 jobs, we've now added back a half

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a million since then, and the economy just continues to do a very good job of creating

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employment and outpacing the nation.

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One of the outcomes in chart 12 is that the unemployment rate is, in October, it's

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the same as the national 3.7, we'll, you all remind you that we get a benchmark revision

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of these unemployment rates that will be provided in February.

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That will probably smooth out this pattern a little bit and continue to suggest that

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we're at or below the national norm in unemployment rates.

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And again, with the rapid employment growth we expect over the next year or two, it

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will just continue to push down this unemployment rate.

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Here's job growth by sector.

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And to look at this chart, it's important to realize that that leisure and hospitality

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growth rate is just extraordinary.

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It makes everything else look slow.

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In fact, it's what's extraordinary.

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We're talking 5.1 percent.

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And indeed, again, this is through September,

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the October number was 5.4 on leisure and hospitality.

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And so just what this tells us is, first of all,

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lots of us are going out to eat more than we used to.

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But what it's also telling us is that tourists

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are increasingly coming to Tennessee.

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Again, good for the economy.

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And so leisure and hospitality with extraordinary growth rates.

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But then, you know, all of those industries with growth rates above 2% are doing very,

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very well in professional and business services and particularly education, durable goods

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manufacturing, those things with a life of over three years.

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So a lot of sectors performing very, very well.

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And even as you get below the 2% average, again, long term, these are strong growth rates

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for most industries in Tennessee.

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This is the geography. Mr. Treasurer, Memphis has not done as well in recent years. I want

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to, that's why I particularly want to point this out. Memphis has over the last several

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months, but gotten to show much stronger employment growth and you see it here in this chart

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with actually above average growth taking place. Again, interestingly, Nashville is not

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at the top of this list for the first time in a few years. It's kind of in the middle still

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still doing fine as we look longer term, Nashville is still going to be likely the leader

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in Tennessee, but lots of other places, particularly in the Chattanooga area, showing extraordinary

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growth over the last several years with a lot of new locations, but a lot of expansion of

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existing business.

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With those thoughts, let me turn to taxes.

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Again, my picture of the economy is one in which we're going to continue to see economic

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expansion but with slower growth rates than we've experienced over the last year or two and kind

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of slowing down into 2020 employment growth likely also having to slow down a little bit as we

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have a more difficult challenge providing labor force but still able to sustain very solid employment.

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The map shows you the most recent data where we can compare states, and I just wanted to show that it observed every state that's darker than Tennessee, grew faster than Tennessee in this quarter every state that's the same color or lighter, grew slower than Tennessee. And you can see, you know, in terms of the east half of the U.S., our sales tax is outperforming the nation. And that's been true over the last few years.

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the sales tax has been very, very strong in terms of its performance.

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So slide 20 is my revenue estimate just to give you a perspective on where I see things going.

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I think of this as a very conservative forecast.

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You can see at the bottom I have forecast 3.7% growth.

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But let's remember what Commissioner Martin just told us.

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that tax revenues through the first quarter have been very good.

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And so what this means is growing 3.4% for the rest of the year.

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It means the sales tax, which is growing well over 5%,

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growing 3.7% for the rest of this year.

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And so again, this is a conservative revenue estimate,

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but I think reasonable as I go into 2020 and the economy slows.

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But with a little more inflation,

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that combination suggests, you know, around 3.5% revenue growth, specifically 3.4% as we look forward.

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Some details on that slide 17 gives you tax collections where we've adjusted them for inflation.

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Notice that since 2016, including my forecast, I'm basically seeing tax revenues pretty flat

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That when adjusted for inflation just modest growth upward.

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But remember, we have cut the inheritance tax, we reduce sales tax on food, we're

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phasing out the income tax and so, so that's played a role in flattening those out.

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And of course, if you take a long term look, you see that the tax revenues are just a bit

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higher in real terms than they were a decade ago.

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So slide 18 just shows you year-by-year adjustment for inflation and I'll not talk about that in detail.

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Slide 19 shows you sales tax revenue growth.

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Again, Commissioner Martin just told you how strong that that has been.

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If I could just take, Mitch can tell me a moment in comment on wayfare in this context.

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But guys, and do you mind if I approach the bench with a couple of slides here?

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Sure.

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Should be one for everybody there.

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Let me make three comments about Wayfarer.

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First of all.

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In what Wayfarer is.

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Sorry.

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So Wayfarer is the U.S. Supreme Court decision.

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I know the commissioner revenue could give a much more insightful discussion than I.

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But Wayfarer, North Dakota versus Wayfarer, is the case

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that the U.S. Supreme Court decided in June, which the important thing is it did not cause

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states to begin to collect the sales tax. It allowed states in certain circumstances

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to require remote vendors to collect their tax. So we need to do something for that to take

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place. And so the map I just gave you is my best shot at what states have done so far.

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I believe there are, and the commission and I were just talking about there 29 states.

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I think I've put 28 in there.

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I didn't include California, but this is based on a presentation I gave in New Orleans last Friday, on the way fair situation and what I think is going to happen, and I didn't have the California information in when I prepared that.

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And so first point is most states have already acted on this, about 45 states have a sales tax, about 2 thirds have already done something to begin to move forward.

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require remote firms to collect the tax.

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Second point is this is not new money.

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This is a situation.

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I mean, imagine this.

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Last year I went in a Walmart store in Knoxville

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and I bought a shirt and I paid the sales tax right there.

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Now, this year, I go in and I buy the same shirt,

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but I do it online from some small vendor

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and there's no sales tax collected.

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Now, the Commissioner Revenue tries to come after me

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to get that money, but not many of us, in fact,

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admit to making those purchases

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and so we don't get the money.

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This is not new money. It's the same shirt. I just bought it in different years from different vendors

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And so we need to keep in mind that this is nothing new. It's trying to maintain the tax base that we have

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And then the third point equally important is there will be less revenue here than most folks expect. I'm happy to give you another chart that I

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There are about 1,000 companies in the U.S. that are doing, these are business to consumer companies that are doing 25 million dollars of sales or more. If we keep a half a million dollars as our threshold as was originally discussed, that kind of translates into a 25 million dollar firm where we're getting 2% of the business in Tennessee. There's about 1,000 companies. We're already collecting from a bunch of those companies.

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companies, and so we should not be expecting an extraordinary amount of money.

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The reality is there are 25 million firms selling on eBay.

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There's two million firms selling on Amazon, and we're talking about collecting from

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another six or seven hundred companies.

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Now they're bigger companies, and so there's more money involved than that whole 25 million

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individually.

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But there is a lot of money that's going to go uncollected, even if we were to allow a threshold of 500,000.

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So I strongly encourage you to be very conservative with any thoughts about how much revenue would arise from the wayfarer decision.

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I think it's the right thing for us to do to enforce the tax on remote firms, but guys, it's better for Tennessee, it's better for Tennessee vendors.

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It's the right thing to do, but recognize the Supreme Court did not say you can collect all the sales taxes out there.

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The estimates, including the ones that myself and my colleagues have made, are about revenue losses,

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not revenue gains associated with a particular type of legislation.

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So caution.

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Yeah, so let me make sure that we have this right.

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We're not talking about a new tax.

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We're talking about collecting and existing tax.

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That's correct, Mr. Controller, it is a tax, it's already in place, and all we're

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doing is allowing the Department of Revenue to enforce this on some other vendors.

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Well, we're not going to even cite it.

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Maybe not as articulately, but in protecting a tax base.

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That's right, you're protecting your tax structure.

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Mr. Secretary, I agree entirely, it's protecting that structure, and that's why it's

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the right thing to do, to protect it.

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But also, you know, I've been talking about this thing for, I'm an old guy, I haven't

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talking about this for decades, you know, taking me a long time to convince anybody other than me,

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this is the right thing to do. But I've always said this is about the economy. It's not about

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tax revenues. It's about level in the play and field so that Tennessee businesses are lined up,

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competing evenly with non-tenancy business. That's all this is, you know, that's what's really important.

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And then also there's some tax revenues associated with it ought to be protected so that we don't have

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go in the future, that wayfare decision is very important to us.

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Slide 20 shows you where the tax revenues have grown by type of vendor.

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Notice that building materials have done very well.

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And in the most recent data, the October data, we saw the construction industry looking very good.

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Notice at the bottom of this chart, general merchandisers and food stores,

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think of, you know, I'm sorry, I think Knoxville,

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Kroger's and Walmart and stores like that

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at the bottom of this, and that's a combination

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of the impacts of e-commerce

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and the reduction of the sales tax rate on food.

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But you see them at the bottom

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of this chart as they have been for much of the last several years.

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Chart 21 shows you the impact of housing being pretty flat.

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This is the really transfer and mortgage taxes and notice that again, what we're seeing is growth near zero in those taxes as those

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The housing industry has not done as strong as we might have anticipated

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I'm just chairman those are my comments. I'd be happy to respond to questions if you have any

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Any questions here

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Mr. Little

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So, Dr. Fox on the slide that you had about the Memphis Statistical Area and everything

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is shown as a growth and everything is there any way you can tease out just the Shelby

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County numbers and pay it county and tips and county on that because DeSoto County

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Mississippi is in that statistical area and that skewing that number a little bit it looks

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like to me.

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Yes.

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Can I hand this to you?

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I'm sure.

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Uh-huh.

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This is a similar chart for Memphis.

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Uh-huh.

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Okay.

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Yeah, we'll we'll go and get you the Tennessee portion only of that. Okay, but that does give you the Memphis

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Detail, okay there. I want to be sure I understood what was going on in Memphis

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Because I know you'd be very interested in that and I'll make sure we get you something that's a Tennessee portion. All right. Thank you

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Let me make sure I have this correctly, you know, you have

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For the current year of the year, we're in an estimated total growth rate of 3.7 percent. That's correct. That is from the revenue collection, Department of Revenue Collections and all funds 3.8. And for the coming year, fiscal year starting in July, you've got 3.4. That is correct. And you say these are conservative numbers. I do think they're conservative numbers. They're conservative on recent history and they're conservative relevant.

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to particularly do the last three, four, five months.

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You know, I've been doing this for 10 years with you,

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and I have not remembered for a single time

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where you said you're not working serve there.

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Oh, sorry.

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I, so the point I was really trying to make Mr. Comptroller,

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sorry, I always think of myself as conservators.

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So I'll admit, the point I was trying to make

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is we can grow more slowly through the rest of this fiscal year

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and hit that estimate.

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For example, with the sales tax, we only have to go 3.7% for the rest of the year.

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Overall, we only have to go 3.4.

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So, it means slower growth rate than what we've seen for the first three months.

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The one exception to where we slower growth rate would be needed is the F&E taxes.

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As Commissioner noted, F&E hadn't done as well in October, but that's a cleanup month as you also pointed out.

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And so that's really a function of, well, what did companies do in April when they filed and they cleaned it up?

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But maybe they just paid more last October, sorry, last April and so they didn't need to pay as much now.

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We'll really get a much better picture in January of where that tax is.

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And so we're going to need better growth to hit my estimate on the F&E taxes.

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Okay, other questions?

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Well, thank you, Mr. Compt.

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I was going to say, I approached this process very conservatively, but I'm worried you'll

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slide my hand if I say that, so I'm going to slide 13, Dr. Fox, just a tizzy job growth

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by sector.

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You know, we continue to see the growth of leisure in hospitality.

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You've talked about that, but I just wonder if there's anything on here that concerns you.

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They just seems to be irrational to you.

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It's not sustainable to you because when I say leisure in hospitality number, I'd be very

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concerned.

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Well, I'd be happy.

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But still even more concerned if a year from now we're sitting the same room and we see 5% again because

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It just doesn't feel sustainable to me

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Mr.

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I agree with you entirely and indeed we don't have the labor force. Yeah to continue to have very true growth in that in that sector

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And so so I think the challenge for Tennessee is how do we continue to grow in tourism in

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in ways that don't require as many workers.

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I was reading recently the McKinsey report on technology

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and where we can have automation.

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And McKinsey pointed out that these single industry

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that has the best potential to automate is that one.

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And they estimate about, and I mean by that,

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something like 65 to 70% of the jobs

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in leisure and hospitality can be automated.

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And so actually my longer term concern

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is that folks who don't have as good of skills,

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who've been, not all of them, of course,

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some really highly skilled people in the industry,

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so I'm not trying to put it by now,

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but as you know, many of these are hourly jobs.

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And if you don't have skills and that gets automated,

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then what do you do?

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Well, that's just what's ever more emphasis

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on our education system to create jobs,

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to create people who can work in these other industries,

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because that's where the future lies.

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Thank you Dr. Fox.

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Other questions?

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Thank you very much.

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Now we're most fortunate to have a representative of the Federal Reserve,

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Federal Reserve Bank of Atlanta.

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We really appreciate this.

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I'm not sure how to pronounce it. Is it Grape?

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Grape.

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be all great, who is the vice president and regional executive, we certainly thank you

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for being here.

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Thank you.

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It is a pleasure to be here.

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Thank you for inviting me and giving me a little bit of time to chat about how we're

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seeing things from the perspective of the Fed.

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I'm going to, my comments will zoom out a bit from Dr. Fox's comments and talk a bit more

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about how we at the Fed are seeing the national economy and perhaps some lessons that we can

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draw from that about thinking around Tennessee's future.

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The first picture, I'm sure you've seen before, represents a general proxy for economic

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activity and the U.S. economy overall and in Tennessee, and this is roughly just to say

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we continue to very closely mirror the pace of growth in the national economy here in

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and so it at least

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It leads us to believe that a lot of the learnings and trends that we're seeing nationally can provide some value as we think about Tennessee's future. The second picture is a little bit different cut of the data that Dr. Fox showed around US GDP. So the dark black line represents quarterly annualized percent change in GDP growth. So this is the number you'd see on the front page of the Wall Street Journal.

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But what I've done here is broken out contributions to that growth from different sectors in the economy.

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And what I want to point out is that the greenish, mid-color green line consumer spending,

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this bar right above the horizontal axis, continues to be the main driver of economic growth in this country.

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So, the story that we were all told and undergrad that this is a very consumption-based economy,

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this really has continued to hold going forward.

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And you've seen, kind of some volatility in other sectors, but the most recent overall

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growth in the economy was 3.5 percent.

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Consumer spending contributed almost full of full three percentage points to that growth.

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So, we continue to really try to parse very closely the dynamics of the consumer market

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as we think about the growth of the overall economy going forward.

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So, of course, we absolutely interlink together the pace of jobs growth with consumer environments.

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This picture is overall net payroll growth in the country and the dotted orange line

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is the monthly numbers, which can be incredibly volatile.

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But if you look through them, so the dark blue line is the 12-month average, which is

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still averaging just a phenomenally strong pace of 210,000 jobs a month to put this in perspective.

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We estimate at the Fed that the economy needs roughly 100 or a little over 100,000 jobs a month in order to keep the unemployment rate steady.

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So essentially in order to absorb new kind of population growth in the economy.

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And you could have asked almost any federal reserve economist or even private sector economist several years ago.

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And I don't think anybody would have been able to say with a straight face that they

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expected this phenomenally strong pace of job growth to persist for as long as it has.

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So though this is a sign that the employment market continues to be strong, we are also

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kind of driving hard in a direction of ongoing tightness in the labor market.

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So it's something that is certainly balancing and that we continue to think is a very welcome

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strength but likely not a sustainable pace of strength. And we expect eventually job growth

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will have to move back down to a number that's more consistent with a long-run growth.

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Again, another cut of data that Dr. Fox showed, this is a intensity employment growth by industry.

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So very similar to his horizontal bar chart, what I will just point out is the size of the bubble represents the relative number of employees in each of these industries in the state.

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And I have both year-ever year percent change and the quarterly average percent change.

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So the further up and to the right a circle is kind of the stronger the momentum in that sector is.

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And one thing I will point out though is that although we're seeing exceptional strength

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in leisure and hospitality, warehousing and transportation, some business services, these

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also tend to be sectors that have lower than median wages.

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So despite the fact that we're adding a large number of jobs, we also are tending to add jobs

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in sectors that have lower wages than the economy overall on average.

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Can I ask a question now?

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Please.

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I'm just curious, I don't have last year's presentation with me, but if I were to look

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at the wage growth in those sectors compared to last year, are we seeing that we're growing

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more in areas that do have a higher wage growth?

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We, these sectoral trends are not new this year.

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I think in general, there's been some shifting as we've seen a bit of a saturation in markets

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like manufacturing and construction, where it just seems those sectors have absorbed

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as much workforce as they could and we're at a point where they're really struggling to

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kind of add additional workers.

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but for the most part, this...

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This trend of the job growth being concentrated among industries that certainly can have high wages, but on average have lower than median wages. That's been consistent over the past several years.

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So when I hear you say that, what I hear you saying is that we are struggling from a labor force standpoint to fill those higher-paying jobs.

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Let's slide forward two slides if you want.

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00:35:25,510 --> 00:35:27,290
Well, I don't get ahead. I mean, I'll leave it up to you.

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If you want to just tell me to wait and you go through your presentation and go from there.

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Okay, let's just keep rolling.

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Perhaps. Yeah, I do want to touch on that.

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And I will, so let's just skip to slide seven.

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I have broken down wage growth by income quartile.

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So these are top-coded data.

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So I'm basically throwing out everyone

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who earns $150,000 a year or more,

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just because there's a small number of people

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and they could really skew the data.

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So if you look at folks below that spectrum,

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the lowest quartile earns less than $14 an hour,

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that's the green line.

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the highest quartile earns above $32 an hour, the blue line, and then orange and purple

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represent those earning kind of middle-income earners.

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In one thing that's been really fascinating that we've seen in the data that is consistent

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with stories we've heard from Tennessee business leaders is the labor market tightness appears

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to be most acute, especially for low-wage workers, and increasingly also for high-wage workers.

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Where what you're seeing is this middle-wage worker, which we tend to, we can track wages pretty

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closely to middle-skill sorts of jobs, their wages, wage growth essentially bottomed out,

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an increased sum but has really become quite stagnant below what we would have seen in prior

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expansionary periods.

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And the concentration of wage growth has been on the low end and on the high end, that reflects

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our readings of labor market tightness in both of those areas.

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So when you think about construction, restaurant and hospitality,

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warehousing workers on the lower end, on the higher end,

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we hear a lot of stories about specialized IT workers,

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executives, those sorts of roles.

436
00:37:25,860 --> 00:37:30,780
There are a lot of anecdotes and the data is consistent with growing tightness in those areas.

437
00:37:31,300 --> 00:37:35,480
However, there's kind of a difficulty shifting folks

438
00:37:35,480 --> 00:37:39,740
from the middle skill spectrum to the outer bands.

439
00:37:40,300 --> 00:37:47,460
How do you reconcile that with, as you have that tightness, wage growth is going to go up because of supply and demand.

440
00:37:47,900 --> 00:37:57,480
So to me, that would seem like in those areas, wages wouldn't actually grow faster because that's where there's less supply of those employees, right?

441
00:37:57,720 --> 00:37:58,040
That's right.

442
00:37:59,120 --> 00:37:59,440
That's right.

443
00:37:59,800 --> 00:38:07,280
So the green and blue line in this picture, the green line represents lower wage, generally

444
00:38:07,280 --> 00:38:13,200
lower skill workers, and it has been growing well above the clip that we've seen the

445
00:38:13,200 --> 00:38:18,620
pace of wage growth for other skill workers and other kind of wage cohorts.

446
00:38:19,120 --> 00:38:24,380
And we're even now about in the high territory that we saw in the previous expansion.

447
00:38:24,380 --> 00:38:30,440
So we are starting to see movement in wages that certainly do reflect this trend of

448
00:38:30,440 --> 00:38:36,660
tightness and employers feeling like they're having to offer higher wages in order

449
00:38:36,660 --> 00:38:39,900
to compensate people to move into their skills.

450
00:38:40,260 --> 00:38:46,300
That said, though these wages are growing, these are still the lowest wages kind of of

451
00:38:46,300 --> 00:38:46,680
the group.

452
00:38:46,920 --> 00:38:52,140
So presumably if someone could shift from the first quartile to the second quartile

453
00:38:52,140 --> 00:38:54,460
once they earn $14.01.

454
00:38:55,220 --> 00:38:56,020
Thank you.

455
00:38:56,580 --> 00:38:58,900
This is maybe a little bit off,

456
00:38:59,240 --> 00:39:02,280
but how would this change here,

457
00:39:02,280 --> 00:39:03,700
which is really fascinating?

458
00:39:05,700 --> 00:39:07,320
How would that relate to our,

459
00:39:07,440 --> 00:39:08,980
you know, we're sales tax state.

460
00:39:09,340 --> 00:39:09,440
Right.

461
00:39:09,660 --> 00:39:13,160
How would this tie into our sales tax collections

462
00:39:13,660 --> 00:39:15,860
where the so-called middle class

463
00:39:15,860 --> 00:39:17,820
is not the one growing at all?

464
00:39:18,120 --> 00:39:18,260
Right.

465
00:39:19,040 --> 00:39:21,340
Well, it's absolutely fascinating.

466
00:39:21,340 --> 00:39:27,720
It tends to be that lower earners have the highest marginal propensity to consume.

467
00:39:28,260 --> 00:39:34,220
So if you're living paycheck to paycheck and, you know, earning kind of a smaller

468
00:39:34,220 --> 00:39:39,900
amount, an extra 10 cents in your pocket is going to mean an extra 10 cents spent in a store

469
00:39:40,640 --> 00:39:45,700
where that tends to be less and less the case as you move up the income spectrum.

470
00:39:45,700 --> 00:39:52,420
So, certainly seeing this improvement as we add jobs and we continue to see wage growth

471
00:39:52,420 --> 00:39:59,540
for lower wage workers, that's much more likely to translate into sales tax related

472
00:39:59,540 --> 00:39:59,900
didn't spend.

473
00:40:14,560 --> 00:40:25,640
So, on your slide number seven is just to be clear, is this Tennessee specific data or this national data that you're using by extrapolation as an illustration?

474
00:40:25,640 --> 00:40:27,660
This is national data.

475
00:40:28,640 --> 00:40:33,420
Is there any source that has Tennessee data on this that you're aware of?

476
00:40:34,040 --> 00:40:35,560
I don't have one included.

477
00:40:35,840 --> 00:40:40,340
Perhaps some of my colleagues may have a better sense of whether we can break this down.

478
00:40:40,740 --> 00:40:48,240
One of the challenges when we move to Tennessee's specific data is we end up getting much less

479
00:40:48,240 --> 00:40:49,340
timely data.

480
00:40:50,080 --> 00:40:53,400
So it can be harder to pick up on these near term trends.

481
00:40:55,740 --> 00:40:56,680
Thank you.

482
00:40:57,200 --> 00:40:57,880
Thank you.

483
00:40:59,320 --> 00:41:09,480
Moving to slide 8, certainly when we think about consumer sentiment, there are a whole

484
00:41:09,480 --> 00:41:10,740
slew of things we look at.

485
00:41:10,940 --> 00:41:15,880
One important metric is this left-hand chart, which is University of Michigan's surveys

486
00:41:15,880 --> 00:41:19,680
of consumer sentiment, which is incredibly robust at this point.

487
00:41:19,880 --> 00:41:23,760
So we had stayed quite low following the most recent recession.

488
00:41:23,760 --> 00:41:28,540
and now have rebounded well above averages from the prior recovery.

489
00:41:28,780 --> 00:41:34,440
So when you ask consumers how they're feeling about their job stability,

490
00:41:34,800 --> 00:41:38,740
their income expectations, how comfortable would they be taking out alone

491
00:41:38,740 --> 00:41:43,140
and making a big purchase, they're very positive about all of those indicators.

492
00:41:43,980 --> 00:41:48,100
On the right hand side of the page, this also represents a general pot proxy

493
00:41:48,100 --> 00:41:50,260
for their financial obligations ratio.

494
00:41:50,260 --> 00:41:57,200
So, it's essentially the ratio of their kind of debt payments to disposable personal

495
00:41:57,200 --> 00:42:03,680
income, which suggests really consumers did do a lot to shore up their financing and

496
00:42:03,680 --> 00:42:08,960
shore up their balance sheet following the great recession and continue to be in a place

497
00:42:08,960 --> 00:42:15,680
where a good portion of their income is still free for discretionary spending and isn't

498
00:42:15,680 --> 00:42:17,200
tied up paying down debt.

499
00:42:18,890 --> 00:42:48,170
Moving to slide nine, I think one important thing that I want to point to that really speaks to how we think about consumer behavior from the perspective of the Federal Reserve is, there are always little things in the economy that can impact kind of near-term shifts in consumer sentiment, or near-term changes in how different demographic groups purchase different sorts of items,

500
00:42:48,170 --> 00:42:51,210
or political uncertainty, or gas prices increasing.

501
00:42:51,410 --> 00:42:55,190
There are a lot of things that feel important to consumers.

502
00:42:55,590 --> 00:43:01,010
But if you zoom out and you look at what is by far the best predictor

503
00:43:01,010 --> 00:43:04,610
of consumer activity in the economy, far in a way

504
00:43:04,610 --> 00:43:07,550
the closest correlation we get is with income.

505
00:43:08,510 --> 00:43:12,930
So this is a picture of disposable personal income and consumer spending.

506
00:43:14,190 --> 00:43:17,250
And they tend to hold very tightly together historically.

507
00:43:17,250 --> 00:43:22,170
And we've even seen that relationship tighten up a bit over the past few years.

508
00:43:22,750 --> 00:43:29,630
So when we are trying to dig into the details of this largest segment of the economy consumer

509
00:43:29,630 --> 00:43:35,750
spending, the reason we look so closely at the employment market is because the best

510
00:43:35,750 --> 00:43:40,650
indicator of the vitality of the consumer and consumer spending is how much people are

511
00:43:40,650 --> 00:43:40,910
earning.

512
00:43:40,910 --> 00:43:41,630
I'll

513
00:43:45,980 --> 00:43:53,520
skip to slide 11, which reflects already some of the comments Dr. Fox shared around

514
00:43:53,890 --> 00:44:00,020
the housing market, which certainly has slowed as a contributor to gross domestic product.

515
00:44:00,120 --> 00:44:04,400
And we have even seen a slowing of housing starts in some instances in recent months.

516
00:44:04,900 --> 00:44:10,040
And that has been in conjunction with rising interest rates and rising mortgage rates.

517
00:44:10,040 --> 00:44:15,820
We also anecdotally continue to hear stories of just there are shortages of available land.

518
00:44:16,040 --> 00:44:22,620
There are shortages of available lots which has meant that developers continue to invest

519
00:44:22,620 --> 00:44:28,720
in kind of higher cost, higher price housing in order to rationalize going to be expense

520
00:44:28,720 --> 00:44:31,360
of building and the limited property available.

521
00:44:31,840 --> 00:44:38,160
This is a national story and I will point out on the right hand side of the chart is a housing

522
00:44:38,160 --> 00:44:39,280
affordability index.

523
00:44:39,280 --> 00:44:59,820
And this is something we talk about very frequently in Nashville and is increasingly a topic in our other cities throughout Tennessee, but I will note that it is a concern nationally as well that housing affordability. So this is a picture that roughly the index is essentially a proxy for what someone earning the median.

524
00:45:06,660 --> 00:45:23,500
And this is declined nationally and continues to be a concern both for employers in Tennessee as they as they talked to us about their ability to attract and retain workers but is also a story that is becoming increasingly prevalent across the country.

525
00:45:23,500 --> 00:45:24,700
Slide

526
00:45:27,130 --> 00:45:37,350
12 is the inflation reading, the Federal Reserve targets a 2 percent personal consumption expenditure price index reading of inflation.

527
00:45:37,890 --> 00:45:51,230
Inflation has increased from a persistently low about 1.5 percent that we had seen throughout almost the entire recovery and appears to be reaching and perhaps stabilizing around our 2 percent objective.

528
00:45:54,860 --> 00:45:56,860
I want to move to slide 13.

529
00:45:57,000 --> 00:46:02,880
I have a couple of, I have two risk factors that I want to point out, that when we are

530
00:46:02,880 --> 00:46:07,820
thinking about our forecast and thinking about the main things that can impact the consumer

531
00:46:07,820 --> 00:46:13,140
right now, there are a couple of uncertainties on the horizon that we have yet to really

532
00:46:13,140 --> 00:46:14,440
see how they play out.

533
00:46:15,300 --> 00:46:21,760
The slide 13 focuses on tariffs, and there are many impacts that tariffs can have on the

534
00:46:21,760 --> 00:46:26,580
economy, both positive and negative, and there are kind of many ways that those mechanics

535
00:46:26,580 --> 00:46:32,100
work their way through the economy. One that is still a question mark that has the

536
00:46:32,100 --> 00:46:38,600
potential to have perhaps the greatest impact on the consumer themselves is what, how could

537
00:46:38,600 --> 00:46:44,920
the tariffs actually impact prices of consumer goods and therefore impact consumers' ability

538
00:46:44,920 --> 00:46:51,600
to spend? So the left hand side of this chart is a picture from the Peterson Institute

539
00:46:51,600 --> 00:46:57,500
It represents the three phases of tariffs, and as you notice, the first phase has very

540
00:46:57,500 --> 00:47:02,220
little orange, which is a tariff that goes directly onto goods sold to consumers.

541
00:47:02,860 --> 00:47:06,880
The second phase has a much greater portion of consumer goods, and then the third phase,

542
00:47:06,880 --> 00:47:12,120
which has not in effect yet, has even greater share of consumer goods.

543
00:47:13,210 --> 00:47:20,040
If you look at the right-hand side of the chart, I've broken down some of the major imports

544
00:47:20,040 --> 00:47:23,160
that we bring into this country from China.

545
00:47:23,380 --> 00:47:27,700
So overall, China represents a little over a fifth

546
00:47:27,700 --> 00:47:30,260
of our total U.S. imports, however,

547
00:47:30,520 --> 00:47:32,400
for particular consumer goods.

548
00:47:33,220 --> 00:47:35,920
Over half of our imports are coming from China,

549
00:47:36,040 --> 00:47:40,120
so that furniture, textiles, leather goods, et cetera.

550
00:47:40,580 --> 00:47:43,000
We import an enormous amount from China.

551
00:47:43,460 --> 00:47:44,520
And what does that mean?

552
00:47:45,740 --> 00:47:47,840
If you flip to slide 14,

553
00:47:47,840 --> 00:47:50,600
There are some interesting dynamics at play.

554
00:47:51,320 --> 00:47:57,260
So when the left hand chart I break down the producer price index,

555
00:47:57,260 --> 00:48:00,620
so essentially producer inflation for intermediate goods,

556
00:48:00,940 --> 00:48:03,740
versus producer inflation for finished goods.

557
00:48:04,220 --> 00:48:05,760
And though their trends are similar,

558
00:48:06,320 --> 00:48:11,540
you see that even when there are wild swings in costs for intermediate goods

559
00:48:11,540 --> 00:48:13,680
and commodity prices for producers,

560
00:48:13,680 --> 00:48:20,160
They are still able to manage their supply chain and absorb those swings in cost so

561
00:48:20,160 --> 00:48:24,840
that what the consumer actually ends up seeing with finished goods is much more muted.

562
00:48:26,440 --> 00:48:33,020
What that has left us with as we think about the inflation prospect going forward is now

563
00:48:33,020 --> 00:48:38,780
that we are starting to see waves of this second wave of tariff that goes directly on consumer

564
00:48:38,780 --> 00:48:44,140
more goods, how much capacity do retailers have to absorb some of those price increases

565
00:48:44,140 --> 00:48:49,120
in their margins, so they don't have to pass the full increase on to consumer prices?

566
00:48:49,840 --> 00:48:54,500
The right-hand side of the chart is two different measures of retailer margins.

567
00:48:55,180 --> 00:49:00,020
And generally, what I want to point out is they were able to recover pretty considerably

568
00:49:00,020 --> 00:49:06,720
from the depths of margins bottoming out, following the financial crisis, but they've stabilized

569
00:49:06,720 --> 00:49:08,220
over the past few years.

570
00:49:08,860 --> 00:49:12,800
So, our both survey data and also kind of conversations

571
00:49:12,800 --> 00:49:15,360
and focus groups with business leaders

572
00:49:15,360 --> 00:49:18,460
that produce and sell a lot of consumer goods

573
00:49:18,460 --> 00:49:21,140
suggest there's some room to absorb

574
00:49:21,140 --> 00:49:23,340
some of these cost increases in their margins.

575
00:49:24,040 --> 00:49:26,880
However, at some point, they do expect to start having

576
00:49:26,880 --> 00:49:30,840
to pass on the tariff costs onto consumer prices

577
00:49:30,840 --> 00:49:33,600
which they expect to have some impact

578
00:49:33,600 --> 00:49:36,160
and consumer's ability to spend.

579
00:49:39,990 --> 00:49:44,150
And slide 15 is my last big question mark.

580
00:49:44,470 --> 00:49:47,570
So when I'm traveling about Tennessee

581
00:49:47,570 --> 00:49:50,310
and meeting with business executives,

582
00:49:50,710 --> 00:49:53,670
I think maybe 90% of the time now,

583
00:49:53,870 --> 00:49:56,370
I get the question, well, when's the next recession?

584
00:49:56,890 --> 00:49:59,970
You say, oh, well, are you, are your customers pulling back?

585
00:50:00,000 --> 00:50:29,300
Are you pulling? What are you seeing that makes you expect to recession? Oh, it's just been so long since we've had one. I think, well, you know, recessions don't die of, or recoveries don't die of old age, right? There's always something that causes every recession we've had in modern documentable history. So one thing I did here, to sort of capture this story, I pulled out the two larger components of GDP growth, business fixed investment on the left hand side of this chart.

586
00:50:29,300 --> 00:50:32,260
and consumer spending on the right-hand side.

587
00:50:32,780 --> 00:50:38,740
And I've indexed them to 100 at each business cycle peak since 1960.

588
00:50:40,020 --> 00:50:44,960
So you can essentially track how each of these measures declined during a recession

589
00:50:44,960 --> 00:50:47,460
and recovered through the following recovery.

590
00:50:47,780 --> 00:50:54,180
Each line ends essentially when the next recession begins and the line kind of resets to 100.

591
00:50:54,560 --> 00:50:57,940
So there are two big things that jump out at me looking at these.

592
00:50:57,940 --> 00:51:03,840
One is the current recovery, the dotted line, is longer than the other lines.

593
00:51:04,240 --> 00:51:09,800
So we are now in a period of the longest post-war recovery in history.

594
00:51:10,320 --> 00:51:15,420
But importantly, it's also very noticeably the lowest of all of the lines.

595
00:51:15,840 --> 00:51:22,240
So even though this has been a long recovery, if we go by the calendar, it has not been a

596
00:51:22,240 --> 00:51:28,460
recovery that suggested kind of percentage point wise a dramatic growth in the economic

597
00:51:28,460 --> 00:51:33,180
fundamentals that we have had that we would have had in the past with a recovery of this

598
00:51:33,180 --> 00:51:38,300
length, which is one of the reasons that we continue to think there is more capacity

599
00:51:38,300 --> 00:51:44,380
for the U.S. economy to continue to expand because we're not in this high inflation fire

600
00:51:44,380 --> 00:51:51,240
hot situation where all of the major components of the economy are growing at their maximum

601
00:51:51,240 --> 00:51:52,160
month pace right now.

602
00:51:54,480 --> 00:51:59,240
I will leave with a general blue chip forecast. On slide 16, this

603
00:51:59,240 --> 00:52:05,300
is essentially the blue line is actual real GDP growth. And then the red line and dotted

604
00:52:05,300 --> 00:52:11,460
lines are essentially a consensus forecast of the top 50 blue chip forecasters in the U.S.

605
00:52:12,180 --> 00:52:18,720
economy. And their expectation is closely aligned with ours at the Federal Reserve and certainly

606
00:52:18,720 --> 00:52:25,820
aligns with Dr. Fox's expectation that, look, we've had, we've had unusually and unsustainably

607
00:52:25,820 --> 00:52:32,320
strong GDP growth over the past couple of quarters. We're expecting that to moderate

608
00:52:32,320 --> 00:52:38,680
somewhat back to a more sustainable, longer run pace of growth that is still strong, especially

609
00:52:38,680 --> 00:52:43,180
for the size of our economy, but isn't this kind of high pressure place?

610
00:52:43,180 --> 00:52:53,380
So they show that all, even the top 10, the bottom 10, the consensus are all 3% or less as of January.

611
00:52:55,020 --> 00:52:55,640
That's right.

612
00:52:59,760 --> 00:53:02,520
I would also say the margin for error of these things.

613
00:53:02,700 --> 00:53:04,300
Oh, I'd say that.

614
00:53:05,460 --> 00:53:07,360
We love to put people in.

615
00:53:10,840 --> 00:53:16,100
And then the last page, I just have a couple of comments about anecdotal feedback from business leaders.

616
00:53:16,100 --> 00:53:17,520
They continue to be positive.

617
00:53:17,760 --> 00:53:20,900
There's some uncertainty as we go into the out years,

618
00:53:20,960 --> 00:53:23,700
but for the most part, a very positive story

619
00:53:24,120 --> 00:53:25,280
from the folks we speak with.

620
00:53:35,170 --> 00:53:36,790
This is absolutely fascinating.

621
00:53:38,330 --> 00:53:40,050
We really appreciate it.

622
00:53:40,130 --> 00:53:40,570
Got questions?

623
00:53:42,680 --> 00:53:43,920
Thank you so much.

624
00:53:43,980 --> 00:53:44,740
Thank you for the pleasure.

625
00:53:44,920 --> 00:53:46,140
We really appreciate it.

626
00:53:46,220 --> 00:53:46,940
I mean, this is wonderful.

627
00:53:47,320 --> 00:53:48,200
Thank you very much.

628
00:53:51,570 --> 00:53:56,290
Now we have the East Tennessee State, Dr. Smith and your folks.

629
00:53:56,750 --> 00:53:58,590
Come on up here and put the good words on us.

630
00:54:23,890 --> 00:54:27,270
So Dr. Smith's not going to come up here next year.

631
00:54:27,850 --> 00:54:28,950
That's all getting in there.

632
00:54:29,410 --> 00:54:29,730
Good

633
00:54:34,020 --> 00:54:35,540
morning.

634
00:54:36,540 --> 00:54:37,160
Good morning.

635
00:54:37,500 --> 00:54:37,940
Good morning.

636
00:54:46,830 --> 00:54:47,270
Proceed.

637
00:54:49,530 --> 00:54:50,370
Thank you.

638
00:54:50,370 --> 00:54:51,050
Well, thank you.

639
00:54:51,210 --> 00:54:55,690
First of all, this is my first opportunity to come before this commission and it's a pleasure

640
00:54:55,690 --> 00:54:56,310
to do so.

641
00:54:56,410 --> 00:54:56,890
I'm for the record.

642
00:54:57,050 --> 00:54:57,490
Say your name.

643
00:54:58,130 --> 00:54:58,830
Fred Maccara.

644
00:54:59,050 --> 00:54:59,350
Okay.

645
00:55:00,000 --> 00:55:29,980
I'm East Tennessee State University Associate Professor of Economics. My presentation will be somewhat shorter because a lot of the points that I was going to make have already been covered by Dr. Fox and Ms. Gravy, Gravy, excuse me. But there's a few things maybe I can suggest that give a little different perspective. There we go. This will be macro view of things. And as Ms. Gravy knows,

646
00:55:29,980 --> 00:55:46,740
The inflation rate has risen to the point that we are at the Fed's target for the personal consumption expenditure price index, both overall and the core that excludes food and energy.

647
00:55:47,380 --> 00:55:52,040
So what that of course implies is that there's no more easing that is likely to be out there.

648
00:55:52,040 --> 00:56:03,000
So we've seen interest rates rising, the Federal Fund's target rate has been increasing,

649
00:56:03,620 --> 00:56:09,680
and with that we've seen interest rates long-term and short-term starting to increase.

650
00:56:10,520 --> 00:56:15,200
There's longer-term interest rates still trailing, but they're on their way up.

651
00:56:16,040 --> 00:56:21,000
One of the sectors of the economy that's particularly affected by that, of course, is the housing market.

652
00:56:21,000 --> 00:56:29,140
And we see as we look at data on new and existing home sales that toward the end of this chart here,

653
00:56:29,140 --> 00:56:35,620
we see a definite decline in the number of new and existing home sales sold.

654
00:56:39,010 --> 00:56:48,730
At the same time, we see an increase in the inventory of new homes for sale expressed both in terms of the number of units for sale,

655
00:56:48,730 --> 00:56:53,530
as well as the months of sales that they represent.

656
00:56:54,410 --> 00:56:58,170
Another way of looking at this, again, is to put those two together.

657
00:56:58,430 --> 00:57:02,950
The number of new homes sold versus the number of new homes for sale.

658
00:57:03,510 --> 00:57:08,770
And we can see that the number of new homes for sale has been steadily increasing.

659
00:57:09,390 --> 00:57:16,310
But again, the number of homes for sale, excuse me, the number of homes sold has started to drop off a bit.

660
00:57:17,950 --> 00:57:22,370
Turning to the labor market, which we've heard several things about, another particular

661
00:57:22,370 --> 00:57:28,870
view is to look at data from the job openings and labor turnover survey or JOLTS, as it's

662
00:57:28,870 --> 00:57:30,410
called, from the labor department.

663
00:57:31,110 --> 00:57:36,470
And one of the things that we observe in this particular chart is that job openings have

664
00:57:36,470 --> 00:57:42,590
been increasing much more sharply than higher, it's getting harder and harder to find people

665
00:57:42,590 --> 00:57:43,770
to fill those jobs.

666
00:57:44,890 --> 00:57:49,890
Another way of looking at this too is to look at the relationship between layoffs and quits.

667
00:57:50,890 --> 00:57:58,890
Workers are feeling a little more confident about leaving their existing jobs and looking for better employment and perhaps higher wages.

668
00:57:59,790 --> 00:58:11,530
Meanwhile employers are a little bit more nervous and they're trying to hold on to the workers that they have so that we see that the level of layoffs and separations has been relatively low.

669
00:58:11,530 --> 00:58:19,750
Another kind of evidence of this comes from some more anecdotal data.

670
00:58:20,130 --> 00:58:24,630
Looking at the National Federation of Independent Businesses, small business optimism index,

671
00:58:25,370 --> 00:58:32,710
this is for September 2018, and there was a statement in that report that said that 87%

672
00:58:32,710 --> 00:58:38,310
of survey respondents, that's respondents to the survey from which that index is drawn,

673
00:58:38,310 --> 00:58:44,530
who are hiring or trying to hire workers reported few or no qualified applicants for the

674
00:58:44,530 --> 00:58:51,870
positions that they were trying to fill. By the way in the October index that rose to 88 percent.

675
00:58:52,750 --> 00:58:58,790
At the end of the optimism index report they always ask small businesses what's the most

676
00:58:58,790 --> 00:59:06,010
important problem that they face. For many many years the two that were always near the top or at

677
00:59:06,010 --> 00:59:12,490
the top or taxes and government regulations and red tape. But for the past several months,

678
00:59:12,770 --> 00:59:17,510
the one that has taken over as the lead is quality of labor. So that's becoming a

679
00:59:17,510 --> 00:59:20,090
bigger and bigger problem that small businesses face.

680
00:59:23,440 --> 00:59:25,060
Now, we've talked a lot about what

681
00:59:25,060 --> 00:59:30,580
the outlook is for the economy, and of course, the impact that a recession could have. One

682
00:59:30,580 --> 00:59:37,380
of the data sources that I'd like to look at is weekly new claims for unemployment benefits.

683
00:59:37,380 --> 00:59:47,500
we're dealing with data that's available weekly, and it's had a pretty good record with regard to being a forward indicator of a coming recession.

684
00:59:48,220 --> 00:59:58,820
There's been a number of false positives, in other words there have been times when we've seen an increase in new claims that was not followed by a recession, but there haven't been any false negatives.

685
00:59:59,260 --> 00:59:59,960
When we see

686
01:00:00,000 --> 01:00:29,800
We've seen a continuing decline or increase in new claims for unemployment benefits that's been followed by a recession. But we also see that the data show recently that the number of new claims have been dropping very, very sharply. And here's more recent data. It's been dropping very, very sharply. In fact, as a percentage of the labor force, new claims

687
01:00:29,800 --> 01:00:34,260
are at historic low, going all the way back to the late 60s.

688
01:00:34,440 --> 01:00:41,800
So as a percentage of the labor force, we have had a record low number of claims, going

689
01:00:41,800 --> 01:00:43,880
all the way in more than 50 years.

690
01:00:47,090 --> 01:00:52,270
Another way of looking at what's taking place in the labor force is that the unemployment

691
01:00:52,270 --> 01:00:53,890
rate, of course, has been declining.

692
01:00:54,290 --> 01:00:59,430
It's not at a record low, but it's at a low compared to, you know, a couple of decades.

693
01:01:00,570 --> 01:01:05,010
Meanwhile, the labor force participation rate, that's the percentage of the working age

694
01:01:05,010 --> 01:01:10,670
population that is either employed or seeking employment, has stabilized.

695
01:01:11,470 --> 01:01:15,390
One of the things that economists and others were concerned about is even though the

696
01:01:15,390 --> 01:01:21,310
unemployment rate was dropping in the recovery from the Great Recession, also the labor force

697
01:01:21,310 --> 01:01:23,250
participation rate was declining.

698
01:01:23,250 --> 01:01:28,450
But that seems to have stabilized now around 63 and a half percent.

699
01:01:29,130 --> 01:01:32,790
Good sign again for strength in the labor market.

700
01:01:34,250 --> 01:01:40,110
Another way of another evidence of strength and I believe Ms. Grafie also pointed this out

701
01:01:40,110 --> 01:01:47,330
is to look at the monthly growth in average weekly and hourly earnings of non-supervisory production workers

702
01:01:47,330 --> 01:01:50,570
and Dr. Fox also mentioned this as well.

703
01:01:52,070 --> 01:01:56,770
Wages, of course, have been something that hasn't been growing at a very rapid rate.

704
01:01:57,410 --> 01:02:05,590
But more recently, what we've been seeing is a little bit of pep in that hourly weekly

705
01:02:05,590 --> 01:02:11,210
and, excuse me, hourly earnings and weekly work earnings of non-supervisory production

706
01:02:11,210 --> 01:02:11,630
workers.

707
01:02:11,950 --> 01:02:16,790
So, again, that's a pretty good indicator of what's happening to kind of middle-class

708
01:02:16,790 --> 01:02:26,270
workers and the labor force in general. Wages have been barely keeping up with inflation but

709
01:02:26,270 --> 01:02:34,190
again some data that we've seen in the previous two presentations. The employment cost index on

710
01:02:34,190 --> 01:02:42,090
total compensation growth of all civilian workers has been rising, getting up to about 3% a little bit

711
01:02:42,090 --> 01:02:49,710
above inflation. Of course, employment cost includes both wages and benefits. And the

712
01:02:49,710 --> 01:02:55,210
surprising thing is that of those two, the wage part of it has been the one that has

713
01:02:55,210 --> 01:03:01,850
been growing more rapidly. The trend is definitely upward. The long-term average has been

714
01:03:01,850 --> 01:03:07,050
a little bit less than two and a half percent, but now we're seeing growth rates in the

715
01:03:07,050 --> 01:03:09,150
the order of about three and a half percent.

716
01:03:13,120 --> 01:03:20,160
Now in a state of which retail sales are source of a good part of our tax burden and tax

717
01:03:20,160 --> 01:03:24,320
revenues depending upon which point of view you're looking at it.

718
01:03:25,020 --> 01:03:32,180
Retail sales as a percentage disposable income has shown kind of an interesting change since

719
01:03:32,180 --> 01:03:33,300
the great recession.

720
01:03:33,300 --> 01:03:40,960
What we've seen is since that great recession, as a percentage of disposable income, retail

721
01:03:40,960 --> 01:03:47,600
sales overall, or whether we exclude food services or whether we exclude autos, have

722
01:03:47,600 --> 01:03:53,200
been running at a rate of a little bit about 2% less as a percentage of disposable income

723
01:03:53,200 --> 01:03:54,340
than they did before.

724
01:03:55,460 --> 01:04:02,520
So if we're going to be using things like disposable income to get an idea of what our tax

725
01:04:02,520 --> 01:04:08,860
revenues might be, to the extent that retail sales are a big part of that, maybe a little

726
01:04:08,860 --> 01:04:12,440
bit less than the historical models might indicate.

727
01:04:14,160 --> 01:04:18,680
Another chart that kind of indicates the same thing is that on an inflation-adjusted

728
01:04:18,680 --> 01:04:25,900
basis, real sales as a percentage of disposable income and personal consumption, again, have

729
01:04:25,900 --> 01:04:31,460
been running about 2% lower than they were prior to the great recession.

730
01:04:32,320 --> 01:04:35,180
Why that's happening is difficult to say.

731
01:04:35,580 --> 01:04:40,740
It might have something to do with the way in which of the data presented maybe a larger

732
01:04:40,740 --> 01:04:47,260
part of consumer expenditures are not picked up by the data that is included in retail sales.

733
01:04:48,960 --> 01:04:58,420
Similarly, when we look at consumer credit, consumer credit of course falls into two categories

734
01:04:58,960 --> 01:04:59,940
revolving.

735
01:05:00,000 --> 01:05:29,920
In non-revolving, revolving credit is a credit that includes use of credit cards, often a part of the way people are buying goods and services. Non-revolving credit does include some forms of consumer expenditure, particularly for vehicles about one of the bigger sources of non-revolving credit burden has been student loans. But what we can see is that revolving credit is becoming a small

736
01:05:29,920 --> 01:05:37,520
percentage of both overall consumer credit and by the way I want to point out an error in the

737
01:05:39,660 --> 01:05:46,900
this particular chart at the bottom when it shows what the two lines represent. The blue

738
01:05:46,900 --> 01:05:51,500
line is not the percentage of revolving. That should be the percentage of non revolving credit.

739
01:05:52,320 --> 01:05:59,440
But revolving credit as a percentage of overall credit and consumer credit and as a percentage

740
01:05:59,440 --> 01:06:02,860
each of non-revolving credit has been declining.

741
01:06:03,500 --> 01:06:07,100
Why that's happening, again, a subject to some speculation,

742
01:06:07,580 --> 01:06:10,300
and maybe the consumers are being a little bit more

743
01:06:10,300 --> 01:06:15,960
circumspect with their credit use because of maybe

744
01:06:15,960 --> 01:06:19,260
how they got burned during the great recession.

745
01:06:19,780 --> 01:06:23,380
It may be temporary, or it may be a permanent factor

746
01:06:23,380 --> 01:06:26,000
that the consumers are being a little better behaved.

747
01:06:26,000 --> 01:06:34,100
maybe the millennials and the newest generation are showing more restraint than baby boomers like me did.

748
01:06:35,240 --> 01:06:37,100
That's all the charts that I have.

749
01:06:37,200 --> 01:06:44,660
I'll be happy to answer any questions that you have before Dr. Mike probably takes over here.

750
01:06:45,620 --> 01:06:46,400
Any questions?

751
01:06:47,280 --> 01:06:49,180
Comments, Dr. Proceed.

752
01:06:49,780 --> 01:06:50,220
Okay.

753
01:06:50,340 --> 01:06:54,620
Now that with Fred has walked us through the national economy, I'd like to talk briefly

754
01:06:54,620 --> 01:06:57,460
about the state, the MSAs and the counties.

755
01:06:59,320 --> 01:07:04,500
Looking at a snapshot of where the economy is right now in the state and the MSAs and

756
01:07:04,500 --> 01:07:09,320
the trends, so where we've been and hopefully a picture of where we're going.

757
01:07:09,420 --> 01:07:15,260
Now we have a positive outlook for the state of Tennessee, consistent with what we've been

758
01:07:15,260 --> 01:07:16,400
seeing at the national level.

759
01:07:16,400 --> 01:07:20,440
we have low unemployment, we have a growing labor force, we have output that's rising.

760
01:07:21,140 --> 01:07:24,000
I think those things are going to continue. And even if a recession does come,

761
01:07:24,760 --> 01:07:29,860
I believe that will recover from quickly and will continue back on the long run trend of growth

762
01:07:29,860 --> 01:07:30,460
for this state.

763
01:07:33,520 --> 01:07:38,240
Here's the Tennessee civilian labor force going back almost two decades. You've

764
01:07:38,240 --> 01:07:42,980
seen there's some variability going back that long. Didn't dip that much in the great recession.

765
01:07:43,620 --> 01:07:49,580
But if you look back to the beginning of 2014 to present, you see some steady growths.

766
01:07:49,760 --> 01:07:53,540
It's a lot of growth here in the civilian labor force people are moving to Tennessee

767
01:07:53,540 --> 01:07:54,920
and entering the labor force.

768
01:07:56,060 --> 01:07:59,540
Not sure if this is sustainable in the long run because this is a big increase in just

769
01:07:59,540 --> 01:08:00,160
a few years.

770
01:08:00,760 --> 01:08:05,680
You may start to flatten out, but do you think that this is going to continue to grow because

771
01:08:05,680 --> 01:08:08,120
this is a state that people want to move to and live in.

772
01:08:08,680 --> 01:08:10,940
It's a lot of our attracting businesses, our attracting workers.

773
01:08:10,940 --> 01:08:13,640
I'm an example of that, moved here in 2016.

774
01:08:14,760 --> 01:08:17,280
Here we have 10 to see real domestic product,

775
01:08:17,680 --> 01:08:19,980
97 to 2018, so a little over two decades.

776
01:08:20,340 --> 01:08:23,280
You can see we had a small dip in the great recession,

777
01:08:23,280 --> 01:08:24,240
we were covered quickly,

778
01:08:24,520 --> 01:08:26,340
and we've been steadily growing ever since.

779
01:08:26,540 --> 01:08:28,980
So we're talking about back nine years here,

780
01:08:29,860 --> 01:08:30,460
steady growth.

781
01:08:31,400 --> 01:08:35,120
This will continue, we think, until people keep mentioning

782
01:08:35,120 --> 01:08:36,620
eventually there's gonna be a recession.

783
01:08:36,620 --> 01:08:38,760
We don't see one coming in the next year.

784
01:08:41,480 --> 01:08:45,160
But if we don't have one, we think the output will continue drawing.

785
01:08:46,040 --> 01:08:49,620
When it does come, there'll be a dip and then we'll end it back on the long-run trend.

786
01:08:52,040 --> 01:08:54,720
Here we have unemployment rate by Tennessee MSA.

787
01:08:54,880 --> 01:08:59,300
Now at the national level, unemployment rate is 3.7%, which is very good.

788
01:08:59,440 --> 01:09:00,720
And Tennessee is even better than that.

789
01:09:01,120 --> 01:09:02,700
For the state, we have 3.6.

790
01:09:03,620 --> 01:09:08,680
Now you can see here in Nashville, 2.9% employment that's extraordinarily low.

791
01:09:08,680 --> 01:09:10,340
and that's bringing down the average for the state.

792
01:09:11,140 --> 01:09:15,060
The next two lowest are Chattanooga and Maxwell, 3.5%.

793
01:09:15,760 --> 01:09:17,900
But there is a big difference between Nashville,

794
01:09:17,900 --> 01:09:19,300
for instance, and Clarksville.

795
01:09:19,440 --> 01:09:21,780
Clarksville is the maximum 4.5%.

796
01:09:21,780 --> 01:09:23,580
Relatively high compared to Nashville,

797
01:09:23,600 --> 01:09:27,240
but still very low, 4.5% is a low unemployment rate.

798
01:09:27,780 --> 01:09:29,220
When you're looking at rates like this,

799
01:09:29,860 --> 01:09:31,980
you're probably dealing with just-friictional employment.

800
01:09:31,980 --> 01:09:34,380
This is people that are between jobs,

801
01:09:34,740 --> 01:09:37,560
the quater fired, and they're looking for a new job.

802
01:09:37,560 --> 01:09:40,680
Now, this chart shows the relative importance of Nashville.

803
01:09:40,900 --> 01:09:44,840
The MSA is with the economic engines of the state, and Nashville is the main driver

804
01:09:44,840 --> 01:09:45,220
of that.

805
01:09:45,780 --> 01:09:53,600
You can see by non-Farm employees, Nashville is the largest by far Memphis is a second

806
01:09:53,600 --> 01:09:53,940
place.

807
01:09:54,140 --> 01:09:55,620
There are about two-thirds of Nashville.

808
01:09:56,360 --> 01:09:59,700
And then everybody else is pretty small compared to Nashville.

809
01:10:00,000 --> 01:10:14,440
Although, if you look at Eastern Tennessee, if you combine all those MSAs together, you do get another Nashville. Do you consider everything from Kingsport to Knoxville to Chattanooga? We add those. That's almost another Nashville by itself. This just spread out a little further.

810
01:10:18,030 --> 01:10:29,750
In this pie chart does a good job of showing the relative importance of Nashville among the MSAs. Labor force by Tennessee MSA, Nashville is 36% of that. Memphis is another big chunk, Knoxville Chattanooga.

811
01:10:29,750 --> 01:10:36,630
Now, the smallest six by themselves aren't much, but they add up.

812
01:10:37,370 --> 01:10:39,090
Altogether, they're larger than Knoxville.

813
01:10:39,210 --> 01:10:41,010
They add up to 17%.

814
01:10:42,580 --> 01:10:45,240
Average weekly earnings by Tennessee MSA.

815
01:10:45,520 --> 01:10:51,260
Ranges from 983 for Nashville to 649 for Kingsport, so that's a big difference.

816
01:10:51,960 --> 01:10:56,880
One thing that we get from looking at this chart is we see the accumulation of physical

817
01:10:56,880 --> 01:11:02,980
capital and human capital in Nashville, leading to a higher labor productivity there.

818
01:11:03,700 --> 01:11:07,580
So we have a lot of business boom in here in Nashville.

819
01:11:08,340 --> 01:11:14,980
Now this takes us to counties. Percent changes in county employment. Red is negative and

820
01:11:14,980 --> 01:11:19,560
then all the blues are positive, ranging from light-blooded dark blue, dark blue is the most.

821
01:11:20,580 --> 01:11:25,560
And you can see the impact that Nashville and Nashville are having on the state. So the

822
01:11:25,560 --> 01:11:32,980
Nashville and Nashville MSAs have very strong increases in county employment and it's

823
01:11:32,980 --> 01:11:37,400
having this radiating effect. There's a contagion there where it's spreading to counties

824
01:11:37,400 --> 01:11:43,380
that are adjacent to the MSAs, but not part of the MSAs. And we have a few patches of

825
01:11:43,380 --> 01:11:47,520
red here. Those are all rural counties. So those are counties that are outside of the MSAs.

826
01:11:50,970 --> 01:11:54,710
Changes in county labor force. Again, you can see the effect that Nashville is having

827
01:11:54,710 --> 01:11:57,170
in the National MSA is growing the labor force

828
01:11:57,170 --> 01:11:58,110
in adjacent counties.

829
01:11:58,330 --> 01:12:02,490
So you have a very strong growth here in middle Tennessee.

830
01:12:03,150 --> 01:12:06,190
People are, it's probably a combination of factors here,

831
01:12:06,290 --> 01:12:07,290
so there's people that are leaving

832
01:12:07,290 --> 01:12:09,210
the rural counties and moving to the big city.

833
01:12:09,630 --> 01:12:11,610
And we're also attracting workers from out of state.

834
01:12:12,710 --> 01:12:15,430
There's more red in this map than in the previous one.

835
01:12:15,450 --> 01:12:17,210
So we have some counties that are

836
01:12:17,210 --> 01:12:18,650
in decline by this statistic.

837
01:12:19,090 --> 01:12:20,590
These are all, again, rural counties

838
01:12:20,590 --> 01:12:22,630
with the exception of Polt County down there.

839
01:12:25,610 --> 01:12:29,570
changes in county state sales tax collections, you see a bunch of patches of

840
01:12:29,570 --> 01:12:33,110
bread throughout as a negative that's expected with the changes in the tax law

841
01:12:33,110 --> 01:12:37,570
that we've seen at the state level but still a good amount of blue in this

842
01:12:37,570 --> 01:12:42,190
chart so even with the decrease in sales tax state sales tax collections are

843
01:12:42,190 --> 01:12:48,750
going up in most counties as the economy grows. Now county local sales tax

844
01:12:48,750 --> 01:12:54,230
collections is what you'd expect there's no change to the law in this case and you

845
01:12:54,230 --> 01:12:58,470
We see a lot of dark blue, so the economy is growing and that's growing in revenue in

846
01:12:58,470 --> 01:12:59,890
most of the counties in the state.

847
01:13:00,370 --> 01:13:05,190
We still see a small number of red counties here, so there's a few that are in decline

848
01:13:05,810 --> 01:13:06,550
by this metric.

849
01:13:08,770 --> 01:13:15,430
Changes in county bank deposits, I focus here on, you look at the Memphis MSA Nashville

850
01:13:15,430 --> 01:13:16,050
and Knoxville.

851
01:13:16,050 --> 01:13:19,010
That's really where you're seeing inflows of financial capital.

852
01:13:19,170 --> 01:13:24,910
That's people moving in, businesses coming in, and bank deposits are accumulating, and

853
01:13:24,910 --> 01:13:27,730
and that's providing money for consumer loans and business loans.

854
01:13:27,890 --> 01:13:31,350
So that's a good sign of growth in West Tennessee,

855
01:13:31,510 --> 01:13:32,730
middle Tennessee, and East Tennessee.

856
01:13:32,970 --> 01:13:34,710
They're each sharing in this growth.

857
01:13:35,670 --> 01:13:37,230
This brings us to the revenue forecast.

858
01:13:37,990 --> 01:13:40,990
The largest component is sales and use.

859
01:13:41,130 --> 01:13:43,670
We're forecasting that we're going to break 9 billion

860
01:13:44,210 --> 01:13:45,310
for the next fiscal year.

861
01:13:45,310 --> 01:13:47,570
That's an increase in 2.26%.

862
01:13:48,290 --> 01:13:51,470
F&E, the next largest, we're predicting a more bold

863
01:13:51,470 --> 01:13:53,550
4.31% increase in net.

864
01:13:53,550 --> 01:13:59,030
But gasoline tax, of course, is going up to do the changes in the tax law, and let's see,

865
01:13:59,090 --> 01:14:03,410
income tax is falling, as expected, inheritance tax is being phased out.

866
01:14:04,090 --> 01:14:11,510
In all, we're forecasting a little over $14.8 billion for the next fiscal year, a 2.78% increase.

867
01:14:11,770 --> 01:14:19,290
Now, I do need to point out the footnotes on sales and use, and FNE, I think it has a privilege tax.

868
01:14:19,290 --> 01:14:25,350
So that takes out, let's see, about $160 million in earmarked funds.

869
01:14:25,430 --> 01:14:30,550
If you add that back in, that takes us really close to where Dr. Fox is for his revenue

870
01:14:30,550 --> 01:14:30,970
estimates.

871
01:14:31,210 --> 01:14:37,450
So that would break $15 billion for next year, and that'd be a higher percentage increase.

872
01:14:39,110 --> 01:14:41,930
Now, this last slide, I'll just skip, let's provide it for your convenience.

873
01:14:57,180 --> 01:14:58,640
So we will assume there are no questions?

874
01:14:59,180 --> 01:14:59,860
No, no, not.

875
01:15:00,080 --> 01:15:12,800
Let me just make sure I've got this for current year, almost 2.8. And for the following year, 2.7.

876
01:15:13,760 --> 01:15:18,500
Right, right, so. And this, this,

877
01:15:21,350 --> 01:15:30,790
that didn't, you hadn't broken out the general fund from the, the total revenue. We need to do, we need to do that.

878
01:15:30,790 --> 01:15:32,170
I believe the last page may do that.

879
01:15:32,350 --> 01:15:33,710
Oh, you have the last page does that?

880
01:15:33,910 --> 01:15:34,050
Yeah.

881
01:15:35,150 --> 01:15:36,170
Okay, I'm sorry.

882
01:15:36,350 --> 01:15:38,010
I haven't seen it.

883
01:15:39,330 --> 01:15:39,770
Okay.

884
01:15:40,750 --> 01:15:42,210
Okay, yeah, it doesn't.

885
01:15:45,430 --> 01:15:47,550
Now, let's talk about lead indicators.

886
01:15:53,200 --> 01:15:56,700
One of the lead indicators we have is the stock market.

887
01:15:58,850 --> 01:16:00,790
It's down to about 500 points right now.

888
01:16:02,170 --> 01:16:04,850
Does that cause any concern?

889
01:16:04,850 --> 01:16:05,870
I'm

890
01:16:07,920 --> 01:16:13,080
not a finance guy, I'm an economist, it's certainly something that I would be concerned

891
01:16:13,080 --> 01:16:17,900
about if I had a whole lot of money invested in the market, but the market has been so

892
01:16:18,540 --> 01:16:26,500
thrown around by all sorts of considerations of what's happening with technology and issues

893
01:16:26,500 --> 01:16:27,140
like that.

894
01:16:27,460 --> 01:16:34,860
I'm not sure how much I would place in terms of that being a bad indicator of the future

895
01:16:34,860 --> 01:16:35,680
of the economy.

896
01:16:42,580 --> 01:16:47,580
I'm not sure about that when I'll refer to my colleagues here on that.

897
01:16:50,540 --> 01:16:52,360
What about housing starts?

898
01:16:53,060 --> 01:16:56,480
Housing starts, I think, is one that is a concern.

899
01:16:57,260 --> 01:17:06,720
I recently attended a public program presented by Ms. Grafie's boss, Raphael Bostic.

900
01:17:06,720 --> 01:17:10,680
And one of the things that he mentioned was that, of course,

901
01:17:10,880 --> 01:17:14,500
Dr. Postic is a well-known expert on housing.

902
01:17:15,160 --> 01:17:17,820
And he said, usually, we used to think of the housing market

903
01:17:17,820 --> 01:17:21,700
and housing statistics as being a lagging indicator of economic conditions.

904
01:17:22,420 --> 01:17:26,120
But more recently, and I'm not sure how far back he goes on this,

905
01:17:26,200 --> 01:17:27,480
but I think it's been considerable.

906
01:17:28,140 --> 01:17:30,680
We've seen housing as more of a leading indicator.

907
01:17:31,120 --> 01:17:33,040
So that is something I'm concerned about.

908
01:17:33,040 --> 01:17:41,940
The decline that I pointed out with housing starts and so forth, I think maybe something to keep an eye on.

909
01:17:42,200 --> 01:17:53,520
I'm just hopeful that what Joe said about, you know, if we do have a recession, we're relatively shallow and relatively brief.

910
01:17:54,160 --> 01:17:57,120
But if there is a recession, if there is.

911
01:17:57,920 --> 01:18:07,180
But again, I don't see any signs of that looking at other indicators, like I mentioned, new claims for unemployment benefits have had a pretty good right.

912
01:18:07,460 --> 01:18:09,400
There's nothing there that suggests that.

913
01:18:10,220 --> 01:18:12,140
So we've talked about the current year.

914
01:18:12,600 --> 01:18:15,300
The likelihood of a recession is fairly low.

915
01:18:15,400 --> 01:18:16,260
Very low, I believe.

916
01:18:17,960 --> 01:18:24,240
And when you say the current year, I assume you mean the year when you're in right now 2019 because there's not much left to this year.

917
01:18:27,920 --> 01:18:33,740
Thank you, Mr. Comptroller. Thank y'all very much for your presentation. It's very

918
01:18:33,740 --> 01:18:39,140
helpful all of them have been and y'all have touched on different points and we appreciate

919
01:18:39,140 --> 01:18:47,160
that. Y'all are more optimistic about the economy and the continuance of it. Well, how

920
01:18:47,160 --> 01:18:54,840
me with your insight and knowledge of what you viewed to drive consumer confidence?

921
01:18:55,900 --> 01:18:57,520
Is it the market?

922
01:18:59,080 --> 01:19:07,260
To me, there seems to be certainly a correlation that is there in the volatility over time

923
01:19:07,760 --> 01:19:11,340
to create some uncertainty with the consumer.

924
01:19:11,340 --> 01:19:18,440
How would you play that back to us with our dependence upon sales tax, which is dependent

925
01:19:18,440 --> 01:19:21,280
obviously on consumer consumption?

926
01:19:21,640 --> 01:19:24,520
So can you tie that together for me?

927
01:19:24,580 --> 01:19:28,000
How should we be viewing that today?

928
01:19:28,460 --> 01:19:33,460
Well, the uptick in consumer confidence was a long time coming.

929
01:19:33,800 --> 01:19:37,560
I think it took a while to get over the shock of the Great Recession.

930
01:19:37,560 --> 01:19:43,740
And if we look at consumer confidence as being something that is very strong, the indexes

931
01:19:43,740 --> 01:19:52,560
of consumer confidence from the conference board as well as the one that Ms. Grafie mentioned,

932
01:19:53,560 --> 01:19:56,160
indicate that consumers are feeling pretty good.

933
01:19:56,160 --> 01:19:59,840
how they translate into consumer spending is another

934
01:20:00,560 --> 01:20:29,900
But I think the other thing is provided a lot of confidence to consumers has been the job market. More so than I believe the stock market is done. I think the stock market may reflect as I was asked about the opposite. People aren't confident then the stock market drops, but I think the consumer confidence seems to come from the job market. And the opportunity for improvements in employment, we're starting to see wages increase, inflation is still relatively low.

935
01:20:29,900 --> 01:20:34,080
So that's a pretty good, pretty good place to pay for consumers right now.

936
01:20:34,800 --> 01:20:41,620
With regard to how that translates into the sorts of things that generate tax revenue,

937
01:20:41,860 --> 01:20:46,060
well, consumer spend and we saw the data on that from a previous presentation.

938
01:20:48,660 --> 01:20:54,080
Maybe retail sales aren't going to be quite as strong as we typically expect in a period

939
01:20:54,080 --> 01:20:59,200
of high consumer confidence for reasons that I mentioned that maybe consumers are being

940
01:20:59,200 --> 01:21:00,720
a little bit more circumstances back.

941
01:21:01,700 --> 01:21:03,040
Okay, thank you.

942
01:21:03,560 --> 01:21:04,840
Thank you, Mr. Caldwell.

943
01:21:05,340 --> 01:21:06,200
Other questions?

944
01:21:07,160 --> 01:21:07,280
No.

945
01:21:07,980 --> 01:21:09,200
Thank y'all very much.

946
01:21:09,760 --> 01:21:10,400
Thank you very

947
01:21:27,330 --> 01:21:28,410
much.

948
01:21:43,520 --> 01:21:45,540
Okay, commissioners, introduce yourself and proceed.

949
01:21:46,340 --> 01:21:49,780
Thank you, Mr. Comptroller and members of the board.

950
01:21:50,080 --> 01:21:51,660
I'm David Jergano, commissioner of revenue.

951
01:21:52,260 --> 01:21:54,760
On my left is Kristen Lotts, our director of research.

952
01:21:55,260 --> 01:21:57,240
You know, my ride is Dr. Michael House,

953
01:21:57,520 --> 01:21:59,260
our staff economist at the department.

954
01:22:00,000 --> 01:22:05,180
We'll be fairly brief, a lot of the points as previously said have already been made.

955
01:22:05,860 --> 01:22:09,580
We appreciate the opportunity to be here to present our estimates if there are any questions

956
01:22:09,580 --> 01:22:14,240
along the way or at the end, certainly happy to answer those, and otherwise I'll turn

957
01:22:14,240 --> 01:22:15,900
over to Dr. Haust to make our presentation.

958
01:22:18,240 --> 01:22:18,580
Good morning.

959
01:22:19,980 --> 01:22:24,100
We're going to spend some time looking at Tennessee indicators on how that will impact,

960
01:22:26,280 --> 01:22:26,820
has

961
01:22:28,360 --> 01:22:32,260
discuss F&E volatility, again, before moving to our revenue estimates.

962
01:22:33,780 --> 01:22:37,760
Looking back at fiscal year 2018, it was a pretty strong growth.

963
01:22:38,420 --> 01:22:43,520
Sales and use grew by three and a quarter percent, even with the reduction in the sales tax

964
01:22:43,520 --> 01:22:44,040
for food.

965
01:22:44,640 --> 01:22:49,660
So if you took out that legislative impact, the underlying growth was up over five percent

966
01:22:49,660 --> 01:22:58,120
for sales tax. Gasoline tax, of course, grew over 20% primarily due to the improved act,

967
01:22:58,600 --> 01:23:05,500
and then also saw F&E tax reduced by 1.89%, which sounds bad, but it's actually good news

968
01:23:05,500 --> 01:23:12,500
compared to the one-time events we had in FY17, which inflated that number. And so the underlying growth

969
01:23:13,220 --> 01:23:18,700
in F&E tax collections for FY18 is actually over 6%, taking out legislative and one-time impacts.

970
01:23:20,140 --> 01:23:21,420
over FY17.

971
01:23:24,180 --> 01:23:26,280
Moving to housing for Tennessee,

972
01:23:26,440 --> 01:23:28,060
according to data from the Ocensus Bureau,

973
01:23:28,380 --> 01:23:31,140
housing starts increased 5.5% in FY18,

974
01:23:32,280 --> 01:23:34,440
and by the end of FY19 Moody's forecast,

975
01:23:35,120 --> 01:23:38,200
the housing starts again increased 4.6%

976
01:23:38,200 --> 01:23:42,680
a year earlier, led by a strong healthy growth

977
01:23:42,680 --> 01:23:46,600
in single-family housing due to population growth

978
01:23:46,600 --> 01:23:47,820
running ahead of the national average

979
01:23:48,280 --> 01:23:50,140
and rising incomes that are promoting

980
01:23:50,140 --> 01:23:56,880
housing household formation and house prices as mentioned earlier are also increasing faster

981
01:23:56,880 --> 01:23:57,440
than nationally.

982
01:24:00,380 --> 01:24:04,100
We're generally going to skip these tax implications slides but I do want to note for

983
01:24:04,100 --> 01:24:09,880
real-to-transfer and real-to mortgage in October there was an air with one large county in Tennessee

984
01:24:09,880 --> 01:24:16,280
and so those numbers should be coming in either this month or next month but those are not

985
01:24:16,280 --> 01:24:20,040
in line with the actual collections we expect for October.

986
01:24:20,040 --> 01:24:21,180
Moving

987
01:24:24,120 --> 01:24:33,420
to the automotive sector, Tennessee registrations increased by 4.3% on FY18, and by the end of this current fiscal year,

988
01:24:34,000 --> 01:24:38,440
registrations are expected to increase by 2.5% from a year earlier.

989
01:24:42,010 --> 01:24:54,210
Moving to slide 7, sales tax, collections grew by 3.4%, and FY18, again, I'll mention that underlying growth is over 5% taking out the food tax decrease.

990
01:24:55,050 --> 01:24:59,970
and by the end of fiscal year 19 sales tax collections are expected to increase.

991
01:25:01,180 --> 01:25:09,160
We've seen as Commissioner Martin noted strong sales tax in the first quarter, about over 5% for F-19.

992
01:25:13,680 --> 01:25:19,500
Motive fuel collections had a strong year, thanks to changes in improved act, up over 20%.

993
01:25:20,320 --> 01:25:29,180
And by the end of fiscal year, 19 collections are expected to increase an additional 7% from a year earlier.

994
01:25:29,180 --> 01:25:30,860
some of the improved act.

995
01:25:31,880 --> 01:25:33,860
Tax changes keep rolling in.

996
01:25:38,060 --> 01:25:39,000
Moving to slide 11.

997
01:25:39,380 --> 01:25:42,820
This is slide on the Tennessee tax volatility comparison,

998
01:25:43,140 --> 01:25:46,400
which looks at the rolling 10-year standard deviation

999
01:25:46,400 --> 01:25:50,780
of percentage change in F&E sales and total tax collections

1000
01:25:50,780 --> 01:25:53,360
as well as for GDP and CPI.

1001
01:25:54,260 --> 01:25:57,680
Each point on the line represents the standard deviation

1002
01:25:57,680 --> 01:26:00,320
of percentage changes for the 10 previous years.

1003
01:26:01,000 --> 01:26:08,030
And so we compare this, comparing standard deviations across these taxes, we can see how

1004
01:26:08,030 --> 01:26:12,590
the volatility between the taxes and by comparing across time, we can see whether that volatility

1005
01:26:12,590 --> 01:26:13,910
is increasing or decreasing.

1006
01:26:14,970 --> 01:26:19,110
And as we can see, F&E collections are extremely volatile, but they did dip down a little bit

1007
01:26:19,110 --> 01:26:19,430
this year.

1008
01:26:20,410 --> 01:26:26,070
On the 10 year period ending, FY18, F&E taxes were over three times as volatile as the total

1009
01:26:26,070 --> 01:26:29,850
tax collections, and almost four times as volatile as sales tax collections.

1010
01:26:31,010 --> 01:26:36,930
This volatility is due to several factors including the timing of tax payments, the usage

1011
01:26:36,930 --> 01:26:41,570
of tax loss and credit carry forwards, and refunds of taxpayer over payments associated

1012
01:26:41,570 --> 01:26:42,430
with the prior years.

1013
01:26:44,250 --> 01:26:48,930
This volatility is further enhanced by the fact that a large percentage of the tax is paid

1014
01:26:48,930 --> 01:26:58,030
by a small number of taxpayers of the over 180,000 taxpayers filed returns in FY17, 1 percent

1015
01:26:58,030 --> 01:27:03,970
of them pays approximately 65% of the sales of the state's total of any collections.

1016
01:27:07,280 --> 01:27:12,460
Moving on to Tennessee employment, data from the Bureau of Labor Statistics shows strong

1017
01:27:12,460 --> 01:27:15,760
growth and employment which is expected to continue over the forecast horizon.

1018
01:27:17,100 --> 01:27:21,140
Professional and business services will power job gains in Tennessee, companies like Philips

1019
01:27:21,140 --> 01:27:27,880
and Amazon moving, creating jobs here in the state as well, help those forecasts moving forward.

1020
01:27:27,880 --> 01:27:38,460
Personal income data from the BEA shows FO-18 personal income growth of 2.27% and are expecting a similar year.

1021
01:27:39,440 --> 01:27:49,820
Fiscal year 19 led by wages growth and wages and salary and average hourly earnings and tendency well behind the national average are rising faster than the rest of the country.

1022
01:27:52,870 --> 01:27:56,530
Part of our estimating process especially for F&Es looking at non-recuring items.

1023
01:27:57,590 --> 01:28:02,770
And our strategy for doing this is by analyzing the daily tax collections relative to previous

1024
01:28:02,770 --> 01:28:06,510
years, and then identifying extraordinary or unusual payments.

1025
01:28:07,710 --> 01:28:12,590
And then we focus the analysis at the taxpayer level to identify the nature of the payments

1026
01:28:12,590 --> 01:28:14,910
and possible implications for collections on the month.

1027
01:28:14,910 --> 01:28:20,450
And we maintain a list of this in the past that we use in making our estimates for the future.

1028
01:28:21,850 --> 01:28:27,890
And as of right now we know of no non-recurring items included in our estimates for fiscal year

1029
01:28:27,890 --> 01:28:32,670
19 and we're not aware of any of their upcoming that would affect 19 and also our estimates

1030
01:28:33,060 --> 01:28:36,430
do not include any potential or proposed rule changes.

1031
01:28:42,100 --> 01:28:45,900
Now we'd like to turn to our estimates, revised estimates for 19 and estimates for 20.

1032
01:28:47,670 --> 01:28:51,400
The original estimates of $14.6 billion are being revised.

1033
01:28:51,400 --> 01:28:57,920
This arsements revises up to just over 15 million led by growth and sales tax of 4.4%

1034
01:28:59,140 --> 01:29:03,700
in growth and the fuel taxes as well, thanks to the improved act.

1035
01:29:04,760 --> 01:29:09,580
And then arsements for, excuse me, a general fund growth of 3.97%.

1036
01:29:10,280 --> 01:29:17,240
Estimates for fiscal year 20, show collections of over 15.6 billion and 3.71% growth.

1037
01:29:17,240 --> 01:29:22,720
with, again, my by-growth in sales news, some of the fuels in F&E as well, with a general

1038
01:29:22,720 --> 01:29:24,760
fun growth of 3.60 percent.

1039
01:29:29,400 --> 01:29:32,420
At this point, we gladly answer any questions that you have.

1040
01:29:33,880 --> 01:29:40,900
I continually have this question is that the revenue, you know, Tennessee is pretty much

1041
01:29:40,900 --> 01:29:49,200
a sales tax date, and our revenue projections are higher than the growth in personal income,

1042
01:29:49,200 --> 01:29:52,400
And that seems to all that presenters.

1043
01:29:52,860 --> 01:29:53,820
Why is that?

1044
01:29:54,720 --> 01:29:59,820
I think tourism and a lot of people come in and visiting and spending dollars that aren't necessarily shown.

1045
01:30:00,000 --> 01:30:13,780
Ten of the income, just the growth and tourism and people spending more than that has to be, it would have to be. Right. Yeah. So it would be out of state spending in Tennessee or something of that sort.

1046
01:30:16,540 --> 01:30:19,040
Traditionally, happened and I can't quite figure it out.

1047
01:30:22,630 --> 01:30:23,650
Other questions.

1048
01:30:25,290 --> 01:30:25,970
Yes sir.

1049
01:30:26,390 --> 01:30:33,830
Do you have any comments on the variances between your projections and what you heard from previous presenters and everything in the comments on that?

1050
01:30:36,420 --> 01:30:49,040
I'm not sure of any major, major differences I think might be a little bit higher on sales tax certainly than in Doctor Fox and some of the others although I think

1051
01:30:50,180 --> 01:31:09,820
It's certainly possible we're up over 5% already in the first quarter, and it wouldn't take three, mid three, high 3% the rest of the year to reach the 4.4% we have for FY19, and I certainly think that's a reasonable, reasonable expectation for the rest of the fiscal year.

1052
01:31:14,570 --> 01:31:20,470
And most of these estimates are really based on your experience in your actual collections.

1053
01:31:20,990 --> 01:31:27,850
This is a collection based estimate, really, is not looking towards the future about the economic factors of those sort of things.

1054
01:31:28,370 --> 01:31:28,530
That's correct.

1055
01:31:29,490 --> 01:31:31,910
Okay, that's what I was just expecting.

1056
01:31:32,250 --> 01:31:32,790
Other questions?

1057
01:31:33,490 --> 01:31:33,670
No.

1058
01:31:34,210 --> 01:31:35,530
Well, thank you all very much.

1059
01:31:36,090 --> 01:31:36,510
Thank you.

1060
01:31:41,000 --> 01:31:41,440
Mr. Gar,

1061
01:32:20,920 --> 01:32:21,380
proceed.

1062
01:32:27,090 --> 01:32:34,950
members of the funding board, thank you for the opportunity to present to you our tax revenue estimates for fiscal year 19, fiscal year 20.

1063
01:32:35,990 --> 01:32:43,750
My name is Boyan Savage, I'm the chief economist at the fiscal review committee and to my left is Robert Curry, he's the assistant director of the committee.

1064
01:32:45,130 --> 01:32:52,550
A lot of our talking points have already been presented to you so we'll try to go through these slides relatively quickly and not be too repetitive.

1065
01:32:52,550 --> 01:32:58,630
We would like to start with giving a general economic overview on how we see the economy

1066
01:32:59,180 --> 01:33:02,270
currently and where the economy is going in the midterm.

1067
01:33:03,610 --> 01:33:09,110
Economic growth continues to be on a strong path, and most of the economic indicators continue

1068
01:33:09,110 --> 01:33:10,250
to flash green.

1069
01:33:11,110 --> 01:33:17,290
We're currently in a period of solid GDP growth, strong consumer spending, robust job creation

1070
01:33:17,290 --> 01:33:22,710
supported by rising incomes, rising prices, and solid business investment.

1071
01:33:23,250 --> 01:33:29,090
The current unemployment rates are at or near all time highs, all time lows, and we expect

1072
01:33:29,090 --> 01:33:35,730
continuous declines as growth in the economy exceeds the sum of labor force and productivity

1073
01:33:35,730 --> 01:33:36,350
gains.

1074
01:33:37,490 --> 01:33:43,270
Consumers sentiment and business optimism are persistently at very high levels, and the

1075
01:33:43,270 --> 01:33:49,810
share of prime work in age adults and the labor force and with the job continues to grow.

1076
01:33:50,750 --> 01:33:55,910
Risks to the near term outlook are balanced and we appear to be slowly entering the

1077
01:33:55,910 --> 01:33:57,690
boom phase of the business cycle.

1078
01:33:58,510 --> 01:34:04,050
The longer term growth expectations are a bit more subdued and the combination of these

1079
01:34:04,050 --> 01:34:07,370
factors is where we see a little bit of a risk.

1080
01:34:08,190 --> 01:34:13,330
Based on the current economic conditions and expectations, the Federal Reserve is widely

1081
01:34:13,330 --> 01:34:17,570
expected to continue removing policy accommodations over the next few quarters.

1082
01:34:18,350 --> 01:34:24,210
December increases anticipated with three more likely increases in the interest rate targets

1083
01:34:24,210 --> 01:34:25,570
in 2019.

1084
01:34:26,430 --> 01:34:33,130
What this could mean in the short run is a continued but more modest economic growth.

1085
01:34:33,130 --> 01:34:39,830
However, navigating these waters of strong economic readings, potential slowdowns in the

1086
01:34:39,830 --> 01:34:46,110
midterm is difficult, and the rational policy making by the Federal Reserve today may

1087
01:34:46,110 --> 01:34:51,770
move the policy from accommodative to neutral and possibly even restrictive couple of years

1088
01:34:51,770 --> 01:34:52,450
down the road.

1089
01:34:53,150 --> 01:34:57,810
At that point, especially if there's another significant issue present in the economy, such

1090
01:34:57,810 --> 01:34:59,970
is the housing bubble into the...

1091
01:35:00,000 --> 01:35:07,660
2007, a significant slowdown or a session could happen. Now, just to be completely clear, we are

1092
01:35:07,660 --> 01:35:13,720
not forecasting a significant slowdown or a recession two years down the road. What we're

1093
01:35:13,720 --> 01:35:20,040
saying is that for maybe even the first time in this economic recovery, we see a clear

1094
01:35:20,040 --> 01:35:26,640
path of how this recovery could end. There are a couple of other smaller concerns housing

1095
01:35:26,640 --> 01:35:31,440
has been mentioned, trade disputes, of course, and demographics, and we may touch on those

1096
01:35:32,160 --> 01:35:33,120
throughout our presentation.

1097
01:35:35,320 --> 01:35:39,380
You've seen this information already, but just quickly GDP,

1098
01:35:39,760 --> 01:35:47,360
real GDP increased by 3.5% in quarter four, that was preceded by 4.25% increase in quarter two,

1099
01:35:47,580 --> 01:35:53,600
and these two quarters are the strongest back-to-back growth quarters in three years.

1100
01:35:53,600 --> 01:35:59,240
the increase in real GDP reflected positive contributions from personal

1101
01:35:59,240 --> 01:36:05,220
consumptions, government spending, state and local, as well as federal, and private

1102
01:36:05,220 --> 01:36:10,580
domestic investment, especially the private inventory investment. The growth

1103
01:36:10,580 --> 01:36:14,800
was partly offset by negative contributions from that exports and residential

1104
01:36:14,800 --> 01:36:19,920
fixed investments, and as it's been mentioned before, residential fixed

1105
01:36:19,920 --> 01:36:21,980
and investments have been struggling lately.

1106
01:36:22,320 --> 01:36:25,360
They've declined in five of the last six quarters.

1107
01:36:26,120 --> 01:36:31,160
Going forward, the real GDP estimates for a quarter four

1108
01:36:31,160 --> 01:36:35,380
of 2018 and calendar year 2019 are generally

1109
01:36:35,380 --> 01:36:37,480
around a 2.5%.

1110
01:36:39,560 --> 01:36:43,160
Real personal consumption expenditures increased by 3%

1111
01:36:43,160 --> 01:36:45,560
in September of this year and have generally stayed

1112
01:36:45,560 --> 01:36:48,980
between two and a half and 3% over the last couple of years.

1113
01:36:48,980 --> 01:36:54,600
consumption on goods has been increased at a greater rate since the last recession.

1114
01:36:54,820 --> 01:36:58,160
But it's also taken a greater hit during the economic downturn.

1115
01:36:58,960 --> 01:37:04,060
Service sector is larger, but we tax more goods under our sales tax.

1116
01:37:04,520 --> 01:37:07,740
So it's good to see continued strong growth in that area.

1117
01:37:08,940 --> 01:37:15,380
In fiscal year 18, our sales tax collections were comprised of 60% retail,

1118
01:37:15,380 --> 01:37:19,500
12% services and 28% from other sectors.

1119
01:37:21,340 --> 01:37:26,420
Real retail and food service sales are averaging about 3% over the last 12 months.

1120
01:37:27,180 --> 01:37:31,580
We are expecting to see pretty strong holiday sales this year as well.

1121
01:37:32,040 --> 01:37:37,500
According to the National Retail Foundation, holiday retail sales, excluding autos, gasoline

1122
01:37:37,500 --> 01:37:42,640
and restaurants are going to range between 4.3 and 4.8%.

1123
01:37:42,640 --> 01:37:48,780
It is, however, important to note that a lot of spending is done online and, as you know,

1124
01:37:49,080 --> 01:37:56,580
we are currently not taxing all of those transactions, but do want to point out that our estimates

1125
01:37:56,580 --> 01:38:00,300
that we are presenting to you today do not account for any such revenue.

1126
01:38:00,580 --> 01:38:05,480
So if that was to take place, it would be in addition to what we're showing today.

1127
01:38:05,480 --> 01:38:05,520
Okay.

1128
01:38:07,920 --> 01:38:14,980
These couple of pieces of information have also been talked about, but I do want

1129
01:38:14,980 --> 01:38:19,760
to touch on them real quickly. Consumer sentiment is very strong and we've seen continued

1130
01:38:19,760 --> 01:38:27,780
growth over the longer term. The sentiment so far has been higher than in any year since

1131
01:38:27,780 --> 01:38:34,380
2000 and most recent stock price declines, rising inflation and interest rates, and even

1132
01:38:34,380 --> 01:38:39,080
negative midterm election campaigns have not significantly undermined such confidence.

1133
01:38:39,840 --> 01:38:45,700
And we do believe that with recent positive signs regarding wage growth and prevailing

1134
01:38:45,700 --> 01:38:53,020
belief that the economy will produce robust job growth in the year to follow are supporting

1135
01:38:53,020 --> 01:38:57,960
this confidence and that's the main reason why it's remaining at such elevated levels.

1136
01:38:57,960 --> 01:39:04,960
Small business optimism index has also been very high, it has increased significantly

1137
01:39:04,960 --> 01:39:09,980
after the presidential election in November of 2016 and it has remained at those high

1138
01:39:09,980 --> 01:39:19,400
levels since the September reading of 107.8 is the third highest reading in the survey's

1139
01:39:19,400 --> 01:39:20,620
45 year history.

1140
01:39:21,560 --> 01:39:27,160
And it's been mentioned that small businesses according to NFIB have really struggling

1141
01:39:27,160 --> 01:39:39,720
to find workers, 87% of them are reporting few or no qualified applicants, 38% of them reported their job openings that they could not fill during the period.

1142
01:39:40,320 --> 01:39:46,580
And so in order to face these labor force challenges, businesses are increasing compensation.

1143
01:39:49,300 --> 01:39:55,280
Stock market as a leading indicator of the economy could be useful but should be used with some caution.

1144
01:39:55,280 --> 01:39:59,960
The market has previously generated false signals, for example, the 1990s.

1145
01:40:00,000 --> 01:40:07,320
87. Market crash was during an economic expansion. As you can see, over the last eight years, we've seen

1146
01:40:07,320 --> 01:40:15,620
relatively steady growth with some relatively minor corrections and downturns. Of course, we're

1147
01:40:15,620 --> 01:40:21,360
in one right now. There are many reasons that you could possibly attribute to that. We think

1148
01:40:21,360 --> 01:40:28,480
big parts, or maybe a reaction to a rise in interest rates, some struggles in the tech sector,

1149
01:40:29,020 --> 01:40:34,620
and some uncertainty perhaps with a recent midterm election. So we're hoping that

1150
01:40:34,620 --> 01:40:38,620
the stock market will bounce back, but significantly in the months to come.

1151
01:40:41,120 --> 01:40:45,180
Other sector has also been talked about, but I would like to point out that just for context,

1152
01:40:45,480 --> 01:40:53,000
last year we collected about 850 million in sales taxes from motor vehicle dealers only. So

1153
01:40:53,000 --> 01:40:56,800
but collections from gasoline stations or service stations.

1154
01:40:57,480 --> 01:41:00,480
So it's easy to see how shifts in this market

1155
01:41:00,480 --> 01:41:03,000
would have a substantial impact on our tax collections.

1156
01:41:03,680 --> 01:41:07,880
It does appear that light vehicle sales are leveling off.

1157
01:41:08,060 --> 01:41:10,480
We're expecting them to be roughly in the same level

1158
01:41:10,480 --> 01:41:12,560
as last year, about 17 million.

1159
01:41:13,200 --> 01:41:16,900
And that level should remain in 2019.

1160
01:41:18,300 --> 01:41:20,880
Light trucks continue to outsell cars.

1161
01:41:21,660 --> 01:41:28,200
They currently represent about 69% or 70% of total light vehicle sales, but that's also very

1162
01:41:28,200 --> 01:41:29,460
depending on the gas prices.

1163
01:41:29,640 --> 01:41:33,500
The lower the gas prices, the higher the light truck share of the total vehicle sales.

1164
01:41:34,560 --> 01:41:40,380
And speaking of the gas prices, there have been some developments in the oil markets recently.

1165
01:41:40,980 --> 01:41:47,600
As you can see, after significant declines during most of 2014 and 2015, when all prices

1166
01:41:47,600 --> 01:41:52,620
is fell from over $100 per barrel to about $30 per barrel.

1167
01:41:53,520 --> 01:42:00,640
We have seen a steady continuous incline, especially since mid-2017, up to mid to high

1168
01:42:00,640 --> 01:42:02,060
70s this year.

1169
01:42:02,540 --> 01:42:07,860
However, since the beginning of October of this year, old prices have decreased by close

1170
01:42:07,860 --> 01:42:10,520
to 30% and are currently in mid-50s.

1171
01:42:11,420 --> 01:42:15,000
So what's the reason behind this price decline?

1172
01:42:15,000 --> 01:42:17,940
Well, we believe it's a simply supply and demand.

1173
01:42:18,940 --> 01:42:24,120
Iranian sanctions were supposed to were expected to lower the supply of oil significantly

1174
01:42:25,080 --> 01:42:30,000
to counter those sanctions many countries, many producers started pumping more oil.

1175
01:42:30,460 --> 01:42:35,960
So we have a situation where drilling activity in the U.S. is at the highest level since March

1176
01:42:35,960 --> 01:42:42,980
of 2015, OPEC countries, their output is at the high since 2016.

1177
01:42:42,980 --> 01:42:48,360
I mean, and also a situation where the U.S. has provided waivers to some nations to

1178
01:42:48,360 --> 01:42:50,440
continue buying Iranian oil.

1179
01:42:50,760 --> 01:42:52,880
So currently we have an oversupply of oil.

1180
01:42:53,580 --> 01:42:55,900
There's also concerns with the demand.

1181
01:42:56,220 --> 01:43:01,780
So what's ahead of us in this market will possible oil supply cuts.

1182
01:43:02,600 --> 01:43:06,940
Opic countries and their allies are meeting at the beginning of December to discuss this.

1183
01:43:06,940 --> 01:43:14,860
There seems to be an understanding that the oversupply will continue to 2019 if no cuts

1184
01:43:14,860 --> 01:43:15,820
to supplies are made.

1185
01:43:17,360 --> 01:43:20,080
We've talked about the housing sector already.

1186
01:43:20,400 --> 01:43:23,940
We do share some of the concerns, especially regarding new home sales.

1187
01:43:24,520 --> 01:43:27,840
One thing to watch going forward will be housing inventory.

1188
01:43:28,980 --> 01:43:33,600
And we are also seeing some slowdown in price appreciation.

1189
01:43:33,600 --> 01:43:37,360
Currently, prices are about 6% year-over-year.

1190
01:43:38,880 --> 01:43:43,620
There are indicators that this will slow down to possibly about 4% in the next year.

1191
01:43:47,490 --> 01:43:52,910
So moving over to the employment situation, this is a simple graph and it just shows

1192
01:43:52,910 --> 01:43:56,850
the quarterly unemployment rate relative to its three-year moving average.

1193
01:43:57,030 --> 01:43:58,930
So we're basically just looking at trend lines.

1194
01:43:58,930 --> 01:44:06,410
There's not too much meaning behind it other than when an economy in this case unemployment

1195
01:44:06,410 --> 01:44:12,410
enters a downturn, we expect the shorter term data to react quicker.

1196
01:44:12,950 --> 01:44:19,870
So what we find interesting is that as soon as the quarterly rate crosses over that three

1197
01:44:19,870 --> 01:44:27,390
year moving average, an official recession follows, and this relationship carries on for multiple

1198
01:44:27,390 --> 01:44:28,190
recessions.

1199
01:44:28,190 --> 01:44:31,750
So the red line here shows the estimates through 2021.

1200
01:44:32,330 --> 01:44:38,190
We are not seeing those two lines crossing, but of course there are some, there's a margin

1201
01:44:38,190 --> 01:44:44,190
or error of error with these estimates, and we do see a potential for a beginning of

1202
01:44:44,190 --> 01:44:44,950
a not turned there.

1203
01:44:47,310 --> 01:44:53,590
Unemployment rates are currently at historic lows, so the labor market is very tight.

1204
01:44:54,650 --> 01:44:59,770
Labor Force Participation Rate has been relatively flat over the last few years, around 62.

1205
01:45:01,900 --> 01:45:26,960
It's been preceded by many years of declining rates due to cyclical reasons such as recession as well as demographic reasons such as age in population and younger people stay in school longer. The Bureau of Labor Statistics estimates this rate to decline to around 61% by 2020. However, if we look at the labor force participation rate for the prime work in age groups,

1206
01:45:26,960 --> 01:45:30,320
So those people between 25 and 54 years of age,

1207
01:45:30,840 --> 01:45:32,820
the picture changes a little bit.

1208
01:45:33,140 --> 01:45:35,920
Those participation rates have been steadily increasing

1209
01:45:35,920 --> 01:45:39,860
since late 2015 and are approaching levels

1210
01:45:39,860 --> 01:45:41,720
that we've seen during the previous cycle.

1211
01:45:42,760 --> 01:45:46,260
And these are generally speaking, higher spending age groups

1212
01:45:46,260 --> 01:45:50,140
that many of these individuals will be starting families,

1213
01:45:50,380 --> 01:45:52,180
having children, hopefully purchasing homes.

1214
01:45:53,340 --> 01:45:55,980
It is expected that this participation rate

1215
01:45:55,980 --> 01:45:57,900
might move up some more in the near future.

1216
01:45:59,260 --> 01:46:04,760
The next couple of slides show information that has been presented to you before this

1217
01:46:04,760 --> 01:46:12,840
is just the breakdown by job growth for the U.S. and Tennessee by industry and once

1218
01:46:12,840 --> 01:46:19,600
again in Tennessee, we have added 63,900 jobs over the last 12 months, that is 2.1 percent

1219
01:46:19,600 --> 01:46:24,580
growth and a lot of that has been thanks to leisure and hospitality.

1220
01:46:24,580 --> 01:46:25,680
We

1221
01:46:28,080 --> 01:46:35,120
find this graph very interesting and shows job openings and unemployment levels in the U.S.

1222
01:46:36,040 --> 01:46:44,280
And what we find most interesting is that the number of job openings exceeded the number of unemployed individuals for the seventh month in the row.

1223
01:46:44,940 --> 01:46:54,420
September reading shows this difference to be about 1 million with the number of job openings just over 7 million and the unemployment level slightly under 6 million.

1224
01:46:54,420 --> 01:47:00,220
Before March of this year, job openings have never exceeded unemployed workers in more

1225
01:47:00,220 --> 01:47:02,240
than 17 years of monthly data.

1226
01:47:02,700 --> 01:47:07,840
So this is a clear sign of how increasingly difficult it is for employers to find workers

1227
01:47:07,840 --> 01:47:08,840
in today's market.

1228
01:47:10,560 --> 01:47:12,420
We were already talked about that.

1229
01:47:13,080 --> 01:47:18,900
So we are finally starting to see some significant movement in various measures of wage and compensation

1230
01:47:18,900 --> 01:47:22,440
growth due to the labor force challenges faced by business

1231
01:47:22,440 --> 01:47:27,560
owners. The latest October reading of 3.1% increase in

1232
01:47:27,560 --> 01:47:31,420
average hourly earnings is the first such increase over 3%

1233
01:47:31,420 --> 01:47:36,080
since 2009. The average hourly earnings currently stand at

1234
01:47:36,080 --> 01:47:40,640
$27.30. Of course, there's a wide range of average earnings

1235
01:47:40,640 --> 01:47:44,880
among different industries with leisure and hospitality being on

1236
01:47:44,880 --> 01:47:48,820
the low end paying slightly over $16 an hour. And in

1237
01:47:48,820 --> 01:47:54,340
information and utilities industries employees earning over $40 per hour and average.

1238
01:47:55,320 --> 01:48:01,140
Wages are rising slightly more than inflation, CPI and core CPI are shown there.

1239
01:48:01,520 --> 01:48:06,800
They're currently around 2%, we expect them to stay somewhere in that range to 2.5% range.

1240
01:48:09,710 --> 01:48:15,790
The yield spread is considered to be a valuable forecasting tool for many economic variables,

1241
01:48:15,790 --> 01:48:27,170
including probabilities of the recession, so we track this indicator to see how likely we are to see significant economic downturn in the future.

1242
01:48:27,750 --> 01:48:34,690
This indicator is very good for predicting the likelihood of recession four to six quarters down the road.

1243
01:48:35,430 --> 01:48:43,650
It has predicted essentially every U.S. recession since 1950 with only one fall signal in 1967.

1244
01:48:44,390 --> 01:48:48,950
Based on information provided by the Federal Reserve Bank of New York, the probability

1245
01:48:48,950 --> 01:48:54,710
of recession using a yield curve model 12 months from now is at about 14%.

1246
01:48:56,680 --> 01:49:02,720
So just switching quickly to state revenues, our total accrued revenues in fiscal year

1247
01:49:02,720 --> 01:49:05,740
18 were 14 billion, 482 million.

1248
01:49:06,380 --> 01:49:13,020
As you know, sales taxes 61% of that with F&E following at 17.8%.

1249
01:49:13,020 --> 01:49:21,340
Fuel taxes are currently taken up a larger share than in the past, mostly due to the changes by the improved act.

1250
01:49:21,740 --> 01:49:24,860
That's the case with motor vehicle registration fees as well.

1251
01:49:25,500 --> 01:49:32,600
And of course, the income tax currently at 1.7% of our collections will be going away over the next few years.

1252
01:49:33,200 --> 01:49:39,780
The current tax rate is 3%, and it will be fully phased out for tax years beginning January 1st of 2021.

1253
01:49:41,780 --> 01:49:50,160
here's a complete summary of all legislative impacts that we needed to take into account for our estimates for fiscal year 19 and fiscal year 20.

1254
01:49:50,700 --> 01:49:59,900
This is relative to collections in fiscal year 18. While net changes did not appear to be that large, a decrease of

1255
01:50:00,000 --> 01:50:29,940
If about 12 million in year one and about 4.3 million in year two, we would like to note two things. One, specific taxes can be impacted to a large extent. And you can see, for example, the income tax is anticipated to be 55.5 million lower solely due to the legislative changes in recent years. And the second point that we would like to make is that many of the recent legislative changes have taken effect already in fiscal year 17-8.

1256
01:50:29,940 --> 01:50:31,000
18 and prior years.

1257
01:50:31,660 --> 01:50:34,820
So the base that we're comparing it to has already been altered.

1258
01:50:35,500 --> 01:50:41,780
For example, in fiscal year, 18 motor vehicle fuel taxes were expected to increase by about

1259
01:50:41,780 --> 01:50:47,140
43 million, which represents an increase of almost 25% to that base.

1260
01:50:47,820 --> 01:50:52,340
So we've already seen significant changes due to just legislating actions.

1261
01:50:52,340 --> 01:51:01,100
And finally before you get to that, you got legislative impact and you got the F&E that

1262
01:51:01,100 --> 01:51:02,680
is from the decoupling.

1263
01:51:03,860 --> 01:51:11,400
No sir, I think the F&E impact here is a combination of several different public chapters

1264
01:51:11,400 --> 01:51:12,320
that have been enacted.

1265
01:51:13,040 --> 01:51:15,220
The improved act is one of them.

1266
01:51:15,220 --> 01:51:20,560
We've also passed legislation that allowed annualized quarterly payments.

1267
01:51:21,720 --> 01:51:28,220
Revenue Modization Act from 2015, so there are several public chapters that were enacted at that time.

1268
01:51:31,140 --> 01:51:40,940
So getting to our actual tax estimates, taking all of these legislative changes into account, into account our economic view.

1269
01:51:40,940 --> 01:51:49,360
We estimate the sales tax growth of 4.3% in fiscal year 19 and 3.8% in fiscal year 20.

1270
01:51:50,240 --> 01:51:55,500
Our gasoline and motor fuel taxes are expected to realize significant growth.

1271
01:51:55,840 --> 01:51:58,480
But once again this is mostly due to legislative changes.

1272
01:51:59,800 --> 01:52:01,780
French has an excise tax collections.

1273
01:52:02,280 --> 01:52:05,420
We estimate those to remain essentially flat.

1274
01:52:06,240 --> 01:52:08,940
What's shown here is compared to a cruel collection.

1275
01:52:08,940 --> 01:52:17,120
So, you are seeing a negative 0.34% impact in year one and negative 0.47 in year two.

1276
01:52:17,680 --> 01:52:25,720
If we were to compare our numbers to the actual cash collections in fiscal year 18, the growth rate is about 0.5%.

1277
01:52:25,720 --> 01:52:27,460
So, essentially, flat.

1278
01:52:28,520 --> 01:52:34,460
We would like to make one point about our estimates for the franchise and XI stacks.

1279
01:52:34,460 --> 01:52:39,920
They rely largely on our view of the economy, where it is now, where we see the economy

1280
01:52:39,920 --> 01:52:42,800
going, and historical trends in tax collections.

1281
01:52:43,520 --> 01:52:50,240
We at our office do not have access to taxpayer confidential information, so we are unable

1282
01:52:50,240 --> 01:52:57,240
to maybe see some major changes with large taxpayers that could be happening there.

1283
01:52:57,640 --> 01:53:02,440
So I wanted to make sure I put that out there for full disclosure.

1284
01:53:03,280 --> 01:53:11,100
Our total revenue growth is at 3.35% in year one, at 3.03% in year two.

1285
01:53:11,740 --> 01:53:17,240
So these diminishing growth rates in our total taxes as well as some major tax categories

1286
01:53:17,240 --> 01:53:22,620
such as the sales tax reflect or take on the economy for the forecasting period of

1287
01:53:22,620 --> 01:53:26,060
continuing growth but growth at diminishing rates.

1288
01:53:26,060 --> 01:53:36,500
And for the remainder of our presentation, we've included a couple of tables that show the breakdown between all funds and the general fund for both years.

1289
01:53:37,420 --> 01:53:47,700
And then this table that compares our estimates in fiscal year 19 to last year's estimates as well as the current budgeted estimates.

1290
01:53:47,700 --> 01:54:02,320
and just a couple of things to note. Our estimates assume 485 million in additional funds compared to last year's collections and almost 351 million in additional funds compared to the current budgeted estimate.

1291
01:54:03,220 --> 01:54:10,320
Most of this increase compared to the current budgeted estimate, 55% of it is related to the sales tax.

1292
01:54:10,320 --> 01:54:19,340
For the general fund, we estimate growth of 380 million over last year and almost 280 million over the current budget.

1293
01:54:20,320 --> 01:54:22,580
And that concludes our prepared remarks.

1294
01:54:22,960 --> 01:54:24,420
We'll be happy to answer any questions.

1295
01:54:33,210 --> 01:54:42,210
This is first time I've seen the compared in three-year average unemployment against the current unemployment is being a leading indicator.

1296
01:54:43,190 --> 01:54:47,950
And it's pretty, pretty active.

1297
01:54:48,910 --> 01:54:49,190
This graph?

1298
01:54:49,810 --> 01:54:50,010
Yeah.

1299
01:54:51,270 --> 01:54:53,730
There's really not too much meaning behind it.

1300
01:54:54,130 --> 01:54:55,750
I can't figure out what the meaning is.

1301
01:54:56,070 --> 01:54:59,590
It's just an interesting thing that we found as we were.

1302
01:55:00,000 --> 01:55:04,300
That's when the lines cross. It's just a happy sense, or is there, you know,

1303
01:55:06,680 --> 01:55:08,040
because that's dramatic,

1304
01:55:08,780 --> 01:55:16,200
dramatically accurate. And right now, there's possibility of it to happen pretty soon.

1305
01:55:17,600 --> 01:55:23,800
Well, we don't see the two lines crossing throughout our forecasting period, but of course,

1306
01:55:23,800 --> 01:55:27,000
There is a significant margin of error, but estimates have.

1307
01:55:28,520 --> 01:55:29,020
Good.

1308
01:55:29,800 --> 01:55:30,780
This is very helpful.

1309
01:55:30,940 --> 01:55:34,840
Questions, commissioners, questions, questions.

1310
01:55:35,680 --> 01:55:36,460
Thank you all.

1311
01:55:36,640 --> 01:55:36,860
Thank you.

1312
01:55:37,560 --> 01:55:40,160
Y'all want to take five minutes, so go ahead.

1313
01:55:40,460 --> 01:55:43,140
Y'all want to go ahead and keep going.

1314
01:55:43,780 --> 01:55:44,620
There's no one.

1315
01:55:44,960 --> 01:55:45,400
Keep going.

1316
01:55:46,500 --> 01:55:48,160
We'll y'all begin.

1317
01:55:53,900 --> 01:55:56,860
He's the one doing all the talking, so.

1318
01:56:29,620 --> 01:56:34,120
Thank you again members of the Funding Board. Once again my name is Brian Savage. I'm the

1319
01:56:34,120 --> 01:56:39,620
economist with the fiscal review committee and my last is Robert Curry assistant director

1320
01:56:39,620 --> 01:56:40,240
of the committee.

1321
01:56:42,400 --> 01:56:47,280
Going into our lottery estimates for the two-year, well five-year period technically,

1322
01:56:47,280 --> 01:56:50,360
We're going to start with historical results.

1323
01:56:50,600 --> 01:56:56,460
This table shows historical results for several major categories over the previous four fiscal

1324
01:56:56,460 --> 01:57:00,860
years, including growth rates for the last fiscal year, fiscal year 18.

1325
01:57:01,720 --> 01:57:09,220
In that fiscal year, net revenue has increased by 122 million or 8.1 percent, 60 percent of

1326
01:57:09,220 --> 01:57:13,980
this increase or about 72 million can be attributed to instant ticket gains.

1327
01:57:13,980 --> 01:57:19,980
While 25% or about 30 million can be attributed to powerball and mega-millions.

1328
01:57:20,520 --> 01:57:27,300
Total expenses increased by 7.8% or about 88 million for a net lottery proceeds increase

1329
01:57:27,300 --> 01:57:31,780
of just over 9% or approximately 33.7 million.

1330
01:57:33,040 --> 01:57:39,020
After school funding which represents unclean winnings has increased by also 9% resulting

1331
01:57:39,020 --> 01:57:42,620
in total state proceeds increase of once again 9%.

1332
01:57:44,990 --> 01:57:51,110
Instant ticket sales represent over 81% of our total sales, so they're by far the most

1333
01:57:51,110 --> 01:57:54,250
significant driver of lottery sales and proceeds.

1334
01:57:55,110 --> 01:58:00,850
This number was close to 83% in the last year, but recent changes to the structure of

1335
01:58:00,850 --> 01:58:05,470
the mega-millions game allowed that game to experience significant growth and represent

1336
01:58:05,470 --> 01:58:06,870
the larger piece of the pie.

1337
01:58:08,010 --> 01:58:11,830
The breakdown of all other games is on this slide as well.

1338
01:58:13,090 --> 01:58:16,430
Quarter one of this fiscal year has not been great.

1339
01:58:16,810 --> 01:58:22,650
Net revenue is down 1.4%, total expenses are down 0.2%,

1340
01:58:22,650 --> 01:58:27,290
and net lottery proceeds have decreased by almost 5% or $5 million.

1341
01:58:28,550 --> 01:58:33,830
However, this has to be put in perspective relative to very strong growth experience

1342
01:58:33,830 --> 01:58:38,870
in quarter one of last year when proceeds were up by over 14%.

1343
01:58:38,870 --> 01:58:42,190
So we are working over very large bases.

1344
01:58:42,890 --> 01:58:47,830
The main reason for the decrease that we're seeing in quarter one is powerball.

1345
01:58:48,490 --> 01:58:53,630
Powerball sales are down over 53 percent or over 22 million dollars.

1346
01:58:54,290 --> 01:58:55,770
And the reason for that is clear.

1347
01:58:56,010 --> 01:59:01,870
In quarter one of last fiscal year, we have a very high jackpot cycle that reached 700 million.

1348
01:59:02,470 --> 01:59:07,470
The highest jackpot cycle that we've seen in quarter one of this year was 247 million.

1349
01:59:07,470 --> 01:59:14,610
And as you know, high jackpot cycles in these games is really what's driving the sales of these games.

1350
01:59:15,730 --> 01:59:20,690
The good news is that the picture completely changes when we include the October sales.

1351
01:59:21,310 --> 01:59:28,310
We are at our office currently don't have the full financial data for financial information for October, but we do have sales.

1352
01:59:28,310 --> 01:59:35,190
sales. So for the first full 17 weeks of the fiscal year, sales total revenue is up

1353
01:59:35,190 --> 01:59:42,210
by 10% or almost $55 million. That's a complete reversal from where we were at the end

1354
01:59:42,210 --> 01:59:47,690
of quarter one. So just that one additional month has added significant sales. The reason

1355
01:59:47,690 --> 01:59:56,410
for this increase in sales is also clear. Mega Millions is up 286% or almost 40 million

1356
01:59:56,410 --> 01:59:59,930
over last year. The reason for that is...

1357
02:00:00,000 --> 02:00:08,640
This is $1.6 billion jackpot that we had in October of this year. Instant games are also up almost 5% or $20 million.

1358
02:00:13,520 --> 02:00:33,820
So let's take a quick look at instant games. This chart just shows the 52 week moving some of instant games. And the main point here is that we are currently at the longer term trend level. We did, we did dip down back in the fiscal year, 16, 17. The growth rate in that year

1359
02:00:33,820 --> 02:00:38,840
was 2.1% and that's the lowest growth rate to date in instant games.

1360
02:00:40,240 --> 02:00:47,400
Once again, instant games are the most significant piece of the total pie with over 81% of our

1361
02:00:47,400 --> 02:00:48,760
lottery ticket sales.

1362
02:00:49,580 --> 02:00:55,420
This is just a comparison of weekly sales last year, the yellow line and quarter one sales

1363
02:00:55,810 --> 02:00:56,680
of this year.

1364
02:00:56,880 --> 02:01:03,580
You can see that we're trending above last year with growth of 3.4% adding October that

1365
02:01:03,580 --> 02:01:12,740
growth is almost 5%. Here's a breakdown of instant ticket sales by price point for last

1366
02:01:12,740 --> 02:01:20,560
year. Instant ticket sales have increased by 5.7% or 76 million last year. This growth

1367
02:01:20,560 --> 02:01:26,980
is on top of the 2.1% increase that we've seen in fiscal year 17 and 6.9% increase in

1368
02:01:26,980 --> 02:01:35,140
fiscal year 16. And as you can see, the increase was mostly due to the additional sales in the $30 price point.

1369
02:01:36,080 --> 02:01:43,480
That price point has kind of cannibalized some of the sales of the $25 price point, which is used to add more.

1370
02:01:44,320 --> 02:01:51,460
But jointly, when we look at those jointly, they continue to be a significant driver of our growth.

1371
02:01:52,520 --> 02:01:56,340
So, here's our instant games estimates.

1372
02:01:57,200 --> 02:02:04,920
For fiscal year 1819, our gross sales median estimate is 1,470 million, with a 10 million

1373
02:02:04,920 --> 02:02:05,960
margin either way.

1374
02:02:06,480 --> 02:02:12,920
This represents growth of 4.4% over last year or an additional 62 million in sales.

1375
02:02:13,460 --> 02:02:18,440
So we essentially assume continued growth in the remaining months of the year, but growth

1376
02:02:18,440 --> 02:02:21,400
at a slower rate than we've seen so far this year.

1377
02:02:22,260 --> 02:02:27,220
Our median estimate for fiscal year 19 assumes an additional 60 million in sales

1378
02:02:27,220 --> 02:02:33,160
on top of our estimate for fiscal year 18 for a growth rate of 4.1%.

1379
02:02:34,660 --> 02:02:37,300
Turning to Powerball and Mega Millions.

1380
02:02:38,100 --> 02:02:42,760
Powerball sales increased by 15% last year or 15.6 million.

1381
02:02:43,480 --> 02:02:47,140
And as you can see in the table, this is largely due to the

1382
02:02:47,140 --> 02:02:55,560
higher highest jackpot cycle, 700 million last year versus 478 million in fiscal year 17.

1383
02:02:57,200 --> 02:03:02,360
Powerball sales in fiscal year 18 are still almost 30 million dollars lower than what they

1384
02:03:02,360 --> 02:03:08,140
were in fiscal year 16 as we had the record-setting jackpot of 1.6 billion in that year.

1385
02:03:09,260 --> 02:03:15,540
Currently, Powerball sales are down 6.1 million or 13 percent in the first 17 weeks of the year,

1386
02:03:15,540 --> 02:03:26,460
but we have had a 750 million jackpot cycle since then so the sales this year are likely ahead of last year sales at this point.

1387
02:03:27,880 --> 02:03:36,200
For both fiscal year 19 and fiscal year 20, we forecast powerful sales to remain around the same level where they were last year.

1388
02:03:36,780 --> 02:03:43,360
Our median estimate is 115 million in both years with slightly wider ranges in fiscal year 20.

1389
02:03:43,360 --> 02:03:49,320
We're confident that these levels of sales can be attained and that any extraordinary jackpot

1390
02:03:49,320 --> 02:03:54,220
cycles like we've seen in fiscal year 16, for example, would take us far beyond these numbers.

1391
02:03:56,990 --> 02:04:03,230
The mega-millions game was significantly redesigned in the October of 2017.

1392
02:04:03,710 --> 02:04:10,830
The most important changes include increasing the cost of the game from $1 to $2, increasing the starting jackpot

1393
02:04:10,830 --> 02:04:15,410
levels from 15 to 40 million and decreasing the odds of winning a jackpot.

1394
02:04:16,330 --> 02:04:21,570
So all of these changes together were designed to, in part, allow jackpots to get significantly

1395
02:04:21,570 --> 02:04:26,790
higher than before and much quicker which would likely result in additional ticket sales.

1396
02:04:27,490 --> 02:04:32,410
And we've seen a lot of that impact is expected in fiscal year 18 with sales increasing by

1397
02:04:32,410 --> 02:04:39,230
almost 40% or close to $15 million. But we really started to see such

1398
02:04:39,230 --> 02:04:44,270
effect this fiscal year. As you can see in the table this fiscal year we

1399
02:04:44,270 --> 02:04:48,530
already reached a record setting jackpot level for mega millions of approximately

1400
02:04:48,530 --> 02:04:55,310
1.6 billion dollars. The highest jackpot in fiscal year 17 was 508 million

1401
02:04:55,310 --> 02:04:59,970
the highest last year was 521 million. So this is a

1402
02:05:03,620 --> 02:05:29,980
So what's the impact on sales, year-to-date? Well, our year-to-date sales represented by the blue bar are almost $54 million. This is $40 million more than sales over the same time period last year before any changes to the game took effect. So we have almost quadrupled last year's sales over that time period. And even more, our year-to-date sales in the first 17 weeks of this year

1403
02:05:29,980 --> 02:05:36,320
fiscal year, already exceed our total sales in fiscal year 18 by about 2 million. So

1404
02:05:36,320 --> 02:05:42,500
with 35 weeks left in the year, we are in line to see extraordinary growth in mega-millions,

1405
02:05:42,780 --> 02:05:47,540
even if we don't reach any more similar jackpot levels for the remainder of the year.

1406
02:05:49,180 --> 02:05:55,320
And that's what our estimates essentially assume, no such significant jackpots for the rest of the year.

1407
02:05:55,320 --> 02:06:02,320
Our fiscal year 19 estimate essentially holds the sales and the remainder of this year equal to what we've seen

1408
02:06:02,320 --> 02:06:04,980
for the same time period last year.

1409
02:06:05,440 --> 02:06:14,220
And that essentially gets us to the $90 million range for the median estimate with a $7 million boundary each way.

1410
02:06:16,060 --> 02:06:22,060
For fiscal year 20, we are expecting, once again, we're not forecasting any significant

1411
02:06:22,660 --> 02:06:28,760
jackpot levels that, like we've seen this year, and we are taken into account the jackpot

1412
02:06:28,760 --> 02:06:29,200
fatigue.

1413
02:06:29,440 --> 02:06:37,060
So we are lowering our median estimate to $75 million with a $10 million boundary each

1414
02:06:37,060 --> 02:06:37,300
way.

1415
02:06:38,680 --> 02:06:44,340
Our analysis shows that it takes about one quarter from the start of the starting level

1416
02:06:44,340 --> 02:06:49,020
of the jackpots to reach to such high 1.5, 1.6 billion levels.

1417
02:06:49,600 --> 02:06:55,200
So that is not unlikely to happen again in the near future.

1418
02:06:55,340 --> 02:07:00,160
So we do believe that our estimates are on the conservative side and we are confident that

1419
02:07:00,160 --> 02:07:01,340
we'll be able to reach those.

1420
02:07:02,680 --> 02:07:09,320
And just going through all the other games quickly, Cache 3 and Cache 4 games have a relatively

1421
02:07:09,320 --> 02:07:15,480
loyal customer base. We generally see continued growth year over year, Cache 3 struggled

1422
02:07:15,480 --> 02:07:23,180
a little bit last year, Cache 4 added 3.2%. Our median estimate for both of those games

1423
02:07:23,180 --> 02:07:32,860
is 160, 106.2 million in fiscal year 19 and 107 million in fiscal year 20, this represents

1424
02:07:32,860 --> 02:07:42,220
growth rates of 3.9% and 0.7% respectively. Last year these two games together grew 0.8%

1425
02:07:42,220 --> 02:07:50,000
in current year-to-date growth is 8.4%. Tennessee cash sales exceeded our expectations

1426
02:07:50,000 --> 02:07:56,960
last year with the growth of almost 15%, this was once again due to relatively high jackpot of over $2 million.

1427
02:07:58,360 --> 02:08:03,800
We are forecasting kind of a reversal to where we were in the prior year.

1428
02:08:04,060 --> 02:08:12,120
So our median estimate is at 16.5 million for fiscal year 19 and 16.2 million fiscal year 20.

1429
02:08:14,040 --> 02:08:19,220
Cash for life experience, the significant decrease last year, over 20%.

1430
02:08:19,860 --> 02:08:25,720
This is a game that was introduced in November of 2015, so that year we had about 35 weeks

1431
02:08:25,720 --> 02:08:33,380
of sales, but even with the partial year, our total fiscal year 16 sales were 12.4 million,

1432
02:08:33,440 --> 02:08:39,160
which is higher than our sales in fiscal year 17 or fiscal year 18, which are full years.

1433
02:08:39,160 --> 02:08:45,260
So as you can see in this graph, which shows weekly sales since inception of this game,

1434
02:08:45,680 --> 02:08:49,920
we kind of see what's typical with these new games. Initial excitement and

1435
02:08:49,920 --> 02:08:54,960
high sales followed by a relatively quick drop-off and kind of a leveling off.

1436
02:08:55,800 --> 02:09:05,560
Weekly sales currently average 161,500 per week. Our median estimate for

1437
02:09:05,560 --> 02:09:12,140
fiscal year 19 is 8.3 million, which works out to be slightly under 160,000 per week for the

1438
02:09:12,140 --> 02:09:16,700
full year. So we do expect a further decline in weekly sales for the remainder of the year.

1439
02:09:17,340 --> 02:09:23,900
For fiscal year 19, our estimate is at 7.5 million or just over 144,000 per week.

1440
02:09:26,210 --> 02:09:32,550
Lada America is also a new game. The first drawing was in November of last year. This game replaced

1441
02:09:32,550 --> 02:09:38,150
hot lava which was discontinued at the end of October last year. So we've had 33

1442
02:09:38,150 --> 02:09:43,110
weeks of sales of Lada America in fiscal year 18 with almost 8 million in

1443
02:09:43,110 --> 02:09:47,950
total sales. But similar to the situation with cash for life you can see that

1444
02:09:47,950 --> 02:09:53,650
declining pattern in weekly sales where sales started in the 500 to the 600,000

1445
02:09:53,650 --> 02:09:58,270
range and are currently under the $300,000 line.

1446
02:10:00,000 --> 02:10:29,980
Our estimate for fiscal year 19 is 13 million, which is equal to 250 in weekly sales. For fiscal year 20, we expect to see a continuous decline with our median estimate of 12.2 million, or just under 235,000 per week. And finally, Kena to go is another relatively new game. It was introduced in August of last year. So we've had 46 weeks of sales of this game. Last year with 14.8 million.

1447
02:10:29,980 --> 02:10:31,260
million in total sales.

1448
02:10:32,560 --> 02:10:36,900
Once again, very similar to the previous two games,

1449
02:10:37,340 --> 02:10:39,040
high sales initially.

1450
02:10:39,560 --> 02:10:42,940
And once again, between 500, 600,000 level

1451
02:10:42,940 --> 02:10:46,640
and we are currently under that $300,000 line.

1452
02:10:48,260 --> 02:10:51,460
We expect to see further declines over the next couple

1453
02:10:51,460 --> 02:10:54,020
of years are median estimate for fiscal year 19

1454
02:10:54,020 --> 02:10:58,240
is 13.5 million or about 260,000 per week.

1455
02:10:58,240 --> 02:11:05,880
and our median estimate for fiscal year 20 is 12.7 million or about 244,000 per week.

1456
02:11:06,340 --> 02:11:09,960
Year-to-date weekly average is 261,000.

1457
02:11:11,080 --> 02:11:15,160
So the following few slides will provide the summary of all of our estimates

1458
02:11:15,160 --> 02:11:17,200
and conclude our presentation.

1459
02:11:18,100 --> 02:11:25,680
For fiscal year 1819, our net lottery proceeds estimates range from 421.1 million

1460
02:11:25,680 --> 02:11:32,900
to 432.7 million, with our median estimate being 426.9 million.

1461
02:11:33,460 --> 02:11:39,720
This represents a 5% growth in proceeds over fiscal year 18, where an increase of approximately

1462
02:11:39,720 --> 02:11:41,900
20.4 million dollars.

1463
02:11:42,600 --> 02:11:48,260
Last year's growth in proceeds was 33.7 million, or 9%.

1464
02:11:48,260 --> 02:11:53,500
Most of our growth this year's expect is expected to come from instant gains and mega-millions.

1465
02:11:55,180 --> 02:12:03,660
For fiscal year 20, our estimate for net lottery proceed ranges from 426.7 million on the low

1466
02:12:03,660 --> 02:12:13,140
end and 444.8 million on the high end with our median estimate being 435.7 million. The median

1467
02:12:13,140 --> 02:12:21,480
estimate represents a 2.1 percent increase over our median estimate in fiscal year 2019. By far,

1468
02:12:21,480 --> 02:12:24,780
most of this expected increase can be attributed to instant gains.

1469
02:12:26,580 --> 02:12:32,300
Forecasting growth in subsequent years is difficult due to a number of unknown factors such

1470
02:12:32,300 --> 02:12:38,660
as changes to payout ratios and matrix changes to jackpot-based gains, legislative actions,

1471
02:12:39,140 --> 02:12:40,860
various jackpot cycles.

1472
02:12:42,200 --> 02:12:48,220
So what we try to do here is look at the average growth rates and over the last five years,

1473
02:12:48,220 --> 02:13:00,320
The average growth rate here in Tennessee for the net lottery proceeds has been 5% per year, excluding the highest and lowest years the average growth has been 4.5%.

1474
02:13:01,180 --> 02:13:09,940
Such growth rates for net revenue have been 4.9% and 5.1% without the low and high.

1475
02:13:09,940 --> 02:13:22,940
So we are essentially assuming 3.5% annual net revenue growth and 2.5% annual net proceeds growth in the three years at the end of our forecasting period.

1476
02:13:24,380 --> 02:13:34,780
And finally, this graph shows our actual net lottery proceeds that's the blue portion of the lines and adds our median estimates to this.

1477
02:13:34,780 --> 02:13:49,520
One thing that I would like to point out is that our forecast for the five-year period appeared to be slightly above the trend line, but this is largely due to the changes to our game mix and changes to specific games, especially the megameleons changes.

1478
02:13:49,820 --> 02:13:51,800
And we've already seen the impact on sales.

1479
02:13:53,200 --> 02:13:55,340
So that concludes our presentation.

1480
02:13:55,340 --> 02:13:59,360
We've got some questions, questions, questions.

1481
02:14:00,180 --> 02:14:01,340
Thank y'all very much.

1482
02:14:01,560 --> 02:14:01,900
Thank you.

1483
02:14:02,680 --> 02:14:05,260
Before we ask Mr. Davis to come up,

1484
02:14:05,400 --> 02:14:08,940
let me recognize the government management fellows

1485
02:14:08,940 --> 02:14:13,080
who are here, Dakota and Adam and Emily and Marissa.

1486
02:14:13,900 --> 02:14:15,540
And Chmene, could y'all stand up?

1487
02:14:18,630 --> 02:14:19,430
Y'all are featured.

1488
02:14:20,370 --> 02:14:21,690
Thank y'all very much.

1489
02:14:22,030 --> 02:14:22,810
Appreciate you being here.

1490
02:14:23,410 --> 02:14:23,830
Thank you.

1491
02:14:24,670 --> 02:14:26,390
If I could just give a little caution.

1492
02:14:26,390 --> 02:14:31,570
I just need to, you know, understand that not every state meeting is as assimilating and exciting as this one.

1493
02:14:53,770 --> 02:14:56,690
Every year you complete, you just fascinate me.

1494
02:14:57,990 --> 02:14:59,970
Go ahead and introduce yourself and proceed.

1495
02:15:00,000 --> 02:15:29,420
Good morning. Andy Davis, chief finance and information systems officer for the Lottery Corporation. Thank you for allowing us to do our presentation this morning. I would like to provide the regrets from Rebecca's. She would love to be here, but she has some tribal commitments on forces. She would not have to be here. Reminder she has a letter for us. Okay. I will do that. Actually, I do have a letter for you and we want to have a letter to the committee.

1496
02:15:29,420 --> 02:15:35,340
as soon as the presentation is over for sure so we provide that and we have that this morning.

1497
02:15:36,040 --> 02:15:39,540
Thank you once again I just want to give you some highlights in terms of where we are a year-to-date

1498
02:15:40,120 --> 02:15:46,960
actually in steps to date on behalf of her. If you think about it this is our 15-year

1499
02:15:46,960 --> 02:15:51,460
anniversary will be January 20th 2019 we'll be in business for 15 years.

1500
02:15:53,040 --> 02:15:58,580
We produced over 19 billion in sales since that point in time our sales have grown in the last

1501
02:15:58,580 --> 02:16:04,420
13 of those 14 fiscal years we've returned over 4.7 billion in total education

1502
02:16:04,420 --> 02:16:10,440
funding since inception and the growth in that funding has been over the 12

1503
02:16:10,440 --> 02:16:14,720
of the 14 years we've had growth in our total education funding and we're

1504
02:16:14,720 --> 02:16:21,280
very proud of that. We paid over 13.5 billion in sales and over 1.2 billion in

1505
02:16:21,280 --> 02:16:25,280
retail commissions so we definitely thank our retail partners for that

1506
02:16:25,280 --> 02:16:31,860
success. Fiscal year 18, which is a fiscal year is just recently ended. We had over 1.73

1507
02:16:31,860 --> 02:16:37,340
billion in sales, which was a record for us, with instance comprising over 1.4 billion of that,

1508
02:16:37,460 --> 02:16:43,920
which was obviously a record for instant products as well. In terms of our total education funding,

1509
02:16:44,140 --> 02:16:49,520
once again we set a record in fiscal year 18, or 421 million, with 406 million of that going to

1510
02:16:49,520 --> 02:16:55,640
that lottery proceeds based off of information we receive from T-SAC that's funded over well

1511
02:16:55,640 --> 02:17:01,380
of 1 million in grants and scholarships to the students of Tennessee so we're very proud

1512
02:17:01,380 --> 02:17:06,660
of that. Definitely proud of our retailers, the employees, board directors and the support

1513
02:17:06,660 --> 02:17:11,580
of the government and legislatures in terms of our success over these last 14 and a half years

1514
02:17:11,980 --> 02:17:16,640
and almost 15 years beginning in January. In terms of a report that I'm going to present

1515
02:17:16,640 --> 02:17:22,640
to use this morning. It really represents where we project ourselves to be. Actually, I'll take

1516
02:17:22,640 --> 02:17:27,960
a consideration of our current year to date. On page two, kind of highlight where we are with our

1517
02:17:27,960 --> 02:17:32,920
three major categories. When you look at our three major categories, we'll October 31st,

1518
02:17:32,920 --> 02:17:40,160
total sales of 610 million compared to 555 million prior year. So currently, we're trending at a

1519
02:17:40,160 --> 02:17:46,640
a little over 9.9% growth for this fiscal year, our instant games, which this year represents

1520
02:17:46,640 --> 02:17:55,360
about 6% of our sales, is 4.8% yield-a-date, multidirectional games, powerball, mega-millions,

1521
02:17:55,860 --> 02:18:03,220
hot-lotto, which we ended this past year, a lot of America and cash for life, growth on those

1522
02:18:03,220 --> 02:18:09,580
products is 45% this year compared to last year through October, clarifying that there is an

1523
02:18:09,580 --> 02:18:17,100
impact from the 1.5 billion mega million jackpot in October that drove that growth for this fiscal year.

1524
02:18:17,960 --> 02:18:22,500
Tennessee only games, which is cash three, cash four, Tennessee cash and, you know, to go.

1525
02:18:23,160 --> 02:18:26,360
It was a reference to about seven percent of our sales year to date.

1526
02:18:26,840 --> 02:18:30,940
We're currently about five percent year to year to date for those games.

1527
02:18:31,620 --> 02:18:37,920
If you look at the chart at the bottom of the report, it's just highlights how that compares to the prior fiscal year.

1528
02:18:37,920 --> 02:18:43,000
As you can see, we have growth in all of those categories through our three major categories

1529
02:18:43,000 --> 02:18:43,820
that we represent.

1530
02:18:44,680 --> 02:18:50,460
If you look at page three, page three, highlight specifically our instant games and talks

1531
02:18:50,460 --> 02:18:55,140
about instant games historically as our largest and most profitable game category.

1532
02:18:55,700 --> 02:19:01,080
At around 80% of our sales over the inception to date averages.

1533
02:19:01,800 --> 02:19:05,720
So we obviously put a lot of attention in terms of how we manage our instant product.

1534
02:19:06,560 --> 02:19:10,580
right now we have about eight price points currently on sale in the market as

1535
02:19:10,580 --> 02:19:16,340
you can see in that the chart this should recognize RFY19 growth right now we

1536
02:19:16,340 --> 02:19:20,760
expect it's current today and what we anticipate for the fiscal year is going to

1537
02:19:20,760 --> 02:19:28,560
be in our higher price point games stars at $10.10, $20, $25, and $30 in terms of a

1538
02:19:28,560 --> 02:19:32,740
high price points. Do you only know those come with a little higher price payout as

1539
02:19:32,740 --> 02:19:38,120
well. We also see the preference from our players, obviously from the from the

1540
02:19:38,120 --> 02:19:42,500
sales they're generating. They prefer those higher price point games because it

1541
02:19:42,500 --> 02:19:47,640
also gives them more chances to win as well. One of the other areas that we see

1542
02:19:47,640 --> 02:19:59,980
our growth continue to be over quite a few years is in our family games and we

1543
02:20:00,000 --> 02:20:29,920
Currently, right now, we have a price point, jumbo books product in the market for every price point that you see on the chart. And they are, they've been where received in the market. We started out with our jumbo books products back in 2004. And we have expanded the product line over that period of time. So there has been one of our most prevalent families out in the market. And we've moved from two price points at the one in two, because I mentioned that product is out there in eight.

1544
02:20:29,920 --> 02:20:35,260
All of the eight price points. We have a jumbo books family product in the market and it sells very well

1545
02:20:35,260 --> 02:20:42,040
It actually averages of almost about 45% of our sales volume on instant products is in that jumbo books family

1546
02:20:42,920 --> 02:20:46,760
When we look at what we project for sales in terms of our instant product for the year

1547
02:20:46,760 --> 02:20:56,660
We're really looking at between 1.45 billion to 1.465 billion for this fiscal year based up our current trends and what we see in terms of

1548
02:20:56,660 --> 02:21:02,540
preferences in the market right now that range would represent about three to

1549
02:21:02,540 --> 02:21:07,540
4% year over year from a low range to a high range compared to a fiscal year

1550
02:21:07,540 --> 02:21:13,800
18. Our prize expense which is the driver for the higher price point games we

1551
02:21:13,800 --> 02:21:19,200
will see that about 67.8% this fiscal year on average over the last couple years

1552
02:21:19,200 --> 02:21:24,880
it was about 67.5% once again that's indicative of our players seeking the

1553
02:21:24,880 --> 02:21:28,400
higher price point games, which generally have a higher price payout because it lost

1554
02:21:28,400 --> 02:21:31,840
more winners in those higher price payout games.

1555
02:21:32,840 --> 02:21:40,220
We look at the report on page 4, we talk about our multi-dustational games, multi-dustational

1556
02:21:40,220 --> 02:21:50,000
games being Powerball, Mega Man's, Cash for Life, and a lot of America, and those games

1557
02:21:50,000 --> 02:21:53,820
or the ones that, or primarily jackpot dependent

1558
02:21:53,820 --> 02:21:56,180
with the exception of cash for life, cash for life

1559
02:21:56,180 --> 02:21:58,720
for life type of game,

1560
02:21:59,080 --> 02:22:02,800
and it just does not have an impact in terms of the jackpot.

1561
02:22:03,440 --> 02:22:05,100
But specifically to Powerball,

1562
02:22:05,260 --> 02:22:06,220
if we're looking at Powerball,

1563
02:22:06,660 --> 02:22:09,640
it is the most popular of our multidirectional games.

1564
02:22:10,180 --> 02:22:11,920
It has been for quite a few years.

1565
02:22:12,220 --> 02:22:15,640
It was first game introduced back in late 2004,

1566
02:22:16,120 --> 02:22:18,280
so it's very familiar with our playerbase.

1567
02:22:19,120 --> 02:22:30,000
Currently right now it's sold in 47 jurisdictions, which is the 44 continental U.S. states that have a lottery, District of Columbia, Puerto Rico, and Virgin Islands.

1568
02:22:30,640 --> 02:22:34,300
So it is nationwide in terms of acceptance in the market.

1569
02:22:35,120 --> 02:22:43,700
When we look at our projections for this fiscal year on parable, we look at between 100 to 108 million projections for the fiscal year sales for that game.

1570
02:22:44,300 --> 02:22:49,740
The high end does include a projection for us to recognize, in addition to the one jackpot

1571
02:22:49,740 --> 02:22:55,100
that we had recently back in early October of over 600 million, one additional jackpot

1572
02:22:55,100 --> 02:22:56,660
reaching the 500 million level.

1573
02:22:57,480 --> 02:23:02,060
So we do anticipate on the high end that we would expect one other jackpot, just based off

1574
02:23:02,060 --> 02:23:07,520
of how the game is expected to perform within current jackpot cycles.

1575
02:23:08,180 --> 02:23:12,280
If you look at the chart that we're representing here, the chart really gives highlights in terms

1576
02:23:12,280 --> 02:23:19,320
of how the jackpot drives average weekly sales. If you look at the $759 million jackpot to the left

1577
02:23:19,320 --> 02:23:26,860
of the chart back in August of 2017, it generally shows we average about $3.5 million on a weekly basis

1578
02:23:26,860 --> 02:23:34,040
through the entire jackpot cycle. If you look at the jackpot just recently in October of 688 million,

1579
02:23:34,240 --> 02:23:40,740
we average about $3 million weekly on that jackpot cycle. On our expected jackpot cycle,

1580
02:23:40,740 --> 02:23:46,180
we were going to anticipate between 1.8 million on a weekly basis with our expected jackpot between

1581
02:23:46,180 --> 02:23:51,660
200 and 300 million in terms of how the game is designed. So you can see specifically how the jackpot

1582
02:23:51,660 --> 02:24:00,800
drives sales for Powerball in our market. On page 5, we specifically look at mega-millions,

1583
02:24:00,800 --> 02:24:08,740
which is our second most popular multi-jurisdictional game in comparison to Powerball. As mentioned earlier,

1584
02:24:08,740 --> 02:24:13,720
we did relaunch the game in October 2017 with game enhancements and actually

1585
02:24:13,720 --> 02:24:18,100
lots more chances of the win at the non jackpot levels. So it increased the

1586
02:24:18,100 --> 02:24:22,340
odds of winning any prize and significantly increased the prize the

1587
02:24:22,340 --> 02:24:26,860
odds of winning the second year prize which was a million dollar prize but at the

1588
02:24:26,860 --> 02:24:30,640
same time we also introduced a price point increased to two dollars per

1589
02:24:31,720 --> 02:24:36,220
ticket which allowed for us to obviously grow the jackpot quickly

1590
02:24:37,120 --> 02:24:42,220
from the original jackpot of 15 million to now starting at 40 million and it

1591
02:24:42,220 --> 02:24:47,540
moves up significantly as each draw whether it's not a jackpot winning.

1592
02:24:48,400 --> 02:24:52,980
Currently this game is sold in 46 jurisdictions which is the 44 continent of

1593
02:24:52,980 --> 02:24:58,640
the US States District of Columbia and Virgin Islands so it is once again also a

1594
02:24:58,640 --> 02:24:59,080
motor.

1595
02:25:00,000 --> 02:25:29,980
It's also a continental U.S. game on solar cross-all states. When we look at the game for us, it does not perform as well as Powerball does, but it does provide significant revenues for us as we realize from the October 1.5 billion, 1.5 billion dollar jackpot where we realize incremental almost 30 million dollars in terms of growth sales, which correlates to about 12 million incremental net lottery proceeds for that game.

1596
02:25:29,980 --> 02:25:36,080
based off of that jackpot. For this fiscal year we're projecting sales in a range

1597
02:25:36,080 --> 02:25:41,080
between 84 and 89 million based off of those results and what we anticipate for

1598
02:25:41,080 --> 02:25:47,960
the fiscal year going forward. We look at the high range is inclusive of two

1599
02:25:47,960 --> 02:25:52,440
additional jackpots reaching the $400 million range which is not too far off what

1600
02:25:52,440 --> 02:25:56,580
we anticipate for the game as it's currently designed in terms of the draw

1601
02:25:56,580 --> 02:26:02,040
cycles. If you look at the chart once again we talk about the average weekly sales as you can see

1602
02:26:02,040 --> 02:26:08,100
for this game we average 3.4 million on a weekly basis through that 1.5 billion cycle

1603
02:26:08,720 --> 02:26:16,540
the end in October. I average weekly sales on a expected jackpot between 250 to 300 million

1604
02:26:16,540 --> 02:26:23,820
is about 900 thousand so you can see the impact jackpot driving those games specifically

1605
02:26:23,820 --> 02:26:26,780
this past October in terms of the mega-millions game.

1606
02:26:27,720 --> 02:26:31,680
Page 6 is the other two games that are multi-jewelstiction games,

1607
02:26:31,900 --> 02:26:34,980
which is a lot of America and cash for life.

1608
02:26:35,520 --> 02:26:39,060
A lot of America currently sold in 17 jurisdictions to date.

1609
02:26:39,620 --> 02:26:41,900
We did start that game in November 2017.

1610
02:26:43,020 --> 02:26:45,540
It's still this game traction here in Tennessee.

1611
02:26:45,700 --> 02:26:49,800
It has not took off in comparison to a hot lot of,

1612
02:26:50,080 --> 02:26:52,260
but we will continue to support that game.

1613
02:26:52,260 --> 02:26:56,860
right now the four year sales are projected between 12 and 13 million for that

1614
02:26:56,860 --> 02:27:03,160
game cash for life which is currently sold in nine jurisdictions as I

1615
02:27:03,160 --> 02:27:07,800
mentioned earlier it is not a jackpot dependent game it is a for life type of

1616
02:27:07,800 --> 02:27:11,460
game there's two prizes there's a thousand dollars a day for life and there's a

1617
02:27:11,460 --> 02:27:15,680
thousand dollars a week for life as the first and second tier prizes for that

1618
02:27:15,680 --> 02:27:22,200
game we have been fortunate enough to have one winner at each of those levels but

1619
02:27:22,200 --> 02:27:26,640
But clearly more winners in Tennessee will be obviously driving factor in terms of sales

1620
02:27:26,640 --> 02:27:27,260
from that game.

1621
02:27:27,800 --> 02:27:33,240
Right now, for your sales, we project that between 8 and 9 million for Cash for Life.

1622
02:27:33,940 --> 02:27:39,880
When we look at our Tennessee only games, those are Cash 3, Cash 4, Tennessee Cash, and

1623
02:27:39,880 --> 02:27:42,800
they're recently launched, you know, the GO games.

1624
02:27:43,340 --> 02:27:47,680
Those games are doing pretty well for us as we move forward.

1625
02:27:47,680 --> 02:27:50,740
With Castering Cache 4, we have a loyal player base.

1626
02:27:51,280 --> 02:27:53,620
We've experienced pretty consistent sales for those games.

1627
02:27:54,220 --> 02:28:00,060
This year actually we've been seeing some increase in terms of Cache 3 sales of almost

1628
02:28:00,060 --> 02:28:01,900
10% throughout October.

1629
02:28:02,460 --> 02:28:07,740
So we're real excited about how we were performing with that particular game.

1630
02:28:08,420 --> 02:28:12,940
Castering Cache 4 daily draw games three times a day with the exception of Sunday.

1631
02:28:13,240 --> 02:28:15,640
We draw on a once a day on Sunday.

1632
02:28:16,680 --> 02:28:23,060
We expect sales for those games to be between $105 to $109 million for this fiscal year.

1633
02:28:23,880 --> 02:28:28,740
Tennessee Cash, which is a jackpot driven game, specific to Tennessee, the jackpot started

1634
02:28:28,740 --> 02:28:35,360
at $200,000 for that game, drawings of three times a week, went to space sales of around

1635
02:28:35,360 --> 02:28:37,160
$16 million for that game.

1636
02:28:37,420 --> 02:28:41,800
It is jackpot dependent, but it's pretty consistent in terms of how the game has performed

1637
02:28:41,800 --> 02:28:43,140
to how it was designed.

1638
02:28:43,600 --> 02:28:45,960
so we're pretty comfortable with that game as it stands.

1639
02:28:46,860 --> 02:28:51,240
Keno to go, we introduced back in last August 2017.

1640
02:28:52,500 --> 02:28:55,060
Drawings for that game is drawing every five minutes,

1641
02:28:55,380 --> 02:28:58,420
but the luxury of that game is we have it available

1642
02:28:58,420 --> 02:29:00,340
in all of our retail and establishments,

1643
02:29:01,200 --> 02:29:02,560
players can purchase a ticket,

1644
02:29:03,100 --> 02:29:04,460
and it's called Keno to go for a reason,

1645
02:29:04,540 --> 02:29:06,760
they can purchase it, they don't have to stay and watch the draw.

1646
02:29:07,040 --> 02:29:08,820
We make the draw available on our website

1647
02:29:08,820 --> 02:29:12,980
and we also make it available through application and app.

1648
02:29:12,980 --> 02:29:17,020
That's available for players to download if they want to see those drawings

1649
02:29:17,580 --> 02:29:21,800
Even though they don't have to stay there and watch it on the monitors. They can actually see it on their phones

1650
02:29:21,800 --> 02:29:23,280
mobile applications

1651
02:29:24,060 --> 02:29:30,680
We added bullseye to that game, which is a game enhancement, which costs an additional dollar or additional

1652
02:29:30,680 --> 02:29:36,700
Cost to players based off of their base costs. There's two times their base costs to do bullseye

1653
02:29:36,700 --> 02:29:40,740
Which provide for enhanced prizes for that game and so far it seems to be doing pretty well

1654
02:29:40,740 --> 02:29:47,180
We're about a 20% increase incremental in terms of revenues for that add on so we're pretty excited about that

1655
02:29:47,180 --> 02:29:54,940
For this fiscal year. We're looking at between 13 and 14 and a half million for that game this fiscal year on 19

1656
02:29:56,380 --> 02:29:59,740
On page eight is just how likes a pie chart in terms of

1657
02:30:00,000 --> 02:30:29,860
How are budgeted expenses or distributed amongst our major expense categories. When you look at budget, what the price chart indicates is based off budgeted total proceeds of a little level 1.6 billion net or free tickets. Prize expense obviously is our driving expenditure for our games. Obviously based off of instant tickets being significant component of our sales, about 80% of large component of our prize expense is going to be based off

1658
02:30:29,860 --> 02:30:35,480
for instance. As I mentioned earlier, I answered this project at about 67.8% for this fiscal

1659
02:30:35,480 --> 02:30:42,420
year, which is going to in total for all prizes, about 64.4% of the total proceeds available

1660
02:30:42,420 --> 02:30:48,700
prize expense. Retail Commissions, or 6.5% of gross sales projected at 115 million.

1661
02:30:49,380 --> 02:30:55,240
Major gaming vendor fees, which is our gaming system vendor, which is IGT and scientific games,

1662
02:30:55,240 --> 02:31:01,760
which is our instant ticket vendor, ticket product and services, combined is about 33

1663
02:31:01,760 --> 02:31:05,380
millions and obviously that's based off of the terms of the contract that we have associated

1664
02:31:05,380 --> 02:31:06,480
with both of those vendors.

1665
02:31:07,380 --> 02:31:12,480
Our non-derrick expenses, which is all the expenses of doing business, is about 36 million

1666
02:31:12,480 --> 02:31:18,580
is currently budgeted, which is about 2% of projected gross sales with general administration

1667
02:31:18,940 --> 02:31:24,000
being 21 million advertising, about 10 million and then other at about 5 million.

1668
02:31:24,000 --> 02:31:26,240
So when we look at net lottery proceeds,

1669
02:31:26,800 --> 02:31:29,840
our net lottery proceeds right now in terms of budget

1670
02:31:29,840 --> 02:31:31,840
was budgeted at $404 million.

1671
02:31:32,140 --> 02:31:34,140
But if you look at page nine

1672
02:31:35,100 --> 02:31:37,860
in terms of our lottery proceeds chart,

1673
02:31:38,400 --> 02:31:42,580
you to date with $151 million versus $133 million last year,

1674
02:31:42,700 --> 02:31:45,300
which is about 18 million ahead of last year through October,

1675
02:31:45,840 --> 02:31:48,480
31st, our current full year range

1676
02:31:48,480 --> 02:31:51,720
we're projected in terms of net lottery education proceeds

1677
02:31:51,720 --> 02:31:58,800
of 411 to 422 million and then you look at after school program proceeds which are based off

1678
02:31:58,800 --> 02:32:07,500
of unclaimed prizes, currently we're at 7.5 versus 2.9 million, the driving factor that is

1679
02:32:07,500 --> 02:32:13,200
really just timing of when we close instant games. So when we close instant games on average three

1680
02:32:13,200 --> 02:32:19,400
times a year, that's going to drive the impact of that line item throughout the entire fiscal year.

1681
02:32:19,400 --> 02:32:26,640
So we currently project that to be between 15 and 16 million when it's all sitting done through June 30th of 2019.

1682
02:32:28,280 --> 02:32:39,200
Page 10 just highlights via a worksheet summary where we are, how fiscal 18 results compare to our fiscal 19 projected ranges.

1683
02:32:39,200 --> 02:32:43,760
518 results was 406 million in a lot of education proceeds,

1684
02:32:45,180 --> 02:32:48,960
15.2 million for at-school program proceeds,

1685
02:32:49,980 --> 02:32:52,580
and then 519 projected ranges that I mentioned earlier,

1686
02:32:52,900 --> 02:32:56,140
411 to 422 million, a lot of education,

1687
02:32:56,780 --> 02:33:00,680
and projected ranges for at-school between 15 and 16 million,

1688
02:33:01,240 --> 02:33:03,520
as highlighted on that worksheet.

1689
02:33:05,020 --> 02:33:13,120
page 11 addresses where we are in terms of our projects of fiscal year 23-23 in terms of how

1690
02:33:13,120 --> 02:33:19,600
tail compares to the industry over the five years excluding high and low due to anomalies

1691
02:33:19,600 --> 02:33:25,560
associated with those fiscal years tail has performed quite significantly higher than the industry

1692
02:33:25,560 --> 02:33:32,300
between 4.5% versus industry at about 2.3%. But when we look at our projections in terms of a

1693
02:33:32,300 --> 02:33:38,300
conservative estimate. I estimates in the out years are projected at 2% to 3% in terms

1694
02:33:38,300 --> 02:33:45,120
of the growth rate year over year. And that's what is reflected in that chart at the

1695
02:33:45,120 --> 02:33:50,020
top of page 10. At school program proceeds, as I mentioned earlier, is based on unclaimed

1696
02:33:50,020 --> 02:33:56,220
prizes. We're averaging a little less than 1.5% of prize expense on average over the years

1697
02:33:56,220 --> 02:34:01,500
through inception. And so is budgeted out for the out years based off of our projected

1698
02:34:01,500 --> 02:34:03,680
that prize expense for those fiscal years.

1699
02:34:04,460 --> 02:34:07,580
Those are the highlights of the report that I presented to you.

1700
02:34:08,080 --> 02:34:12,540
As I mentioned earlier, I do have the report available to you that explains why we will

1701
02:34:12,540 --> 02:34:18,080
not return 35% and as we specifically mentioned, the driver to that is going to be an instant

1702
02:34:18,080 --> 02:34:18,500
product.

1703
02:34:19,240 --> 02:34:25,440
Prize expense for instant products is a significant driver for our sales and we've seen that

1704
02:34:25,440 --> 02:34:31,940
that over time our actual return from return to education for projects from our instant

1705
02:34:31,940 --> 02:34:36,180
ticket products have significantly increased year over year even though the proceeds from

1706
02:34:36,180 --> 02:34:40,700
those games are going to be less than 35% and that is reflected in a letter that I'll be

1707
02:34:40,700 --> 02:34:44,100
providing to each of you at the conclusion of this report.

1708
02:34:44,600 --> 02:34:45,440
Do you have any questions?

1709
02:34:45,960 --> 02:34:55,200
Yes, that letter will say your position that by the total amount going to educational

1710
02:34:55,200 --> 02:34:59,960
It will be greater by not having the...

1711
02:35:03,580 --> 02:35:08,160
So the amount of money going to education is greater on a kind of this. Correct. The actual

1712
02:35:08,160 --> 02:35:13,720
dollars increase the over here without percentage increase. That's right. You have any other

1713
02:35:13,720 --> 02:35:22,460
questions? I have this may be more appropriate for Director Hargrave, but you know, traditionally

1714
02:35:22,460 --> 02:35:29,780
Finally, you said that the lottery may be a tax on the poor in order to fund middle-class

1715
02:35:29,780 --> 02:35:30,500
education.

1716
02:35:31,360 --> 02:35:39,320
Of course, most of the proceeds go to the Hope Scholarship, but statistically, the results

1717
02:35:39,320 --> 02:35:47,340
you've seen nationwide off-the-guet Tennessee-Pacific ratios is that all levels of income participate

1718
02:35:47,340 --> 02:35:50,340
about the same percentage in the lottery.

1719
02:35:51,860 --> 02:35:53,680
Is that your understanding?

1720
02:35:54,400 --> 02:35:56,420
That is the information that we've had available to us

1721
02:35:56,420 --> 02:35:58,040
over the years, almost recent years,

1722
02:35:58,420 --> 02:36:00,420
so that it is evenly distributed based off

1723
02:36:00,420 --> 02:36:04,940
of income within classes, not necessarily based off

1724
02:36:04,940 --> 02:36:07,440
of specific demographics.

1725
02:36:07,900 --> 02:36:13,520
And then the, and maybe Mr. Felt should be better.

1726
02:36:13,520 --> 02:36:18,120
the Hope Scholarship is really where most money goes.

1727
02:36:19,280 --> 02:36:23,000
And this goes across all levels of society,

1728
02:36:23,260 --> 02:36:25,540
and not necessarily just the Mr. Clas.

1729
02:36:26,620 --> 02:36:28,680
Yeah, I believe Mr. Feltz will support that.

1730
02:36:28,940 --> 02:36:33,600
I guess it was, you know, this whole thing to me

1731
02:36:33,600 --> 02:36:34,640
is so counterintuitive.

1732
02:36:35,240 --> 02:36:39,880
I can't believe any of it, but it happens every year,

1733
02:36:40,140 --> 02:36:40,880
so I'm again interested.

1734
02:36:41,480 --> 02:36:42,560
Thank you very much.

1735
02:36:43,120 --> 02:36:44,980
Just so we have another question.

1736
02:36:47,360 --> 02:36:48,780
Okay, thank you very much.

1737
02:36:48,880 --> 02:36:49,020
All right.

1738
02:36:49,100 --> 02:36:50,100
Thank you.

1739
02:37:10,070 --> 02:37:10,710
You got the letters.

1740
02:37:10,910 --> 02:37:11,010
Good.

1741
02:37:23,070 --> 02:37:24,490
Morning, Mr. Chairman, member of the board.

1742
02:37:24,630 --> 02:37:32,070
Before you start, is the hope scholarships or the distributed among all pretty much economic

1743
02:37:32,070 --> 02:37:32,550
levels?

1744
02:37:33,550 --> 02:37:34,030
Yes.

1745
02:37:34,870 --> 02:37:35,410
Great question.

1746
02:37:35,570 --> 02:37:40,430
We do look at, there's an annual lottery report that we have that looks at distribution

1747
02:37:40,430 --> 02:37:41,650
across the incomes.

1748
02:37:42,190 --> 02:37:46,950
There is, and if memory serves me correctly, and I can verify the information to be shared.

1749
02:37:47,130 --> 02:37:55,070
But ballpark it's up to, it's about 10% every 10,000, so I think we started like 12,000

1750
02:37:55,070 --> 02:38:01,670
incomes and go up in those increments, but a majority of that does go to the upper income.

1751
02:38:02,010 --> 02:38:04,690
I think it's around 100,000 or more that we have.

1752
02:38:04,830 --> 02:38:07,730
But I'm happy to get that information for you all to be sure.

1753
02:38:08,590 --> 02:38:09,230
Okay.

1754
02:38:09,730 --> 02:38:09,970
Thank you.

1755
02:38:10,570 --> 02:38:14,830
Tim Phelps, Chief Grants, and Scholarships Officer with the T-SAC.

1756
02:38:15,490 --> 02:38:21,030
You should have the copy of our latest memo which provides the estimated expenditures for

1757
02:38:21,030 --> 02:38:22,450
our lottery funded programs.

1758
02:38:22,450 --> 02:38:27,830
As you can see, we've got a baseline estimate for the current year through 22-23.

1759
02:38:28,590 --> 02:38:34,730
The current year estimate we base on actual fall semester expenditures in the lottery programs

1760
02:38:34,730 --> 02:38:36,470
as of just a week ago.

1761
02:38:36,470 --> 02:38:46,190
So it does include estimates for two new programs, obviously the Tennessee Reconnect that you all are familiar with, and then also the Tennessee Vidal College Scholarship Program.

1762
02:38:46,870 --> 02:38:55,210
The out-year estimates that we have are based on growth in the projected recipients that take up rate, the scholarship renewal rate.

1763
02:38:55,750 --> 02:39:05,190
Our low end of that is representing a lower take up rate and a lower renewal rate, and then the higher end of that is a higher take up rate and a higher renewal rate.

1764
02:39:05,190 --> 02:39:09,430
and be happy to answer any questions that you may have.

1765
02:39:13,260 --> 02:39:19,640
If the estimates that we have for the lottery proceeds are off,

1766
02:39:23,740 --> 02:39:28,800
are you able to adjust with reserves to provide for the current year?

1767
02:39:29,560 --> 02:39:32,860
We do, so we have the lottery for education account,

1768
02:39:33,000 --> 02:39:36,160
which has 110 million that we're able to access.

1769
02:39:36,660 --> 02:39:42,880
So if we have a shortfall in the lottery proceeds, then we're able to make up the difference from that.

1770
02:39:43,320 --> 02:39:49,060
Then once we do that, the next year, we replenish the lottery for education account back up to that amount.

1771
02:39:49,180 --> 02:39:50,580
That's what I wanted to be sure of.

1772
02:39:50,700 --> 02:39:50,960
Yes, sir.

1773
02:39:51,860 --> 02:39:53,600
We have questions.

1774
02:39:54,520 --> 02:39:55,720
Let me get a little bit on that.

1775
02:39:55,820 --> 02:39:57,440
Yeah, I think this is something to make sure we do.

1776
02:39:58,360 --> 02:39:59,760
So, you would be able to take the reserves.

1777
02:40:00,000 --> 02:40:11,440
Some of the lot of education fund and make up a shortfall up to $110 million after telling me. That is correct. And then you would replenish that next year, but what if the number stay down? Yeah.

1778
02:40:13,140 --> 02:40:28,640
Then we have essentially circuit breakers that allow T-SAC to reduce the awards or eliminate programs in some places. I just want to make clear, it's not automatic replenishing of those funds, is it?

1779
02:40:28,640 --> 02:40:34,460
But it is, I think, up to the 410 million, if memory serves me correctly, we go back up to that.

1780
02:40:34,700 --> 02:40:39,660
I did not remember that, we take proceeds from each quarterly transfer that will be from the lottery.

1781
02:40:39,960 --> 02:40:42,840
And then we put that back in the library for education account.

1782
02:40:43,060 --> 02:40:44,200
Thank you for clarifying that.

1783
02:40:44,220 --> 02:40:44,560
That's good.

1784
02:40:45,440 --> 02:40:46,300
Other questions?

1785
02:40:47,340 --> 02:40:48,120
Thank you very much.

1786
02:40:48,720 --> 02:40:49,240
Thank you, Mr. Chairman.

1787
02:40:54,990 --> 02:41:00,890
Each year we have a request from the Department of Education for

1788
02:41:00,890 --> 02:41:15,290
a lottery scholarship day that's provided for Intensity Code Annotated Section 451-111-C2V.

1789
02:41:16,190 --> 02:41:23,770
In this request is for $23,000 this year, and this is for enhancement for education programs.

1790
02:41:26,290 --> 02:41:31,550
And I've moved that we approve this request.

1791
02:41:33,540 --> 02:41:35,080
Any discussion?

1792
02:41:37,190 --> 02:41:38,650
All in favor say aye.

1793
02:41:41,130 --> 02:41:51,770
Let's recess the meeting of the State Funding Board until Tuesday the 26th at 1 p.m.

1794
02:41:51,770 --> 02:42:02,330
this room. We will consider a variety of matters, including the red new estimates at that time.

1795
02:42:03,290 --> 02:42:06,370
So we are now in recess. Thank you all very much.