[This transcript was generated automatically from audio using AI and hasn't been reviewed by a person -- it can contain mistakes, including plausible-sounding sentences that were never actually said. Treat it as a starting point, not a verbatim record.]

[0:06] 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.
[0:20] Can y
[0:24] 'all
[0:44] today,
[0:47] November 20th, this is the meeting of the State Funding Board. We have a quorum. I call the meeting to order.
[0:54] or the first item on the agenda is a report of the revenue, I go for revenues, Commissioner
[1:03] Martin.
[1:04] Mr. Comptroller, thank you.
[1:07] Good morning.
[1:08] It's always good to give a positive report.
[1:11] That's a good part of the job and certainly our revenue performance through the first three
[1:20] months of FY19 have been good. The first two months were very strong and they were driven
[1:31] by a sales tax growth which was very strong. In October we moved back to more normal growth,
[1:42] if you will. We still ended in October over our budget. Here the number was driven as much
[1:52] by anything as F&E, which is interesting because F&E in October, that's a big month,
[2:00] a reconcilement month. So that bodes well, I think, for us, as we go forward, as F&E was
[2:08] almost 15 percent above the budgeted number. So when you look at the three months collectively,
[2:19] again, a good beginning, a positive variance to the budget and it really gives us a good feeling
[2:31] about how FY19 will end with a good chance for a positive variance for revenue for the
[2:42] year. We need to continue, though, to be cautious in our spending and we will do so as we
[2:52] watch the economy, there's certainly been volatility in the market the last few weeks and the
[3:02] movement in the market into negative movement has an impact on consumer confidence, I'm
[3:09] sure we'll hear some discussion of that in more depth and in better material as we hear
[3:16] from the economists this morning, but if there is a downturn in the economy, that could
[3:26] have obviously a negative impact on consumer confidence, which would show up in our
[3:33] sales tax performance and sales tax we need to keep in mind is 61% of our tax revenue.
[3:43] But, again, the numbers through the first three months are positive and
[3:49] bode well for us to finish in the positive territory for FY19.
[3:56] Mr. Comptroller, that's my report.
[3:57] Any questions?
[3:59] We're here to do the revenue estimating and we'll have
[4:06] economists giving their views.
[4:09] use this board will make determination as to a range.
[4:17] We have members of the Hessman administration and I believe who are likely to be part of
[4:25] the lead administration here today and they will come up with a number for the budget.
[4:30] We also have, in far more important, four members of the general assembly and the other ones
[4:35] who actually determine what the number is.
[4:38] and so I'd like to welcome Representative Hayes Award in Williams until this end,
[4:45] and what's, you're the ones who make the elsewhere a decision, and we welcome you that.
[4:53] We'll begin with Professor Fox from the Boys Center for Business.
[5:03] No, we haven't done it. I've got my agenda, I guess,
[5:09] I've got an old agenda.
[5:12] We have the minutes from the September 13th meeting.
[5:17] I staff has reviewed them. They appear to be in order, any comments, corrections, or suggestions.
[5:25] All in favor, say aye.
[5:27] Minutes are approved.
[5:29] Dr. Fox, could you proceed?
[5:34] It's Chairman.
[5:34] Thank you very much.
[5:35] And members of the Funding Board, I certainly appreciate the chance to be with you again
[5:39] this year and to talk about the economy and where things stand from a fiscal perspective.
[5:46] What I'd like to do, if it's acceptable, is just talk through a few slides with you.
[5:50] And I'm going to focus mostly on Tennessee.
[5:53] I do have some slides on the U.S. economy here
[5:56] that I'll rush through.
[5:57] I know you're going to have other presentations on that.
[6:00] And I know that ultimately the issue is about tax revenues.
[6:03] My first slide shows you GDP performance.
[6:07] As you know, it's been very strong 3.5 percent
[6:11] in the most recent quarter, 4.2, the quarter before that.
[6:15] The two strongest quarters in a row
[6:17] going about four or five years, and this is going to be the strongest four quarters in
[6:22] four or five years, and so GDP has performed very well.
[6:28] I do expect from here it's going to slow.
[6:31] The fourth quarter will see growth that 2.5% or a little better than that, so we'll end
[6:37] out with the current calendar year, about 3% growth in GDP.
[6:42] As we go through 2019 and 2020, the things which have caused such fast growth in 2018 begin
[6:53] to play out.
[6:54] And so, as we think about these sources of growth, it's been, first of all, the tax cut,
[6:59] putting more money in businesses and people's pockets.
[7:02] That did create fiscal stimulus, the spending package in February of this year, which added
[7:08] additional stimulus to the economists, the effect of that plays out as we get to the end
[7:14] of 2019. Consumers are confident at the same time. As commissioners, as you noted, the
[7:21] market is very volatile. Again, even this morning, the initial look is it's going to be down
[7:28] again based on the preliminary numbers. And so I expect consumers to slow. My next chart,
[7:36] actually, sorry, my next chart, the third one is it shows you that consumers have led
[7:43] the last several quarters in terms of economic performance and so a good report in terms of GDP
[7:51] but slowing and by the time we get to the end of the window you're looking at here fiscal 2020
[7:58] we're going to be looking at GDP growth rates around 2% or a little less and so there's no bad news
[8:06] I'm not forecasting recession.
[8:07] I am, however, suggesting much slower growth than in the past, the last year.
[8:14] As we look at the length of this economic expansion, I had a chart, it was actually my second
[8:19] one here for you, it does show you that this current expansion will be the longest in the
[8:26] post-war time period by the middle of next summer.
[8:33] Just a couple of things about why the economy is slowing.
[8:36] First of all, in terms of housing, housing has never recovered in the way we expected over the past decade.
[8:44] It's been very much driven by demographics and particularly by millennials not forming households.
[8:52] And we can see it here in the data even right now with housing starts actually negative over the last several quarters.
[8:59] and residential fixed investment, also flat or negative, and similarly vehicle sales,
[9:06] which, as you know, are very important to Tennessee.
[9:10] Not, I mean, there's still an expansion levels, but they've been coming down every quarter
[9:15] and Commissioner, I know you and I have talked about it as well as the Secretary about how
[9:20] this is likely to play out more over the next decade, but even before we get to these longer
[9:25] longer term changes, slow downs in these big ticket items from a sales perspective.
[9:32] With those thoughts, I'm going to turn forward to my ninth slide and can leave space for
[9:38] others to talk about the national economy.
[9:41] Important to remember that while we think of the economy in real terms, and so when I'm
[9:47] talking about GDP, I'm talking about a net of inflation, in fact, we tax nominal dollars,
[9:54] real dollars. And so inflation matters to us as we think about the number of
[10:00] 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
[10:29] We'll continue to see the Fed funds rate going up over the next 18 months or so,
[10:34] against slowing the economy and getting it back into trend levels to keep the inflation rate from rising too rapidly.
[10:44] My 10th slide shows you employment growth for Tennessee and for the U.S.
[10:51] This was drawn through September last Thursday after we had sent these to Nashville.
[10:55] bill, the October release took place. Employment growth for October was 2 percent, still very
[11:02] good and exceeding the national average. This is well above our population or labor
[11:07] force growth rate. It continues to push down the unemployment rate as a result, as we're
[11:14] all keenly aware and proud to hear. Amazon is going to bring 5,000 jobs to this area along
[11:20] with a lot of other good news. And so this is putting a lot of pressure on Tennessee's
[11:24] labor force, we've counted on a lot of in migration of population and that will certainly
[11:30] remain important as we look forward.
[11:32] Chart 11 illustrates how many jobs have been created in Tennessee and again this is
[11:39] something I think to be very proud and excited about.
[11:43] We bottomed out in the recession having lost about 200,000 jobs, we've now added back a half
[11:49] a million since then, and the economy just continues to do a very good job of creating
[11:57] employment and outpacing the nation.
[12:01] One of the outcomes in chart 12 is that the unemployment rate is, in October, it's
[12:07] the same as the national 3.7, we'll, you all remind you that we get a benchmark revision
[12:13] of these unemployment rates that will be provided in February.
[12:17] That will probably smooth out this pattern a little bit and continue to suggest that
[12:23] we're at or below the national norm in unemployment rates.
[12:27] And again, with the rapid employment growth we expect over the next year or two, it
[12:32] will just continue to push down this unemployment rate.
[12:36] Here's job growth by sector.
[12:37] And to look at this chart, it's important to realize that that leisure and hospitality
[12:44] growth rate is just extraordinary.
[12:45] It makes everything else look slow.
[12:47] In fact, it's what's extraordinary.
[12:49] We're talking 5.1 percent.
[12:51] And indeed, again, this is through September,
[12:53] the October number was 5.4 on leisure and hospitality.
[12:57] And so just what this tells us is, first of all,
[13:00] lots of us are going out to eat more than we used to.
[13:02] But what it's also telling us is that tourists
[13:06] are increasingly coming to Tennessee.
[13:09] Again, good for the economy.
[13:11] And so leisure and hospitality with extraordinary growth rates.
[13:13] But then, you know, all of those industries with growth rates above 2% are doing very,
[13:20] very well in professional and business services and particularly education, durable goods
[13:24] manufacturing, those things with a life of over three years.
[13:28] So a lot of sectors performing very, very well.
[13:33] And even as you get below the 2% average, again, long term, these are strong growth rates
[13:40] for most industries in Tennessee.
[13:41] This is the geography. Mr. Treasurer, Memphis has not done as well in recent years. I want
[13:48] to, that's why I particularly want to point this out. Memphis has over the last several
[13:52] months, but gotten to show much stronger employment growth and you see it here in this chart
[13:59] with actually above average growth taking place. Again, interestingly, Nashville is not
[14:05] at the top of this list for the first time in a few years. It's kind of in the middle still
[14:10] still doing fine as we look longer term, Nashville is still going to be likely the leader
[14:14] in Tennessee, but lots of other places, particularly in the Chattanooga area, showing extraordinary
[14:22] growth over the last several years with a lot of new locations, but a lot of expansion of
[14:28] existing business.
[14:30] With those thoughts, let me turn to taxes.
[14:32] Again, my picture of the economy is one in which we're going to continue to see economic
[14:38] expansion but with slower growth rates than we've experienced over the last year or two and kind
[14:45] of slowing down into 2020 employment growth likely also having to slow down a little bit as we
[14:51] have a more difficult challenge providing labor force but still able to sustain very solid employment.
[15:00] 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.
[15:26] the sales tax has been very, very strong in terms of its performance.
[15:33] So slide 20 is my revenue estimate just to give you a perspective on where I see things going.
[15:41] I think of this as a very conservative forecast.
[15:44] You can see at the bottom I have forecast 3.7% growth.
[15:50] But let's remember what Commissioner Martin just told us.
[15:54] that tax revenues through the first quarter have been very good.
[15:58] And so what this means is growing 3.4% for the rest of the year.
[16:03] It means the sales tax, which is growing well over 5%,
[16:07] growing 3.7% for the rest of this year.
[16:11] And so again, this is a conservative revenue estimate,
[16:15] but I think reasonable as I go into 2020 and the economy slows.
[16:20] But with a little more inflation,
[16:21] that combination suggests, you know, around 3.5% revenue growth, specifically 3.4% as we look forward.
[16:34] Some details on that slide 17 gives you tax collections where we've adjusted them for inflation.
[16:44] Notice that since 2016, including my forecast, I'm basically seeing tax revenues pretty flat
[16:51] That when adjusted for inflation just modest growth upward.
[16:56] But remember, we have cut the inheritance tax, we reduce sales tax on food, we're
[17:03] phasing out the income tax and so, so that's played a role in flattening those out.
[17:08] And of course, if you take a long term look, you see that the tax revenues are just a bit
[17:12] higher in real terms than they were a decade ago.
[17:16] So slide 18 just shows you year-by-year adjustment for inflation and I'll not talk about that in detail.
[17:26] Slide 19 shows you sales tax revenue growth.
[17:29] Again, Commissioner Martin just told you how strong that that has been.
[17:35] If I could just take, Mitch can tell me a moment in comment on wayfare in this context.
[17:41] But guys, and do you mind if I approach the bench with a couple of slides here?
[17:48] Sure.
[17:50] Should be one for everybody there.
[17:52] Let me make three comments about Wayfarer.
[17:56] First of all.
[17:57] In what Wayfarer is.
[17:58] Sorry.
[17:59] So Wayfarer is the U.S. Supreme Court decision.
[18:01] I know the commissioner revenue could give a much more insightful discussion than I.
[18:07] But Wayfarer, North Dakota versus Wayfarer, is the case
[18:11] that the U.S. Supreme Court decided in June, which the important thing is it did not cause
[18:18] states to begin to collect the sales tax. It allowed states in certain circumstances
[18:25] to require remote vendors to collect their tax. So we need to do something for that to take
[18:31] place. And so the map I just gave you is my best shot at what states have done so far.
[18:39] I believe there are, and the commission and I were just talking about there 29 states.
[18:42] I think I've put 28 in there.
[18:44] 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.
[18:57] 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.
[19:09] require remote firms to collect the tax.
[19:11] Second point is this is not new money.
[19:14] This is a situation.
[19:16] I mean, imagine this.
[19:17] Last year I went in a Walmart store in Knoxville
[19:19] and I bought a shirt and I paid the sales tax right there.
[19:24] Now, this year, I go in and I buy the same shirt,
[19:26] but I do it online from some small vendor
[19:28] and there's no sales tax collected.
[19:30] Now, the Commissioner Revenue tries to come after me
[19:32] to get that money, but not many of us, in fact,
[19:35] admit to making those purchases
[19:37] and so we don't get the money.
[19:38] This is not new money. It's the same shirt. I just bought it in different years from different vendors
[19:43] And so we need to keep in mind that this is nothing new. It's trying to maintain the tax base that we have
[19:50] 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
[20:01] 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.
[20:29] companies, and so we should not be expecting an extraordinary amount of money.
[20:33] The reality is there are 25 million firms selling on eBay.
[20:40] There's two million firms selling on Amazon, and we're talking about collecting from
[20:49] another six or seven hundred companies.
[20:50] Now they're bigger companies, and so there's more money involved than that whole 25 million
[20:55] individually.
[20:56] But there is a lot of money that's going to go uncollected, even if we were to allow a threshold of 500,000.
[21:03] So I strongly encourage you to be very conservative with any thoughts about how much revenue would arise from the wayfarer decision.
[21:12] 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.
[21:21] It's the right thing to do, but recognize the Supreme Court did not say you can collect all the sales taxes out there.
[21:26] The estimates, including the ones that myself and my colleagues have made, are about revenue losses,
[21:33] not revenue gains associated with a particular type of legislation.
[21:40] So caution.
[21:42] Yeah, so let me make sure that we have this right.
[21:45] We're not talking about a new tax.
[21:47] We're talking about collecting and existing tax.
[21:50] That's correct, Mr. Controller, it is a tax, it's already in place, and all we're
[21:55] doing is allowing the Department of Revenue to enforce this on some other vendors.
[22:03] Well, we're not going to even cite it.
[22:04] Maybe not as articulately, but in protecting a tax base.
[22:08] That's right, you're protecting your tax structure.
[22:10] Mr. Secretary, I agree entirely, it's protecting that structure, and that's why it's
[22:14] the right thing to do, to protect it.
[22:15] But also, you know, I've been talking about this thing for, I'm an old guy, I haven't
[22:20] talking about this for decades, you know, taking me a long time to convince anybody other than me,
[22:24] this is the right thing to do. But I've always said this is about the economy. It's not about
[22:29] tax revenues. It's about level in the play and field so that Tennessee businesses are lined up,
[22:35] competing evenly with non-tenancy business. That's all this is, you know, that's what's really important.
[22:40] And then also there's some tax revenues associated with it ought to be protected so that we don't have
[22:50] go in the future, that wayfare decision is very important to us.
[22:55] Slide 20 shows you where the tax revenues have grown by type of vendor.
[23:03] Notice that building materials have done very well.
[23:06] And in the most recent data, the October data, we saw the construction industry looking very good.
[23:11] Notice at the bottom of this chart, general merchandisers and food stores,
[23:16] think of, you know, I'm sorry, I think Knoxville,
[23:19] Kroger's and Walmart and stores like that
[23:23] at the bottom of this, and that's a combination
[23:26] of the impacts of e-commerce
[23:29] and the reduction of the sales tax rate on food.
[23:32] But you see them at the bottom
[23:34] of this chart as they have been for much of the last several years.
[23:39] Chart 21 shows you the impact of housing being pretty flat.
[23:43] 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
[23:53] The housing industry has not done as strong as we might have anticipated
[23:59] I'm just chairman those are my comments. I'd be happy to respond to questions if you have any
[24:04] Any questions here
[24:09] Mr. Little
[24:09] So, Dr. Fox on the slide that you had about the Memphis Statistical Area and everything
[24:15] is shown as a growth and everything is there any way you can tease out just the Shelby
[24:19] County numbers and pay it county and tips and county on that because DeSoto County
[24:24] Mississippi is in that statistical area and that skewing that number a little bit it looks
[24:29] like to me.
[24:30] Yes.
[24:31] Can I hand this to you?
[24:32] I'm sure.
[24:33] Uh-huh.
[24:33] This is a similar chart for Memphis.
[24:36] Uh-huh.
[24:37] Okay.
[24:37] Yeah, we'll we'll go and get you the Tennessee portion only of that. Okay, but that does give you the Memphis
[24:44] Detail, okay there. I want to be sure I understood what was going on in Memphis
[24:48] 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
[24:54] Let me make sure I have this correctly, you know, you have
[25:00] 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.
[25:30] to particularly do the last three, four, five months.
[25:32] You know, I've been doing this for 10 years with you,
[25:35] and I have not remembered for a single time
[25:37] where you said you're not working serve there.
[25:39] Oh, sorry.
[25:40] I, so the point I was really trying to make Mr. Comptroller,
[25:46] sorry, I always think of myself as conservators.
[25:49] So I'll admit, the point I was trying to make
[25:52] is we can grow more slowly through the rest of this fiscal year
[25:56] and hit that estimate.
[25:57] For example, with the sales tax, we only have to go 3.7% for the rest of the year.
[26:02] Overall, we only have to go 3.4.
[26:04] So, it means slower growth rate than what we've seen for the first three months.
[26:10] The one exception to where we slower growth rate would be needed is the F&E taxes.
[26:16] As Commissioner noted, F&E hadn't done as well in October, but that's a cleanup month as you also pointed out.
[26:24] And so that's really a function of, well, what did companies do in April when they filed and they cleaned it up?
[26:29] But maybe they just paid more last October, sorry, last April and so they didn't need to pay as much now.
[26:35] We'll really get a much better picture in January of where that tax is.
[26:39] And so we're going to need better growth to hit my estimate on the F&E taxes.
[26:44] Okay, other questions?
[26:47] Well, thank you, Mr. Compt.
[26:49] I was going to say, I approached this process very conservatively, but I'm worried you'll
[26:52] slide my hand if I say that, so I'm going to slide 13, Dr. Fox, just a tizzy job growth
[26:58] by sector.
[27:00] You know, we continue to see the growth of leisure in hospitality.
[27:02] You've talked about that, but I just wonder if there's anything on here that concerns you.
[27:08] They just seems to be irrational to you.
[27:10] It's not sustainable to you because when I say leisure in hospitality number, I'd be very
[27:15] concerned.
[27:16] Well, I'd be happy.
[27:17] But still even more concerned if a year from now we're sitting the same room and we see 5% again because
[27:24] It just doesn't feel sustainable to me
[27:27] Mr.
[27:28] 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
[27:35] And so so I think the challenge for Tennessee is how do we continue to grow in tourism in
[27:42] in ways that don't require as many workers.
[27:45] I was reading recently the McKinsey report on technology
[27:49] and where we can have automation.
[27:51] And McKinsey pointed out that these single industry
[27:54] that has the best potential to automate is that one.
[27:58] And they estimate about, and I mean by that,
[28:01] something like 65 to 70% of the jobs
[28:04] in leisure and hospitality can be automated.
[28:07] And so actually my longer term concern
[28:10] is that folks who don't have as good of skills,
[28:15] who've been, not all of them, of course,
[28:16] some really highly skilled people in the industry,
[28:18] so I'm not trying to put it by now,
[28:19] but as you know, many of these are hourly jobs.
[28:22] And if you don't have skills and that gets automated,
[28:25] then what do you do?
[28:27] Well, that's just what's ever more emphasis
[28:28] on our education system to create jobs,
[28:32] to create people who can work in these other industries,
[28:36] because that's where the future lies.
[28:37] Thank you Dr. Fox.
[28:41] Other questions?
[28:44] Thank you very much.
[28:48] Now we're most fortunate to have a representative of the Federal Reserve,
[28:53] Federal Reserve Bank of Atlanta.
[28:55] We really appreciate this.
[28:59] I'm not sure how to pronounce it. Is it Grape?
[29:02] Grape.
[29:03] be all great, who is the vice president and regional executive, we certainly thank you
[29:10] for being here.
[29:11] Thank you.
[29:12] It is a pleasure to be here.
[29:13] Thank you for inviting me and giving me a little bit of time to chat about how we're
[29:19] seeing things from the perspective of the Fed.
[29:21] I'm going to, my comments will zoom out a bit from Dr. Fox's comments and talk a bit more
[29:28] about how we at the Fed are seeing the national economy and perhaps some lessons that we can
[29:34] draw from that about thinking around Tennessee's future.
[29:39] The first picture, I'm sure you've seen before, represents a general proxy for economic
[29:45] activity and the U.S. economy overall and in Tennessee, and this is roughly just to say
[29:52] we continue to very closely mirror the pace of growth in the national economy here in
[29:57] and so it at least
[30:00] 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.
[30:29] But what I've done here is broken out contributions to that growth from different sectors in the economy.
[30:37] And what I want to point out is that the greenish, mid-color green line consumer spending,
[30:44] this bar right above the horizontal axis, continues to be the main driver of economic growth in this country.
[30:53] So, the story that we were all told and undergrad that this is a very consumption-based economy,
[31:00] this really has continued to hold going forward.
[31:03] And you've seen, kind of some volatility in other sectors, but the most recent overall
[31:09] growth in the economy was 3.5 percent.
[31:12] Consumer spending contributed almost full of full three percentage points to that growth.
[31:17] So, we continue to really try to parse very closely the dynamics of the consumer market
[31:26] as we think about the growth of the overall economy going forward.
[31:31] So, of course, we absolutely interlink together the pace of jobs growth with consumer environments.
[31:40] This picture is overall net payroll growth in the country and the dotted orange line
[31:46] is the monthly numbers, which can be incredibly volatile.
[31:50] But if you look through them, so the dark blue line is the 12-month average, which is
[31:56] still averaging just a phenomenally strong pace of 210,000 jobs a month to put this in perspective.
[32:04] 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.
[32:15] So essentially in order to absorb new kind of population growth in the economy.
[32:20] And you could have asked almost any federal reserve economist or even private sector economist several years ago.
[32:27] And I don't think anybody would have been able to say with a straight face that they
[32:32] expected this phenomenally strong pace of job growth to persist for as long as it has.
[32:38] So though this is a sign that the employment market continues to be strong, we are also
[32:44] kind of driving hard in a direction of ongoing tightness in the labor market.
[32:50] So it's something that is certainly balancing and that we continue to think is a very welcome
[32:57] strength but likely not a sustainable pace of strength. And we expect eventually job growth
[33:03] will have to move back down to a number that's more consistent with a long-run growth.
[33:12] Again, another cut of data that Dr. Fox showed, this is a intensity employment growth by industry.
[33:19] 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.
[33:31] And I have both year-ever year percent change and the quarterly average percent change.
[33:36] So the further up and to the right a circle is kind of the stronger the momentum in that sector is.
[33:44] And one thing I will point out though is that although we're seeing exceptional strength
[33:48] in leisure and hospitality, warehousing and transportation, some business services, these
[33:53] also tend to be sectors that have lower than median wages.
[33:57] So despite the fact that we're adding a large number of jobs, we also are tending to add jobs
[34:03] in sectors that have lower wages than the economy overall on average.
[34:09] Can I ask a question now?
[34:12] Please.
[34:13] I'm just curious, I don't have last year's presentation with me, but if I were to look
[34:18] at the wage growth in those sectors compared to last year, are we seeing that we're growing
[34:25] more in areas that do have a higher wage growth?
[34:32] We, these sectoral trends are not new this year.
[34:38] I think in general, there's been some shifting as we've seen a bit of a saturation in markets
[34:43] like manufacturing and construction, where it just seems those sectors have absorbed
[34:50] as much workforce as they could and we're at a point where they're really struggling to
[34:55] kind of add additional workers.
[34:57] but for the most part, this...
[35:00] 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.
[35:13] 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.
[35:23] Let's slide forward two slides if you want.
[35:25] Well, I don't get ahead. I mean, I'll leave it up to you.
[35:27] If you want to just tell me to wait and you go through your presentation and go from there.
[35:35] Okay, let's just keep rolling.
[35:38] Perhaps. Yeah, I do want to touch on that.
[35:40] And I will, so let's just skip to slide seven.
[35:45] I have broken down wage growth by income quartile.
[35:50] So these are top-coded data.
[35:52] So I'm basically throwing out everyone
[35:54] who earns $150,000 a year or more,
[35:58] just because there's a small number of people
[36:00] and they could really skew the data.
[36:02] So if you look at folks below that spectrum,
[36:05] the lowest quartile earns less than $14 an hour,
[36:09] that's the green line.
[36:10] the highest quartile earns above $32 an hour, the blue line, and then orange and purple
[36:16] represent those earning kind of middle-income earners.
[36:20] In one thing that's been really fascinating that we've seen in the data that is consistent
[36:25] with stories we've heard from Tennessee business leaders is the labor market tightness appears
[36:31] to be most acute, especially for low-wage workers, and increasingly also for high-wage workers.
[36:38] Where what you're seeing is this middle-wage worker, which we tend to, we can track wages pretty
[36:44] closely to middle-skill sorts of jobs, their wages, wage growth essentially bottomed out,
[36:51] an increased sum but has really become quite stagnant below what we would have seen in prior
[36:57] expansionary periods.
[36:58] And the concentration of wage growth has been on the low end and on the high end, that reflects
[37:06] our readings of labor market tightness in both of those areas.
[37:10] So when you think about construction, restaurant and hospitality,
[37:16] warehousing workers on the lower end, on the higher end,
[37:18] we hear a lot of stories about specialized IT workers,
[37:23] executives, those sorts of roles.
[37:25] There are a lot of anecdotes and the data is consistent with growing tightness in those areas.
[37:31] However, there's kind of a difficulty shifting folks
[37:35] from the middle skill spectrum to the outer bands.
[37:40] How do you reconcile that with, as you have that tightness, wage growth is going to go up because of supply and demand.
[37:47] 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?
[37:57] That's right.
[37:59] That's right.
[37:59] So the green and blue line in this picture, the green line represents lower wage, generally
[38:07] lower skill workers, and it has been growing well above the clip that we've seen the
[38:13] pace of wage growth for other skill workers and other kind of wage cohorts.
[38:19] And we're even now about in the high territory that we saw in the previous expansion.
[38:24] So we are starting to see movement in wages that certainly do reflect this trend of
[38:30] tightness and employers feeling like they're having to offer higher wages in order
[38:36] to compensate people to move into their skills.
[38:40] That said, though these wages are growing, these are still the lowest wages kind of of
[38:46] the group.
[38:46] So presumably if someone could shift from the first quartile to the second quartile
[38:52] once they earn $14.01.
[38:55] Thank you.
[38:56] This is maybe a little bit off,
[38:59] but how would this change here,
[39:02] which is really fascinating?
[39:05] How would that relate to our,
[39:07] you know, we're sales tax state.
[39:09] Right.
[39:09] How would this tie into our sales tax collections
[39:13] where the so-called middle class
[39:15] is not the one growing at all?
[39:18] Right.
[39:19] Well, it's absolutely fascinating.
[39:21] It tends to be that lower earners have the highest marginal propensity to consume.
[39:28] So if you're living paycheck to paycheck and, you know, earning kind of a smaller
[39:34] amount, an extra 10 cents in your pocket is going to mean an extra 10 cents spent in a store
[39:40] where that tends to be less and less the case as you move up the income spectrum.
[39:45] So, certainly seeing this improvement as we add jobs and we continue to see wage growth
[39:52] for lower wage workers, that's much more likely to translate into sales tax related
[39:59] didn't spend.
[40:14] 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?
[40:25] This is national data.
[40:28] Is there any source that has Tennessee data on this that you're aware of?
[40:34] I don't have one included.
[40:35] Perhaps some of my colleagues may have a better sense of whether we can break this down.
[40:40] One of the challenges when we move to Tennessee's specific data is we end up getting much less
[40:48] timely data.
[40:50] So it can be harder to pick up on these near term trends.
[40:55] Thank you.
[40:57] Thank you.
[40:59] Moving to slide 8, certainly when we think about consumer sentiment, there are a whole
[41:09] slew of things we look at.
[41:10] One important metric is this left-hand chart, which is University of Michigan's surveys
[41:15] of consumer sentiment, which is incredibly robust at this point.
[41:19] So we had stayed quite low following the most recent recession.
[41:23] and now have rebounded well above averages from the prior recovery.
[41:28] So when you ask consumers how they're feeling about their job stability,
[41:34] their income expectations, how comfortable would they be taking out alone
[41:38] and making a big purchase, they're very positive about all of those indicators.
[41:43] On the right hand side of the page, this also represents a general pot proxy
[41:48] for their financial obligations ratio.
[41:50] So, it's essentially the ratio of their kind of debt payments to disposable personal
[41:57] income, which suggests really consumers did do a lot to shore up their financing and
[42:03] shore up their balance sheet following the great recession and continue to be in a place
[42:08] where a good portion of their income is still free for discretionary spending and isn't
[42:15] tied up paying down debt.
[42:18] 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,
[42:48] or political uncertainty, or gas prices increasing.
[42:51] There are a lot of things that feel important to consumers.
[42:55] But if you zoom out and you look at what is by far the best predictor
[43:01] of consumer activity in the economy, far in a way
[43:04] the closest correlation we get is with income.
[43:08] So this is a picture of disposable personal income and consumer spending.
[43:14] And they tend to hold very tightly together historically.
[43:17] And we've even seen that relationship tighten up a bit over the past few years.
[43:22] So when we are trying to dig into the details of this largest segment of the economy consumer
[43:29] spending, the reason we look so closely at the employment market is because the best
[43:35] indicator of the vitality of the consumer and consumer spending is how much people are
[43:40] earning.
[43:40] I'll
[43:45] skip to slide 11, which reflects already some of the comments Dr. Fox shared around
[43:53] the housing market, which certainly has slowed as a contributor to gross domestic product.
[44:00] And we have even seen a slowing of housing starts in some instances in recent months.
[44:04] And that has been in conjunction with rising interest rates and rising mortgage rates.
[44:10] We also anecdotally continue to hear stories of just there are shortages of available land.
[44:16] There are shortages of available lots which has meant that developers continue to invest
[44:22] in kind of higher cost, higher price housing in order to rationalize going to be expense
[44:28] of building and the limited property available.
[44:31] This is a national story and I will point out on the right hand side of the chart is a housing
[44:38] affordability index.
[44:39] 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.
[45:06] 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.
[45:23] Slide
[45:27] 12 is the inflation reading, the Federal Reserve targets a 2 percent personal consumption expenditure price index reading of inflation.
[45:37] 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.
[45:54] I want to move to slide 13.
[45:57] I have a couple of, I have two risk factors that I want to point out, that when we are
[46:02] thinking about our forecast and thinking about the main things that can impact the consumer
[46:07] right now, there are a couple of uncertainties on the horizon that we have yet to really
[46:13] see how they play out.
[46:15] The slide 13 focuses on tariffs, and there are many impacts that tariffs can have on the
[46:21] economy, both positive and negative, and there are kind of many ways that those mechanics
[46:26] work their way through the economy. One that is still a question mark that has the
[46:32] potential to have perhaps the greatest impact on the consumer themselves is what, how could
[46:38] the tariffs actually impact prices of consumer goods and therefore impact consumers' ability
[46:44] to spend? So the left hand side of this chart is a picture from the Peterson Institute
[46:51] It represents the three phases of tariffs, and as you notice, the first phase has very
[46:57] little orange, which is a tariff that goes directly onto goods sold to consumers.
[47:02] The second phase has a much greater portion of consumer goods, and then the third phase,
[47:06] which has not in effect yet, has even greater share of consumer goods.
[47:13] If you look at the right-hand side of the chart, I've broken down some of the major imports
[47:20] that we bring into this country from China.
[47:23] So overall, China represents a little over a fifth
[47:27] of our total U.S. imports, however,
[47:30] for particular consumer goods.
[47:33] Over half of our imports are coming from China,
[47:36] so that furniture, textiles, leather goods, et cetera.
[47:40] We import an enormous amount from China.
[47:43] And what does that mean?
[47:45] If you flip to slide 14,
[47:47] There are some interesting dynamics at play.
[47:51] So when the left hand chart I break down the producer price index,
[47:57] so essentially producer inflation for intermediate goods,
[48:00] versus producer inflation for finished goods.
[48:04] And though their trends are similar,
[48:06] you see that even when there are wild swings in costs for intermediate goods
[48:11] and commodity prices for producers,
[48:13] They are still able to manage their supply chain and absorb those swings in cost so
[48:20] that what the consumer actually ends up seeing with finished goods is much more muted.
[48:26] What that has left us with as we think about the inflation prospect going forward is now
[48:33] that we are starting to see waves of this second wave of tariff that goes directly on consumer
[48:38] more goods, how much capacity do retailers have to absorb some of those price increases
[48:44] in their margins, so they don't have to pass the full increase on to consumer prices?
[48:49] The right-hand side of the chart is two different measures of retailer margins.
[48:55] And generally, what I want to point out is they were able to recover pretty considerably
[49:00] from the depths of margins bottoming out, following the financial crisis, but they've stabilized
[49:06] over the past few years.
[49:08] So, our both survey data and also kind of conversations
[49:12] and focus groups with business leaders
[49:15] that produce and sell a lot of consumer goods
[49:18] suggest there's some room to absorb
[49:21] some of these cost increases in their margins.
[49:24] However, at some point, they do expect to start having
[49:26] to pass on the tariff costs onto consumer prices
[49:30] which they expect to have some impact
[49:33] and consumer's ability to spend.
[49:39] And slide 15 is my last big question mark.
[49:44] So when I'm traveling about Tennessee
[49:47] and meeting with business executives,
[49:50] I think maybe 90% of the time now,
[49:53] I get the question, well, when's the next recession?
[49:56] You say, oh, well, are you, are your customers pulling back?
[50:00] 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.
[50:29] and consumer spending on the right-hand side.
[50:32] And I've indexed them to 100 at each business cycle peak since 1960.
[50:40] So you can essentially track how each of these measures declined during a recession
[50:44] and recovered through the following recovery.
[50:47] Each line ends essentially when the next recession begins and the line kind of resets to 100.
[50:54] So there are two big things that jump out at me looking at these.
[50:57] One is the current recovery, the dotted line, is longer than the other lines.
[51:04] So we are now in a period of the longest post-war recovery in history.
[51:10] But importantly, it's also very noticeably the lowest of all of the lines.
[51:15] So even though this has been a long recovery, if we go by the calendar, it has not been a
[51:22] recovery that suggested kind of percentage point wise a dramatic growth in the economic
[51:28] fundamentals that we have had that we would have had in the past with a recovery of this
[51:33] length, which is one of the reasons that we continue to think there is more capacity
[51:38] for the U.S. economy to continue to expand because we're not in this high inflation fire
[51:44] hot situation where all of the major components of the economy are growing at their maximum
[51:51] month pace right now.
[51:54] I will leave with a general blue chip forecast. On slide 16, this
[51:59] is essentially the blue line is actual real GDP growth. And then the red line and dotted
[52:05] lines are essentially a consensus forecast of the top 50 blue chip forecasters in the U.S.
[52:12] economy. And their expectation is closely aligned with ours at the Federal Reserve and certainly
[52:18] aligns with Dr. Fox's expectation that, look, we've had, we've had unusually and unsustainably
[52:25] strong GDP growth over the past couple of quarters. We're expecting that to moderate
[52:32] somewhat back to a more sustainable, longer run pace of growth that is still strong, especially
[52:38] for the size of our economy, but isn't this kind of high pressure place?
[52:43] So they show that all, even the top 10, the bottom 10, the consensus are all 3% or less as of January.
[52:55] That's right.
[52:59] I would also say the margin for error of these things.
[53:02] Oh, I'd say that.
[53:05] We love to put people in.
[53:10] And then the last page, I just have a couple of comments about anecdotal feedback from business leaders.
[53:16] They continue to be positive.
[53:17] There's some uncertainty as we go into the out years,
[53:20] but for the most part, a very positive story
[53:24] from the folks we speak with.
[53:35] This is absolutely fascinating.
[53:38] We really appreciate it.
[53:40] Got questions?
[53:42] Thank you so much.
[53:43] Thank you for the pleasure.
[53:44] We really appreciate it.
[53:46] I mean, this is wonderful.
[53:47] Thank you very much.
[53:51] Now we have the East Tennessee State, Dr. Smith and your folks.
[53:56] Come on up here and put the good words on us.
[54:23] So Dr. Smith's not going to come up here next year.
[54:27] That's all getting in there.
[54:29] Good
[54:34] morning.
[54:36] Good morning.
[54:37] Good morning.
[54:46] Proceed.
[54:49] Thank you.
[54:50] Well, thank you.
[54:51] First of all, this is my first opportunity to come before this commission and it's a pleasure
[54:55] to do so.
[54:56] I'm for the record.
[54:57] Say your name.
[54:58] Fred Maccara.
[54:59] Okay.
[55:00] 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,
[55:29] 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.
[55:47] So what that of course implies is that there's no more easing that is likely to be out there.
[55:52] So we've seen interest rates rising, the Federal Fund's target rate has been increasing,
[56:03] and with that we've seen interest rates long-term and short-term starting to increase.
[56:10] There's longer-term interest rates still trailing, but they're on their way up.
[56:16] One of the sectors of the economy that's particularly affected by that, of course, is the housing market.
[56:21] And we see as we look at data on new and existing home sales that toward the end of this chart here,
[56:29] we see a definite decline in the number of new and existing home sales sold.
[56:39] 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,
[56:48] as well as the months of sales that they represent.
[56:54] Another way of looking at this, again, is to put those two together.
[56:58] The number of new homes sold versus the number of new homes for sale.
[57:03] And we can see that the number of new homes for sale has been steadily increasing.
[57:09] But again, the number of homes for sale, excuse me, the number of homes sold has started to drop off a bit.
[57:17] Turning to the labor market, which we've heard several things about, another particular
[57:22] view is to look at data from the job openings and labor turnover survey or JOLTS, as it's
[57:28] called, from the labor department.
[57:31] And one of the things that we observe in this particular chart is that job openings have
[57:36] been increasing much more sharply than higher, it's getting harder and harder to find people
[57:42] to fill those jobs.
[57:44] Another way of looking at this too is to look at the relationship between layoffs and quits.
[57:50] Workers are feeling a little more confident about leaving their existing jobs and looking for better employment and perhaps higher wages.
[57:59] 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.
[58:11] Another kind of evidence of this comes from some more anecdotal data.
[58:20] Looking at the National Federation of Independent Businesses, small business optimism index,
[58:25] this is for September 2018, and there was a statement in that report that said that 87%
[58:32] of survey respondents, that's respondents to the survey from which that index is drawn,
[58:38] who are hiring or trying to hire workers reported few or no qualified applicants for the
[58:44] positions that they were trying to fill. By the way in the October index that rose to 88 percent.
[58:52] At the end of the optimism index report they always ask small businesses what's the most
[58:58] important problem that they face. For many many years the two that were always near the top or at
[59:06] the top or taxes and government regulations and red tape. But for the past several months,
[59:12] the one that has taken over as the lead is quality of labor. So that's becoming a
[59:17] bigger and bigger problem that small businesses face.
[59:23] Now, we've talked a lot about what
[59:25] the outlook is for the economy, and of course, the impact that a recession could have. One
[59:30] of the data sources that I'd like to look at is weekly new claims for unemployment benefits.
[59:37] 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.
[59:48] 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.
[59:59] When we see
[1:00:00] 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
[1:00:29] are at historic low, going all the way back to the late 60s.
[1:00:34] So as a percentage of the labor force, we have had a record low number of claims, going
[1:00:41] all the way in more than 50 years.
[1:00:47] Another way of looking at what's taking place in the labor force is that the unemployment
[1:00:52] rate, of course, has been declining.
[1:00:54] It's not at a record low, but it's at a low compared to, you know, a couple of decades.
[1:01:00] Meanwhile, the labor force participation rate, that's the percentage of the working age
[1:01:05] population that is either employed or seeking employment, has stabilized.
[1:01:11] One of the things that economists and others were concerned about is even though the
[1:01:15] unemployment rate was dropping in the recovery from the Great Recession, also the labor force
[1:01:21] participation rate was declining.
[1:01:23] But that seems to have stabilized now around 63 and a half percent.
[1:01:29] Good sign again for strength in the labor market.
[1:01:34] Another way of another evidence of strength and I believe Ms. Grafie also pointed this out
[1:01:40] is to look at the monthly growth in average weekly and hourly earnings of non-supervisory production workers
[1:01:47] and Dr. Fox also mentioned this as well.
[1:01:52] Wages, of course, have been something that hasn't been growing at a very rapid rate.
[1:01:57] But more recently, what we've been seeing is a little bit of pep in that hourly weekly
[1:02:05] and, excuse me, hourly earnings and weekly work earnings of non-supervisory production
[1:02:11] workers.
[1:02:11] So, again, that's a pretty good indicator of what's happening to kind of middle-class
[1:02:16] workers and the labor force in general. Wages have been barely keeping up with inflation but
[1:02:26] again some data that we've seen in the previous two presentations. The employment cost index on
[1:02:34] total compensation growth of all civilian workers has been rising, getting up to about 3% a little bit
[1:02:42] above inflation. Of course, employment cost includes both wages and benefits. And the
[1:02:49] surprising thing is that of those two, the wage part of it has been the one that has
[1:02:55] been growing more rapidly. The trend is definitely upward. The long-term average has been
[1:03:01] a little bit less than two and a half percent, but now we're seeing growth rates in the
[1:03:07] the order of about three and a half percent.
[1:03:13] Now in a state of which retail sales are source of a good part of our tax burden and tax
[1:03:20] revenues depending upon which point of view you're looking at it.
[1:03:25] Retail sales as a percentage disposable income has shown kind of an interesting change since
[1:03:32] the great recession.
[1:03:33] What we've seen is since that great recession, as a percentage of disposable income, retail
[1:03:40] sales overall, or whether we exclude food services or whether we exclude autos, have
[1:03:47] been running at a rate of a little bit about 2% less as a percentage of disposable income
[1:03:53] than they did before.
[1:03:55] So if we're going to be using things like disposable income to get an idea of what our tax
[1:04:02] revenues might be, to the extent that retail sales are a big part of that, maybe a little
[1:04:08] bit less than the historical models might indicate.
[1:04:14] Another chart that kind of indicates the same thing is that on an inflation-adjusted
[1:04:18] basis, real sales as a percentage of disposable income and personal consumption, again, have
[1:04:25] been running about 2% lower than they were prior to the great recession.
[1:04:32] Why that's happening is difficult to say.
[1:04:35] It might have something to do with the way in which of the data presented maybe a larger
[1:04:40] part of consumer expenditures are not picked up by the data that is included in retail sales.
[1:04:48] Similarly, when we look at consumer credit, consumer credit of course falls into two categories
[1:04:58] revolving.
[1:05:00] 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
[1:05:29] percentage of both overall consumer credit and by the way I want to point out an error in the
[1:05:39] this particular chart at the bottom when it shows what the two lines represent. The blue
[1:05:46] line is not the percentage of revolving. That should be the percentage of non revolving credit.
[1:05:52] But revolving credit as a percentage of overall credit and consumer credit and as a percentage
[1:05:59] each of non-revolving credit has been declining.
[1:06:03] Why that's happening, again, a subject to some speculation,
[1:06:07] and maybe the consumers are being a little bit more
[1:06:10] circumspect with their credit use because of maybe
[1:06:15] how they got burned during the great recession.
[1:06:19] It may be temporary, or it may be a permanent factor
[1:06:23] that the consumers are being a little better behaved.
[1:06:26] maybe the millennials and the newest generation are showing more restraint than baby boomers like me did.
[1:06:35] That's all the charts that I have.
[1:06:37] I'll be happy to answer any questions that you have before Dr. Mike probably takes over here.
[1:06:45] Any questions?
[1:06:47] Comments, Dr. Proceed.
[1:06:49] Okay.
[1:06:50] Now that with Fred has walked us through the national economy, I'd like to talk briefly
[1:06:54] about the state, the MSAs and the counties.
[1:06:59] Looking at a snapshot of where the economy is right now in the state and the MSAs and
[1:07:04] the trends, so where we've been and hopefully a picture of where we're going.
[1:07:09] Now we have a positive outlook for the state of Tennessee, consistent with what we've been
[1:07:15] seeing at the national level.
[1:07:16] we have low unemployment, we have a growing labor force, we have output that's rising.
[1:07:21] I think those things are going to continue. And even if a recession does come,
[1:07:24] I believe that will recover from quickly and will continue back on the long run trend of growth
[1:07:29] for this state.
[1:07:33] Here's the Tennessee civilian labor force going back almost two decades. You've
[1:07:38] seen there's some variability going back that long. Didn't dip that much in the great recession.
[1:07:43] But if you look back to the beginning of 2014 to present, you see some steady growths.
[1:07:49] It's a lot of growth here in the civilian labor force people are moving to Tennessee
[1:07:53] and entering the labor force.
[1:07:56] Not sure if this is sustainable in the long run because this is a big increase in just
[1:07:59] a few years.
[1:08:00] You may start to flatten out, but do you think that this is going to continue to grow because
[1:08:05] this is a state that people want to move to and live in.
[1:08:08] It's a lot of our attracting businesses, our attracting workers.
[1:08:10] I'm an example of that, moved here in 2016.
[1:08:14] Here we have 10 to see real domestic product,
[1:08:17] 97 to 2018, so a little over two decades.
[1:08:20] You can see we had a small dip in the great recession,
[1:08:23] we were covered quickly,
[1:08:24] and we've been steadily growing ever since.
[1:08:26] So we're talking about back nine years here,
[1:08:29] steady growth.
[1:08:31] This will continue, we think, until people keep mentioning
[1:08:35] eventually there's gonna be a recession.
[1:08:36] We don't see one coming in the next year.
[1:08:41] But if we don't have one, we think the output will continue drawing.
[1:08:46] When it does come, there'll be a dip and then we'll end it back on the long-run trend.
[1:08:52] Here we have unemployment rate by Tennessee MSA.
[1:08:54] Now at the national level, unemployment rate is 3.7%, which is very good.
[1:08:59] And Tennessee is even better than that.
[1:09:01] For the state, we have 3.6.
[1:09:03] Now you can see here in Nashville, 2.9% employment that's extraordinarily low.
[1:09:08] and that's bringing down the average for the state.
[1:09:11] The next two lowest are Chattanooga and Maxwell, 3.5%.
[1:09:15] But there is a big difference between Nashville,
[1:09:17] for instance, and Clarksville.
[1:09:19] Clarksville is the maximum 4.5%.
[1:09:21] Relatively high compared to Nashville,
[1:09:23] but still very low, 4.5% is a low unemployment rate.
[1:09:27] When you're looking at rates like this,
[1:09:29] you're probably dealing with just-friictional employment.
[1:09:31] This is people that are between jobs,
[1:09:34] the quater fired, and they're looking for a new job.
[1:09:37] Now, this chart shows the relative importance of Nashville.
[1:09:40] The MSA is with the economic engines of the state, and Nashville is the main driver
[1:09:44] of that.
[1:09:45] You can see by non-Farm employees, Nashville is the largest by far Memphis is a second
[1:09:53] place.
[1:09:54] There are about two-thirds of Nashville.
[1:09:56] And then everybody else is pretty small compared to Nashville.
[1:10:00] 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.
[1:10:18] 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.
[1:10:29] Now, the smallest six by themselves aren't much, but they add up.
[1:10:37] Altogether, they're larger than Knoxville.
[1:10:39] They add up to 17%.
[1:10:42] Average weekly earnings by Tennessee MSA.
[1:10:45] Ranges from 983 for Nashville to 649 for Kingsport, so that's a big difference.
[1:10:51] One thing that we get from looking at this chart is we see the accumulation of physical
[1:10:56] capital and human capital in Nashville, leading to a higher labor productivity there.
[1:11:03] So we have a lot of business boom in here in Nashville.
[1:11:08] Now this takes us to counties. Percent changes in county employment. Red is negative and
[1:11:14] then all the blues are positive, ranging from light-blooded dark blue, dark blue is the most.
[1:11:20] And you can see the impact that Nashville and Nashville are having on the state. So the
[1:11:25] Nashville and Nashville MSAs have very strong increases in county employment and it's
[1:11:32] having this radiating effect. There's a contagion there where it's spreading to counties
[1:11:37] that are adjacent to the MSAs, but not part of the MSAs. And we have a few patches of
[1:11:43] red here. Those are all rural counties. So those are counties that are outside of the MSAs.
[1:11:50] Changes in county labor force. Again, you can see the effect that Nashville is having
[1:11:54] in the National MSA is growing the labor force
[1:11:57] in adjacent counties.
[1:11:58] So you have a very strong growth here in middle Tennessee.
[1:12:03] People are, it's probably a combination of factors here,
[1:12:06] so there's people that are leaving
[1:12:07] the rural counties and moving to the big city.
[1:12:09] And we're also attracting workers from out of state.
[1:12:12] There's more red in this map than in the previous one.
[1:12:15] So we have some counties that are
[1:12:17] in decline by this statistic.
[1:12:19] These are all, again, rural counties
[1:12:20] with the exception of Polt County down there.
[1:12:25] changes in county state sales tax collections, you see a bunch of patches of
[1:12:29] bread throughout as a negative that's expected with the changes in the tax law
[1:12:33] that we've seen at the state level but still a good amount of blue in this
[1:12:37] chart so even with the decrease in sales tax state sales tax collections are
[1:12:42] going up in most counties as the economy grows. Now county local sales tax
[1:12:48] collections is what you'd expect there's no change to the law in this case and you
[1:12:54] We see a lot of dark blue, so the economy is growing and that's growing in revenue in
[1:12:58] most of the counties in the state.
[1:13:00] We still see a small number of red counties here, so there's a few that are in decline
[1:13:05] by this metric.
[1:13:08] Changes in county bank deposits, I focus here on, you look at the Memphis MSA Nashville
[1:13:15] and Knoxville.
[1:13:16] That's really where you're seeing inflows of financial capital.
[1:13:19] That's people moving in, businesses coming in, and bank deposits are accumulating, and
[1:13:24] and that's providing money for consumer loans and business loans.
[1:13:27] So that's a good sign of growth in West Tennessee,
[1:13:31] middle Tennessee, and East Tennessee.
[1:13:32] They're each sharing in this growth.
[1:13:35] This brings us to the revenue forecast.
[1:13:37] The largest component is sales and use.
[1:13:41] We're forecasting that we're going to break 9 billion
[1:13:44] for the next fiscal year.
[1:13:45] That's an increase in 2.26%.
[1:13:48] F&E, the next largest, we're predicting a more bold
[1:13:51] 4.31% increase in net.
[1:13:53] But gasoline tax, of course, is going up to do the changes in the tax law, and let's see,
[1:13:59] income tax is falling, as expected, inheritance tax is being phased out.
[1:14:04] In all, we're forecasting a little over $14.8 billion for the next fiscal year, a 2.78% increase.
[1:14:11] Now, I do need to point out the footnotes on sales and use, and FNE, I think it has a privilege tax.
[1:14:19] So that takes out, let's see, about $160 million in earmarked funds.
[1:14:25] If you add that back in, that takes us really close to where Dr. Fox is for his revenue
[1:14:30] estimates.
[1:14:31] So that would break $15 billion for next year, and that'd be a higher percentage increase.
[1:14:39] Now, this last slide, I'll just skip, let's provide it for your convenience.
[1:14:57] So we will assume there are no questions?
[1:14:59] No, no, not.
[1:15:00] Let me just make sure I've got this for current year, almost 2.8. And for the following year, 2.7.
[1:15:13] Right, right, so. And this, this,
[1:15:21] 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.
[1:15:30] I believe the last page may do that.
[1:15:32] Oh, you have the last page does that?
[1:15:33] Yeah.
[1:15:35] Okay, I'm sorry.
[1:15:36] I haven't seen it.
[1:15:39] Okay.
[1:15:40] Okay, yeah, it doesn't.
[1:15:45] Now, let's talk about lead indicators.
[1:15:53] One of the lead indicators we have is the stock market.
[1:15:58] It's down to about 500 points right now.
[1:16:02] Does that cause any concern?
[1:16:04] I'm
[1:16:07] not a finance guy, I'm an economist, it's certainly something that I would be concerned
[1:16:13] about if I had a whole lot of money invested in the market, but the market has been so
[1:16:18] thrown around by all sorts of considerations of what's happening with technology and issues
[1:16:26] like that.
[1:16:27] I'm not sure how much I would place in terms of that being a bad indicator of the future
[1:16:34] of the economy.
[1:16:42] I'm not sure about that when I'll refer to my colleagues here on that.
[1:16:50] What about housing starts?
[1:16:53] Housing starts, I think, is one that is a concern.
[1:16:57] I recently attended a public program presented by Ms. Grafie's boss, Raphael Bostic.
[1:17:06] And one of the things that he mentioned was that, of course,
[1:17:10] Dr. Postic is a well-known expert on housing.
[1:17:15] And he said, usually, we used to think of the housing market
[1:17:17] and housing statistics as being a lagging indicator of economic conditions.
[1:17:22] But more recently, and I'm not sure how far back he goes on this,
[1:17:26] but I think it's been considerable.
[1:17:28] We've seen housing as more of a leading indicator.
[1:17:31] So that is something I'm concerned about.
[1:17:33] The decline that I pointed out with housing starts and so forth, I think maybe something to keep an eye on.
[1:17:42] I'm just hopeful that what Joe said about, you know, if we do have a recession, we're relatively shallow and relatively brief.
[1:17:54] But if there is a recession, if there is.
[1:17:57] 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.
[1:18:07] There's nothing there that suggests that.
[1:18:10] So we've talked about the current year.
[1:18:12] The likelihood of a recession is fairly low.
[1:18:15] Very low, I believe.
[1:18:17] 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.
[1:18:27] Thank you, Mr. Comptroller. Thank y'all very much for your presentation. It's very
[1:18:33] helpful all of them have been and y'all have touched on different points and we appreciate
[1:18:39] that. Y'all are more optimistic about the economy and the continuance of it. Well, how
[1:18:47] me with your insight and knowledge of what you viewed to drive consumer confidence?
[1:18:55] Is it the market?
[1:18:59] To me, there seems to be certainly a correlation that is there in the volatility over time
[1:19:07] to create some uncertainty with the consumer.
[1:19:11] How would you play that back to us with our dependence upon sales tax, which is dependent
[1:19:18] obviously on consumer consumption?
[1:19:21] So can you tie that together for me?
[1:19:24] How should we be viewing that today?
[1:19:28] Well, the uptick in consumer confidence was a long time coming.
[1:19:33] I think it took a while to get over the shock of the Great Recession.
[1:19:37] And if we look at consumer confidence as being something that is very strong, the indexes
[1:19:43] of consumer confidence from the conference board as well as the one that Ms. Grafie mentioned,
[1:19:53] indicate that consumers are feeling pretty good.
[1:19:56] how they translate into consumer spending is another
[1:20:00] 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.
[1:20:29] So that's a pretty good, pretty good place to pay for consumers right now.
[1:20:34] With regard to how that translates into the sorts of things that generate tax revenue,
[1:20:41] well, consumer spend and we saw the data on that from a previous presentation.
[1:20:48] Maybe retail sales aren't going to be quite as strong as we typically expect in a period
[1:20:54] of high consumer confidence for reasons that I mentioned that maybe consumers are being
[1:20:59] a little bit more circumstances back.
[1:21:01] Okay, thank you.
[1:21:03] Thank you, Mr. Caldwell.
[1:21:05] Other questions?
[1:21:07] No.
[1:21:07] Thank y'all very much.
[1:21:09] Thank you very
[1:21:27] much.
[1:21:43] Okay, commissioners, introduce yourself and proceed.
[1:21:46] Thank you, Mr. Comptroller and members of the board.
[1:21:50] I'm David Jergano, commissioner of revenue.
[1:21:52] On my left is Kristen Lotts, our director of research.
[1:21:55] You know, my ride is Dr. Michael House,
[1:21:57] our staff economist at the department.
[1:22:00] We'll be fairly brief, a lot of the points as previously said have already been made.
[1:22:05] We appreciate the opportunity to be here to present our estimates if there are any questions
[1:22:09] along the way or at the end, certainly happy to answer those, and otherwise I'll turn
[1:22:14] over to Dr. Haust to make our presentation.
[1:22:18] Good morning.
[1:22:19] We're going to spend some time looking at Tennessee indicators on how that will impact,
[1:22:26] has
[1:22:28] discuss F&E volatility, again, before moving to our revenue estimates.
[1:22:33] Looking back at fiscal year 2018, it was a pretty strong growth.
[1:22:38] Sales and use grew by three and a quarter percent, even with the reduction in the sales tax
[1:22:43] for food.
[1:22:44] So if you took out that legislative impact, the underlying growth was up over five percent
[1:22:49] for sales tax. Gasoline tax, of course, grew over 20% primarily due to the improved act,
[1:22:58] and then also saw F&E tax reduced by 1.89%, which sounds bad, but it's actually good news
[1:23:05] compared to the one-time events we had in FY17, which inflated that number. And so the underlying growth
[1:23:13] in F&E tax collections for FY18 is actually over 6%, taking out legislative and one-time impacts.
[1:23:20] over FY17.
[1:23:24] Moving to housing for Tennessee,
[1:23:26] according to data from the Ocensus Bureau,
[1:23:28] housing starts increased 5.5% in FY18,
[1:23:32] and by the end of FY19 Moody's forecast,
[1:23:35] the housing starts again increased 4.6%
[1:23:38] a year earlier, led by a strong healthy growth
[1:23:42] in single-family housing due to population growth
[1:23:46] running ahead of the national average
[1:23:48] and rising incomes that are promoting
[1:23:50] housing household formation and house prices as mentioned earlier are also increasing faster
[1:23:56] than nationally.
[1:24:00] We're generally going to skip these tax implications slides but I do want to note for
[1:24:04] real-to-transfer and real-to mortgage in October there was an air with one large county in Tennessee
[1:24:09] and so those numbers should be coming in either this month or next month but those are not
[1:24:16] in line with the actual collections we expect for October.
[1:24:20] Moving
[1:24:24] to the automotive sector, Tennessee registrations increased by 4.3% on FY18, and by the end of this current fiscal year,
[1:24:34] registrations are expected to increase by 2.5% from a year earlier.
[1:24:42] 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.
[1:24:55] and by the end of fiscal year 19 sales tax collections are expected to increase.
[1:25:01] We've seen as Commissioner Martin noted strong sales tax in the first quarter, about over 5% for F-19.
[1:25:13] Motive fuel collections had a strong year, thanks to changes in improved act, up over 20%.
[1:25:20] And by the end of fiscal year, 19 collections are expected to increase an additional 7% from a year earlier.
[1:25:29] some of the improved act.
[1:25:31] Tax changes keep rolling in.
[1:25:38] Moving to slide 11.
[1:25:39] This is slide on the Tennessee tax volatility comparison,
[1:25:43] which looks at the rolling 10-year standard deviation
[1:25:46] of percentage change in F&E sales and total tax collections
[1:25:50] as well as for GDP and CPI.
[1:25:54] Each point on the line represents the standard deviation
[1:25:57] of percentage changes for the 10 previous years.
[1:26:01] And so we compare this, comparing standard deviations across these taxes, we can see how
[1:26:08] the volatility between the taxes and by comparing across time, we can see whether that volatility
[1:26:12] is increasing or decreasing.
[1:26:14] And as we can see, F&E collections are extremely volatile, but they did dip down a little bit
[1:26:19] this year.
[1:26:20] On the 10 year period ending, FY18, F&E taxes were over three times as volatile as the total
[1:26:26] tax collections, and almost four times as volatile as sales tax collections.
[1:26:31] This volatility is due to several factors including the timing of tax payments, the usage
[1:26:36] of tax loss and credit carry forwards, and refunds of taxpayer over payments associated
[1:26:41] with the prior years.
[1:26:44] This volatility is further enhanced by the fact that a large percentage of the tax is paid
[1:26:48] by a small number of taxpayers of the over 180,000 taxpayers filed returns in FY17, 1 percent
[1:26:58] of them pays approximately 65% of the sales of the state's total of any collections.
[1:27:07] Moving on to Tennessee employment, data from the Bureau of Labor Statistics shows strong
[1:27:12] growth and employment which is expected to continue over the forecast horizon.
[1:27:17] Professional and business services will power job gains in Tennessee, companies like Philips
[1:27:21] and Amazon moving, creating jobs here in the state as well, help those forecasts moving forward.
[1:27:27] Personal income data from the BEA shows FO-18 personal income growth of 2.27% and are expecting a similar year.
[1:27:39] 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.
[1:27:52] Part of our estimating process especially for F&Es looking at non-recuring items.
[1:27:57] And our strategy for doing this is by analyzing the daily tax collections relative to previous
[1:28:02] years, and then identifying extraordinary or unusual payments.
[1:28:07] And then we focus the analysis at the taxpayer level to identify the nature of the payments
[1:28:12] and possible implications for collections on the month.
[1:28:14] And we maintain a list of this in the past that we use in making our estimates for the future.
[1:28:21] And as of right now we know of no non-recurring items included in our estimates for fiscal year
[1:28:27] 19 and we're not aware of any of their upcoming that would affect 19 and also our estimates
[1:28:33] do not include any potential or proposed rule changes.
[1:28:42] Now we'd like to turn to our estimates, revised estimates for 19 and estimates for 20.
[1:28:47] The original estimates of $14.6 billion are being revised.
[1:28:51] This arsements revises up to just over 15 million led by growth and sales tax of 4.4%
[1:28:59] in growth and the fuel taxes as well, thanks to the improved act.
[1:29:04] And then arsements for, excuse me, a general fund growth of 3.97%.
[1:29:10] Estimates for fiscal year 20, show collections of over 15.6 billion and 3.71% growth.
[1:29:17] with, again, my by-growth in sales news, some of the fuels in F&E as well, with a general
[1:29:22] fun growth of 3.60 percent.
[1:29:29] At this point, we gladly answer any questions that you have.
[1:29:33] I continually have this question is that the revenue, you know, Tennessee is pretty much
[1:29:40] a sales tax date, and our revenue projections are higher than the growth in personal income,
[1:29:49] And that seems to all that presenters.
[1:29:52] Why is that?
[1:29:54] I think tourism and a lot of people come in and visiting and spending dollars that aren't necessarily shown.
[1:30:00] 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.
[1:30:16] Traditionally, happened and I can't quite figure it out.
[1:30:22] Other questions.
[1:30:25] Yes sir.
[1:30:26] 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?
[1:30:36] 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
[1:30:50] 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.
[1:31:14] And most of these estimates are really based on your experience in your actual collections.
[1:31:20] This is a collection based estimate, really, is not looking towards the future about the economic factors of those sort of things.
[1:31:28] That's correct.
[1:31:29] Okay, that's what I was just expecting.
[1:31:32] Other questions?
[1:31:33] No.
[1:31:34] Well, thank you all very much.
[1:31:36] Thank you.
[1:31:41] Mr. Gar,
[1:32:20] proceed.
[1:32:27] 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.
[1:32:35] 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.
[1:32:45] 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.
[1:32:52] We would like to start with giving a general economic overview on how we see the economy
[1:32:59] currently and where the economy is going in the midterm.
[1:33:03] Economic growth continues to be on a strong path, and most of the economic indicators continue
[1:33:09] to flash green.
[1:33:11] We're currently in a period of solid GDP growth, strong consumer spending, robust job creation
[1:33:17] supported by rising incomes, rising prices, and solid business investment.
[1:33:23] The current unemployment rates are at or near all time highs, all time lows, and we expect
[1:33:29] continuous declines as growth in the economy exceeds the sum of labor force and productivity
[1:33:35] gains.
[1:33:37] Consumers sentiment and business optimism are persistently at very high levels, and the
[1:33:43] share of prime work in age adults and the labor force and with the job continues to grow.
[1:33:50] Risks to the near term outlook are balanced and we appear to be slowly entering the
[1:33:55] boom phase of the business cycle.
[1:33:58] The longer term growth expectations are a bit more subdued and the combination of these
[1:34:04] factors is where we see a little bit of a risk.
[1:34:08] Based on the current economic conditions and expectations, the Federal Reserve is widely
[1:34:13] expected to continue removing policy accommodations over the next few quarters.
[1:34:18] December increases anticipated with three more likely increases in the interest rate targets
[1:34:24] in 2019.
[1:34:26] What this could mean in the short run is a continued but more modest economic growth.
[1:34:33] However, navigating these waters of strong economic readings, potential slowdowns in the
[1:34:39] midterm is difficult, and the rational policy making by the Federal Reserve today may
[1:34:46] move the policy from accommodative to neutral and possibly even restrictive couple of years
[1:34:51] down the road.
[1:34:53] At that point, especially if there's another significant issue present in the economy, such
[1:34:57] is the housing bubble into the...
[1:35:00] 2007, a significant slowdown or a session could happen. Now, just to be completely clear, we are
[1:35:07] not forecasting a significant slowdown or a recession two years down the road. What we're
[1:35:13] saying is that for maybe even the first time in this economic recovery, we see a clear
[1:35:20] path of how this recovery could end. There are a couple of other smaller concerns housing
[1:35:26] has been mentioned, trade disputes, of course, and demographics, and we may touch on those
[1:35:32] throughout our presentation.
[1:35:35] You've seen this information already, but just quickly GDP,
[1:35:39] real GDP increased by 3.5% in quarter four, that was preceded by 4.25% increase in quarter two,
[1:35:47] and these two quarters are the strongest back-to-back growth quarters in three years.
[1:35:53] the increase in real GDP reflected positive contributions from personal
[1:35:59] consumptions, government spending, state and local, as well as federal, and private
[1:36:05] domestic investment, especially the private inventory investment. The growth
[1:36:10] was partly offset by negative contributions from that exports and residential
[1:36:14] fixed investments, and as it's been mentioned before, residential fixed
[1:36:19] and investments have been struggling lately.
[1:36:22] They've declined in five of the last six quarters.
[1:36:26] Going forward, the real GDP estimates for a quarter four
[1:36:31] of 2018 and calendar year 2019 are generally
[1:36:35] around a 2.5%.
[1:36:39] Real personal consumption expenditures increased by 3%
[1:36:43] in September of this year and have generally stayed
[1:36:45] between two and a half and 3% over the last couple of years.
[1:36:48] consumption on goods has been increased at a greater rate since the last recession.
[1:36:54] But it's also taken a greater hit during the economic downturn.
[1:36:58] Service sector is larger, but we tax more goods under our sales tax.
[1:37:04] So it's good to see continued strong growth in that area.
[1:37:08] In fiscal year 18, our sales tax collections were comprised of 60% retail,
[1:37:15] 12% services and 28% from other sectors.
[1:37:21] Real retail and food service sales are averaging about 3% over the last 12 months.
[1:37:27] We are expecting to see pretty strong holiday sales this year as well.
[1:37:32] According to the National Retail Foundation, holiday retail sales, excluding autos, gasoline
[1:37:37] and restaurants are going to range between 4.3 and 4.8%.
[1:37:42] It is, however, important to note that a lot of spending is done online and, as you know,
[1:37:49] we are currently not taxing all of those transactions, but do want to point out that our estimates
[1:37:56] that we are presenting to you today do not account for any such revenue.
[1:38:00] So if that was to take place, it would be in addition to what we're showing today.
[1:38:05] Okay.
[1:38:07] These couple of pieces of information have also been talked about, but I do want
[1:38:14] to touch on them real quickly. Consumer sentiment is very strong and we've seen continued
[1:38:19] growth over the longer term. The sentiment so far has been higher than in any year since
[1:38:27] 2000 and most recent stock price declines, rising inflation and interest rates, and even
[1:38:34] negative midterm election campaigns have not significantly undermined such confidence.
[1:38:39] And we do believe that with recent positive signs regarding wage growth and prevailing
[1:38:45] belief that the economy will produce robust job growth in the year to follow are supporting
[1:38:53] this confidence and that's the main reason why it's remaining at such elevated levels.
[1:38:57] Small business optimism index has also been very high, it has increased significantly
[1:39:04] after the presidential election in November of 2016 and it has remained at those high
[1:39:09] levels since the September reading of 107.8 is the third highest reading in the survey's
[1:39:19] 45 year history.
[1:39:21] And it's been mentioned that small businesses according to NFIB have really struggling
[1:39:27] 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.
[1:39:40] And so in order to face these labor force challenges, businesses are increasing compensation.
[1:39:49] Stock market as a leading indicator of the economy could be useful but should be used with some caution.
[1:39:55] The market has previously generated false signals, for example, the 1990s.
[1:40:00] 87. Market crash was during an economic expansion. As you can see, over the last eight years, we've seen
[1:40:07] relatively steady growth with some relatively minor corrections and downturns. Of course, we're
[1:40:15] in one right now. There are many reasons that you could possibly attribute to that. We think
[1:40:21] big parts, or maybe a reaction to a rise in interest rates, some struggles in the tech sector,
[1:40:29] and some uncertainty perhaps with a recent midterm election. So we're hoping that
[1:40:34] the stock market will bounce back, but significantly in the months to come.
[1:40:41] Other sector has also been talked about, but I would like to point out that just for context,
[1:40:45] last year we collected about 850 million in sales taxes from motor vehicle dealers only. So
[1:40:53] but collections from gasoline stations or service stations.
[1:40:57] So it's easy to see how shifts in this market
[1:41:00] would have a substantial impact on our tax collections.
[1:41:03] It does appear that light vehicle sales are leveling off.
[1:41:08] We're expecting them to be roughly in the same level
[1:41:10] as last year, about 17 million.
[1:41:13] And that level should remain in 2019.
[1:41:18] Light trucks continue to outsell cars.
[1:41:21] They currently represent about 69% or 70% of total light vehicle sales, but that's also very
[1:41:28] depending on the gas prices.
[1:41:29] The lower the gas prices, the higher the light truck share of the total vehicle sales.
[1:41:34] And speaking of the gas prices, there have been some developments in the oil markets recently.
[1:41:40] As you can see, after significant declines during most of 2014 and 2015, when all prices
[1:41:47] is fell from over $100 per barrel to about $30 per barrel.
[1:41:53] We have seen a steady continuous incline, especially since mid-2017, up to mid to high
[1:42:00] 70s this year.
[1:42:02] However, since the beginning of October of this year, old prices have decreased by close
[1:42:07] to 30% and are currently in mid-50s.
[1:42:11] So what's the reason behind this price decline?
[1:42:15] Well, we believe it's a simply supply and demand.
[1:42:18] Iranian sanctions were supposed to were expected to lower the supply of oil significantly
[1:42:25] to counter those sanctions many countries, many producers started pumping more oil.
[1:42:30] So we have a situation where drilling activity in the U.S. is at the highest level since March
[1:42:35] of 2015, OPEC countries, their output is at the high since 2016.
[1:42:42] I mean, and also a situation where the U.S. has provided waivers to some nations to
[1:42:48] continue buying Iranian oil.
[1:42:50] So currently we have an oversupply of oil.
[1:42:53] There's also concerns with the demand.
[1:42:56] So what's ahead of us in this market will possible oil supply cuts.
[1:43:02] Opic countries and their allies are meeting at the beginning of December to discuss this.
[1:43:06] There seems to be an understanding that the oversupply will continue to 2019 if no cuts
[1:43:14] to supplies are made.
[1:43:17] We've talked about the housing sector already.
[1:43:20] We do share some of the concerns, especially regarding new home sales.
[1:43:24] One thing to watch going forward will be housing inventory.
[1:43:28] And we are also seeing some slowdown in price appreciation.
[1:43:33] Currently, prices are about 6% year-over-year.
[1:43:38] There are indicators that this will slow down to possibly about 4% in the next year.
[1:43:47] So moving over to the employment situation, this is a simple graph and it just shows
[1:43:52] the quarterly unemployment rate relative to its three-year moving average.
[1:43:57] So we're basically just looking at trend lines.
[1:43:58] There's not too much meaning behind it other than when an economy in this case unemployment
[1:44:06] enters a downturn, we expect the shorter term data to react quicker.
[1:44:12] So what we find interesting is that as soon as the quarterly rate crosses over that three
[1:44:19] year moving average, an official recession follows, and this relationship carries on for multiple
[1:44:27] recessions.
[1:44:28] So the red line here shows the estimates through 2021.
[1:44:32] We are not seeing those two lines crossing, but of course there are some, there's a margin
[1:44:38] or error of error with these estimates, and we do see a potential for a beginning of
[1:44:44] a not turned there.
[1:44:47] Unemployment rates are currently at historic lows, so the labor market is very tight.
[1:44:54] Labor Force Participation Rate has been relatively flat over the last few years, around 62.
[1:45:01] 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,
[1:45:26] So those people between 25 and 54 years of age,
[1:45:30] the picture changes a little bit.
[1:45:33] Those participation rates have been steadily increasing
[1:45:35] since late 2015 and are approaching levels
[1:45:39] that we've seen during the previous cycle.
[1:45:42] And these are generally speaking, higher spending age groups
[1:45:46] that many of these individuals will be starting families,
[1:45:50] having children, hopefully purchasing homes.
[1:45:53] It is expected that this participation rate
[1:45:55] might move up some more in the near future.
[1:45:59] The next couple of slides show information that has been presented to you before this
[1:46:04] is just the breakdown by job growth for the U.S. and Tennessee by industry and once
[1:46:12] again in Tennessee, we have added 63,900 jobs over the last 12 months, that is 2.1 percent
[1:46:19] growth and a lot of that has been thanks to leisure and hospitality.
[1:46:24] We
[1:46:28] find this graph very interesting and shows job openings and unemployment levels in the U.S.
[1:46:36] 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.
[1:46:44] 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.
[1:46:54] Before March of this year, job openings have never exceeded unemployed workers in more
[1:47:00] than 17 years of monthly data.
[1:47:02] So this is a clear sign of how increasingly difficult it is for employers to find workers
[1:47:07] in today's market.
[1:47:10] We were already talked about that.
[1:47:13] So we are finally starting to see some significant movement in various measures of wage and compensation
[1:47:18] growth due to the labor force challenges faced by business
[1:47:22] owners. The latest October reading of 3.1% increase in
[1:47:27] average hourly earnings is the first such increase over 3%
[1:47:31] since 2009. The average hourly earnings currently stand at
[1:47:36] $27.30. Of course, there's a wide range of average earnings
[1:47:40] among different industries with leisure and hospitality being on
[1:47:44] the low end paying slightly over $16 an hour. And in
[1:47:48] information and utilities industries employees earning over $40 per hour and average.
[1:47:55] Wages are rising slightly more than inflation, CPI and core CPI are shown there.
[1:48:01] They're currently around 2%, we expect them to stay somewhere in that range to 2.5% range.
[1:48:09] The yield spread is considered to be a valuable forecasting tool for many economic variables,
[1:48:15] including probabilities of the recession, so we track this indicator to see how likely we are to see significant economic downturn in the future.
[1:48:27] This indicator is very good for predicting the likelihood of recession four to six quarters down the road.
[1:48:35] It has predicted essentially every U.S. recession since 1950 with only one fall signal in 1967.
[1:48:44] Based on information provided by the Federal Reserve Bank of New York, the probability
[1:48:48] of recession using a yield curve model 12 months from now is at about 14%.
[1:48:56] So just switching quickly to state revenues, our total accrued revenues in fiscal year
[1:49:02] 18 were 14 billion, 482 million.
[1:49:06] As you know, sales taxes 61% of that with F&E following at 17.8%.
[1:49:13] Fuel taxes are currently taken up a larger share than in the past, mostly due to the changes by the improved act.
[1:49:21] That's the case with motor vehicle registration fees as well.
[1:49:25] And of course, the income tax currently at 1.7% of our collections will be going away over the next few years.
[1:49:33] The current tax rate is 3%, and it will be fully phased out for tax years beginning January 1st of 2021.
[1:49:41] 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.
[1:49:50] This is relative to collections in fiscal year 18. While net changes did not appear to be that large, a decrease of
[1:50:00] 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.
[1:50:29] 18 and prior years.
[1:50:31] So the base that we're comparing it to has already been altered.
[1:50:35] For example, in fiscal year, 18 motor vehicle fuel taxes were expected to increase by about
[1:50:41] 43 million, which represents an increase of almost 25% to that base.
[1:50:47] So we've already seen significant changes due to just legislating actions.
[1:50:52] And finally before you get to that, you got legislative impact and you got the F&E that
[1:51:01] is from the decoupling.
[1:51:03] No sir, I think the F&E impact here is a combination of several different public chapters
[1:51:11] that have been enacted.
[1:51:13] The improved act is one of them.
[1:51:15] We've also passed legislation that allowed annualized quarterly payments.
[1:51:21] Revenue Modization Act from 2015, so there are several public chapters that were enacted at that time.
[1:51:31] So getting to our actual tax estimates, taking all of these legislative changes into account, into account our economic view.
[1:51:40] We estimate the sales tax growth of 4.3% in fiscal year 19 and 3.8% in fiscal year 20.
[1:51:50] Our gasoline and motor fuel taxes are expected to realize significant growth.
[1:51:55] But once again this is mostly due to legislative changes.
[1:51:59] French has an excise tax collections.
[1:52:02] We estimate those to remain essentially flat.
[1:52:06] What's shown here is compared to a cruel collection.
[1:52:08] So, you are seeing a negative 0.34% impact in year one and negative 0.47 in year two.
[1:52:17] If we were to compare our numbers to the actual cash collections in fiscal year 18, the growth rate is about 0.5%.
[1:52:25] So, essentially, flat.
[1:52:28] We would like to make one point about our estimates for the franchise and XI stacks.
[1:52:34] They rely largely on our view of the economy, where it is now, where we see the economy
[1:52:39] going, and historical trends in tax collections.
[1:52:43] We at our office do not have access to taxpayer confidential information, so we are unable
[1:52:50] to maybe see some major changes with large taxpayers that could be happening there.
[1:52:57] So I wanted to make sure I put that out there for full disclosure.
[1:53:03] Our total revenue growth is at 3.35% in year one, at 3.03% in year two.
[1:53:11] So these diminishing growth rates in our total taxes as well as some major tax categories
[1:53:17] such as the sales tax reflect or take on the economy for the forecasting period of
[1:53:22] continuing growth but growth at diminishing rates.
[1:53:26] 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.
[1:53:37] And then this table that compares our estimates in fiscal year 19 to last year's estimates as well as the current budgeted estimates.
[1:53:47] 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.
[1:54:03] Most of this increase compared to the current budgeted estimate, 55% of it is related to the sales tax.
[1:54:10] For the general fund, we estimate growth of 380 million over last year and almost 280 million over the current budget.
[1:54:20] And that concludes our prepared remarks.
[1:54:22] We'll be happy to answer any questions.
[1:54:33] This is first time I've seen the compared in three-year average unemployment against the current unemployment is being a leading indicator.
[1:54:43] And it's pretty, pretty active.
[1:54:48] This graph?
[1:54:49] Yeah.
[1:54:51] There's really not too much meaning behind it.
[1:54:54] I can't figure out what the meaning is.
[1:54:56] It's just an interesting thing that we found as we were.
[1:55:00] That's when the lines cross. It's just a happy sense, or is there, you know,
[1:55:06] because that's dramatic,
[1:55:08] dramatically accurate. And right now, there's possibility of it to happen pretty soon.
[1:55:17] Well, we don't see the two lines crossing throughout our forecasting period, but of course,
[1:55:23] There is a significant margin of error, but estimates have.
[1:55:28] Good.
[1:55:29] This is very helpful.
[1:55:30] Questions, commissioners, questions, questions.
[1:55:35] Thank you all.
[1:55:36] Thank you.
[1:55:37] Y'all want to take five minutes, so go ahead.
[1:55:40] Y'all want to go ahead and keep going.
[1:55:43] There's no one.
[1:55:44] Keep going.
[1:55:46] We'll y'all begin.
[1:55:53] He's the one doing all the talking, so.
[1:56:29] Thank you again members of the Funding Board. Once again my name is Brian Savage. I'm the
[1:56:34] economist with the fiscal review committee and my last is Robert Curry assistant director
[1:56:39] of the committee.
[1:56:42] Going into our lottery estimates for the two-year, well five-year period technically,
[1:56:47] We're going to start with historical results.
[1:56:50] This table shows historical results for several major categories over the previous four fiscal
[1:56:56] years, including growth rates for the last fiscal year, fiscal year 18.
[1:57:01] In that fiscal year, net revenue has increased by 122 million or 8.1 percent, 60 percent of
[1:57:09] this increase or about 72 million can be attributed to instant ticket gains.
[1:57:13] While 25% or about 30 million can be attributed to powerball and mega-millions.
[1:57:20] Total expenses increased by 7.8% or about 88 million for a net lottery proceeds increase
[1:57:27] of just over 9% or approximately 33.7 million.
[1:57:33] After school funding which represents unclean winnings has increased by also 9% resulting
[1:57:39] in total state proceeds increase of once again 9%.
[1:57:44] Instant ticket sales represent over 81% of our total sales, so they're by far the most
[1:57:51] significant driver of lottery sales and proceeds.
[1:57:55] This number was close to 83% in the last year, but recent changes to the structure of
[1:58:00] the mega-millions game allowed that game to experience significant growth and represent
[1:58:05] the larger piece of the pie.
[1:58:08] The breakdown of all other games is on this slide as well.
[1:58:13] Quarter one of this fiscal year has not been great.
[1:58:16] Net revenue is down 1.4%, total expenses are down 0.2%,
[1:58:22] and net lottery proceeds have decreased by almost 5% or $5 million.
[1:58:28] However, this has to be put in perspective relative to very strong growth experience
[1:58:33] in quarter one of last year when proceeds were up by over 14%.
[1:58:38] So we are working over very large bases.
[1:58:42] The main reason for the decrease that we're seeing in quarter one is powerball.
[1:58:48] Powerball sales are down over 53 percent or over 22 million dollars.
[1:58:54] And the reason for that is clear.
[1:58:56] In quarter one of last fiscal year, we have a very high jackpot cycle that reached 700 million.
[1:59:02] The highest jackpot cycle that we've seen in quarter one of this year was 247 million.
[1:59:07] And as you know, high jackpot cycles in these games is really what's driving the sales of these games.
[1:59:15] The good news is that the picture completely changes when we include the October sales.
[1:59:21] We are at our office currently don't have the full financial data for financial information for October, but we do have sales.
[1:59:28] sales. So for the first full 17 weeks of the fiscal year, sales total revenue is up
[1:59:35] by 10% or almost $55 million. That's a complete reversal from where we were at the end
[1:59:42] of quarter one. So just that one additional month has added significant sales. The reason
[1:59:47] for this increase in sales is also clear. Mega Millions is up 286% or almost 40 million
[1:59:56] over last year. The reason for that is...
[2:00:00] This is $1.6 billion jackpot that we had in October of this year. Instant games are also up almost 5% or $20 million.
[2:00:13] 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
[2:00:33] was 2.1% and that's the lowest growth rate to date in instant games.
[2:00:40] Once again, instant games are the most significant piece of the total pie with over 81% of our
[2:00:47] lottery ticket sales.
[2:00:49] This is just a comparison of weekly sales last year, the yellow line and quarter one sales
[2:00:55] of this year.
[2:00:56] You can see that we're trending above last year with growth of 3.4% adding October that
[2:01:03] growth is almost 5%. Here's a breakdown of instant ticket sales by price point for last
[2:01:12] year. Instant ticket sales have increased by 5.7% or 76 million last year. This growth
[2:01:20] is on top of the 2.1% increase that we've seen in fiscal year 17 and 6.9% increase in
[2:01:26] fiscal year 16. And as you can see, the increase was mostly due to the additional sales in the $30 price point.
[2:01:36] That price point has kind of cannibalized some of the sales of the $25 price point, which is used to add more.
[2:01:44] But jointly, when we look at those jointly, they continue to be a significant driver of our growth.
[2:01:52] So, here's our instant games estimates.
[2:01:57] For fiscal year 1819, our gross sales median estimate is 1,470 million, with a 10 million
[2:02:04] margin either way.
[2:02:06] This represents growth of 4.4% over last year or an additional 62 million in sales.
[2:02:13] So we essentially assume continued growth in the remaining months of the year, but growth
[2:02:18] at a slower rate than we've seen so far this year.
[2:02:22] Our median estimate for fiscal year 19 assumes an additional 60 million in sales
[2:02:27] on top of our estimate for fiscal year 18 for a growth rate of 4.1%.
[2:02:34] Turning to Powerball and Mega Millions.
[2:02:38] Powerball sales increased by 15% last year or 15.6 million.
[2:02:43] And as you can see in the table, this is largely due to the
[2:02:47] higher highest jackpot cycle, 700 million last year versus 478 million in fiscal year 17.
[2:02:57] Powerball sales in fiscal year 18 are still almost 30 million dollars lower than what they
[2:03:02] were in fiscal year 16 as we had the record-setting jackpot of 1.6 billion in that year.
[2:03:09] Currently, Powerball sales are down 6.1 million or 13 percent in the first 17 weeks of the year,
[2:03:15] 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.
[2:03:27] For both fiscal year 19 and fiscal year 20, we forecast powerful sales to remain around the same level where they were last year.
[2:03:36] Our median estimate is 115 million in both years with slightly wider ranges in fiscal year 20.
[2:03:43] We're confident that these levels of sales can be attained and that any extraordinary jackpot
[2:03:49] cycles like we've seen in fiscal year 16, for example, would take us far beyond these numbers.
[2:03:56] The mega-millions game was significantly redesigned in the October of 2017.
[2:04:03] The most important changes include increasing the cost of the game from $1 to $2, increasing the starting jackpot
[2:04:10] levels from 15 to 40 million and decreasing the odds of winning a jackpot.
[2:04:16] So all of these changes together were designed to, in part, allow jackpots to get significantly
[2:04:21] higher than before and much quicker which would likely result in additional ticket sales.
[2:04:27] And we've seen a lot of that impact is expected in fiscal year 18 with sales increasing by
[2:04:32] almost 40% or close to $15 million. But we really started to see such
[2:04:39] effect this fiscal year. As you can see in the table this fiscal year we
[2:04:44] already reached a record setting jackpot level for mega millions of approximately
[2:04:48] 1.6 billion dollars. The highest jackpot in fiscal year 17 was 508 million
[2:04:55] the highest last year was 521 million. So this is a
[2:05:03] 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
[2:05:29] fiscal year, already exceed our total sales in fiscal year 18 by about 2 million. So
[2:05:36] with 35 weeks left in the year, we are in line to see extraordinary growth in mega-millions,
[2:05:42] even if we don't reach any more similar jackpot levels for the remainder of the year.
[2:05:49] And that's what our estimates essentially assume, no such significant jackpots for the rest of the year.
[2:05:55] Our fiscal year 19 estimate essentially holds the sales and the remainder of this year equal to what we've seen
[2:06:02] for the same time period last year.
[2:06:05] And that essentially gets us to the $90 million range for the median estimate with a $7 million boundary each way.
[2:06:16] For fiscal year 20, we are expecting, once again, we're not forecasting any significant
[2:06:22] jackpot levels that, like we've seen this year, and we are taken into account the jackpot
[2:06:28] fatigue.
[2:06:29] So we are lowering our median estimate to $75 million with a $10 million boundary each
[2:06:37] way.
[2:06:38] Our analysis shows that it takes about one quarter from the start of the starting level
[2:06:44] of the jackpots to reach to such high 1.5, 1.6 billion levels.
[2:06:49] So that is not unlikely to happen again in the near future.
[2:06:55] So we do believe that our estimates are on the conservative side and we are confident that
[2:07:00] we'll be able to reach those.
[2:07:02] And just going through all the other games quickly, Cache 3 and Cache 4 games have a relatively
[2:07:09] loyal customer base. We generally see continued growth year over year, Cache 3 struggled
[2:07:15] a little bit last year, Cache 4 added 3.2%. Our median estimate for both of those games
[2:07:23] is 160, 106.2 million in fiscal year 19 and 107 million in fiscal year 20, this represents
[2:07:32] growth rates of 3.9% and 0.7% respectively. Last year these two games together grew 0.8%
[2:07:42] in current year-to-date growth is 8.4%. Tennessee cash sales exceeded our expectations
[2:07:50] last year with the growth of almost 15%, this was once again due to relatively high jackpot of over $2 million.
[2:07:58] We are forecasting kind of a reversal to where we were in the prior year.
[2:08:04] So our median estimate is at 16.5 million for fiscal year 19 and 16.2 million fiscal year 20.
[2:08:14] Cash for life experience, the significant decrease last year, over 20%.
[2:08:19] This is a game that was introduced in November of 2015, so that year we had about 35 weeks
[2:08:25] of sales, but even with the partial year, our total fiscal year 16 sales were 12.4 million,
[2:08:33] which is higher than our sales in fiscal year 17 or fiscal year 18, which are full years.
[2:08:39] So as you can see in this graph, which shows weekly sales since inception of this game,
[2:08:45] we kind of see what's typical with these new games. Initial excitement and
[2:08:49] high sales followed by a relatively quick drop-off and kind of a leveling off.
[2:08:55] Weekly sales currently average 161,500 per week. Our median estimate for
[2:09:05] fiscal year 19 is 8.3 million, which works out to be slightly under 160,000 per week for the
[2:09:12] full year. So we do expect a further decline in weekly sales for the remainder of the year.
[2:09:17] For fiscal year 19, our estimate is at 7.5 million or just over 144,000 per week.
[2:09:26] Lada America is also a new game. The first drawing was in November of last year. This game replaced
[2:09:32] hot lava which was discontinued at the end of October last year. So we've had 33
[2:09:38] weeks of sales of Lada America in fiscal year 18 with almost 8 million in
[2:09:43] total sales. But similar to the situation with cash for life you can see that
[2:09:47] declining pattern in weekly sales where sales started in the 500 to the 600,000
[2:09:53] range and are currently under the $300,000 line.
[2:10:00] 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.
[2:10:29] million in total sales.
[2:10:32] Once again, very similar to the previous two games,
[2:10:37] high sales initially.
[2:10:39] And once again, between 500, 600,000 level
[2:10:42] and we are currently under that $300,000 line.
[2:10:48] We expect to see further declines over the next couple
[2:10:51] of years are median estimate for fiscal year 19
[2:10:54] is 13.5 million or about 260,000 per week.
[2:10:58] and our median estimate for fiscal year 20 is 12.7 million or about 244,000 per week.
[2:11:06] Year-to-date weekly average is 261,000.
[2:11:11] So the following few slides will provide the summary of all of our estimates
[2:11:15] and conclude our presentation.
[2:11:18] For fiscal year 1819, our net lottery proceeds estimates range from 421.1 million
[2:11:25] to 432.7 million, with our median estimate being 426.9 million.
[2:11:33] This represents a 5% growth in proceeds over fiscal year 18, where an increase of approximately
[2:11:39] 20.4 million dollars.
[2:11:42] Last year's growth in proceeds was 33.7 million, or 9%.
[2:11:48] Most of our growth this year's expect is expected to come from instant gains and mega-millions.
[2:11:55] For fiscal year 20, our estimate for net lottery proceed ranges from 426.7 million on the low
[2:12:03] end and 444.8 million on the high end with our median estimate being 435.7 million. The median
[2:12:13] estimate represents a 2.1 percent increase over our median estimate in fiscal year 2019. By far,
[2:12:21] most of this expected increase can be attributed to instant gains.
[2:12:26] Forecasting growth in subsequent years is difficult due to a number of unknown factors such
[2:12:32] as changes to payout ratios and matrix changes to jackpot-based gains, legislative actions,
[2:12:39] various jackpot cycles.
[2:12:42] So what we try to do here is look at the average growth rates and over the last five years,
[2:12:48] 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%.
[2:13:01] Such growth rates for net revenue have been 4.9% and 5.1% without the low and high.
[2:13:09] 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.
[2:13:24] 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.
[2:13:34] 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.
[2:13:49] And we've already seen the impact on sales.
[2:13:53] So that concludes our presentation.
[2:13:55] We've got some questions, questions, questions.
[2:14:00] Thank y'all very much.
[2:14:01] Thank you.
[2:14:02] Before we ask Mr. Davis to come up,
[2:14:05] let me recognize the government management fellows
[2:14:08] who are here, Dakota and Adam and Emily and Marissa.
[2:14:13] And Chmene, could y'all stand up?
[2:14:18] Y'all are featured.
[2:14:20] Thank y'all very much.
[2:14:22] Appreciate you being here.
[2:14:23] Thank you.
[2:14:24] If I could just give a little caution.
[2:14:26] I just need to, you know, understand that not every state meeting is as assimilating and exciting as this one.
[2:14:53] Every year you complete, you just fascinate me.
[2:14:57] Go ahead and introduce yourself and proceed.
[2:15:00] 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.
[2:15:29] as soon as the presentation is over for sure so we provide that and we have that this morning.
[2:15:36] Thank you once again I just want to give you some highlights in terms of where we are a year-to-date
[2:15:40] actually in steps to date on behalf of her. If you think about it this is our 15-year
[2:15:46] anniversary will be January 20th 2019 we'll be in business for 15 years.
[2:15:53] We produced over 19 billion in sales since that point in time our sales have grown in the last
[2:15:58] 13 of those 14 fiscal years we've returned over 4.7 billion in total education
[2:16:04] funding since inception and the growth in that funding has been over the 12
[2:16:10] of the 14 years we've had growth in our total education funding and we're
[2:16:14] very proud of that. We paid over 13.5 billion in sales and over 1.2 billion in
[2:16:21] retail commissions so we definitely thank our retail partners for that
[2:16:25] success. Fiscal year 18, which is a fiscal year is just recently ended. We had over 1.73
[2:16:31] billion in sales, which was a record for us, with instance comprising over 1.4 billion of that,
[2:16:37] which was obviously a record for instant products as well. In terms of our total education funding,
[2:16:44] once again we set a record in fiscal year 18, or 421 million, with 406 million of that going to
[2:16:49] that lottery proceeds based off of information we receive from T-SAC that's funded over well
[2:16:55] of 1 million in grants and scholarships to the students of Tennessee so we're very proud
[2:17:01] of that. Definitely proud of our retailers, the employees, board directors and the support
[2:17:06] of the government and legislatures in terms of our success over these last 14 and a half years
[2:17:11] and almost 15 years beginning in January. In terms of a report that I'm going to present
[2:17:16] to use this morning. It really represents where we project ourselves to be. Actually, I'll take
[2:17:22] a consideration of our current year to date. On page two, kind of highlight where we are with our
[2:17:27] three major categories. When you look at our three major categories, we'll October 31st,
[2:17:32] total sales of 610 million compared to 555 million prior year. So currently, we're trending at a
[2:17:40] a little over 9.9% growth for this fiscal year, our instant games, which this year represents
[2:17:46] about 6% of our sales, is 4.8% yield-a-date, multidirectional games, powerball, mega-millions,
[2:17:55] hot-lotto, which we ended this past year, a lot of America and cash for life, growth on those
[2:18:03] products is 45% this year compared to last year through October, clarifying that there is an
[2:18:09] impact from the 1.5 billion mega million jackpot in October that drove that growth for this fiscal year.
[2:18:17] Tennessee only games, which is cash three, cash four, Tennessee cash and, you know, to go.
[2:18:23] It was a reference to about seven percent of our sales year to date.
[2:18:26] We're currently about five percent year to year to date for those games.
[2:18:31] If you look at the chart at the bottom of the report, it's just highlights how that compares to the prior fiscal year.
[2:18:37] As you can see, we have growth in all of those categories through our three major categories
[2:18:43] that we represent.
[2:18:44] If you look at page three, page three, highlight specifically our instant games and talks
[2:18:50] about instant games historically as our largest and most profitable game category.
[2:18:55] At around 80% of our sales over the inception to date averages.
[2:19:01] So we obviously put a lot of attention in terms of how we manage our instant product.
[2:19:06] right now we have about eight price points currently on sale in the market as
[2:19:10] you can see in that the chart this should recognize RFY19 growth right now we
[2:19:16] expect it's current today and what we anticipate for the fiscal year is going to
[2:19:20] be in our higher price point games stars at $10.10, $20, $25, and $30 in terms of a
[2:19:28] high price points. Do you only know those come with a little higher price payout as
[2:19:32] well. We also see the preference from our players, obviously from the from the
[2:19:38] sales they're generating. They prefer those higher price point games because it
[2:19:42] also gives them more chances to win as well. One of the other areas that we see
[2:19:47] our growth continue to be over quite a few years is in our family games and we
[2:20:00] 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.
[2:20:29] All of the eight price points. We have a jumbo books family product in the market and it sells very well
[2:20:35] It actually averages of almost about 45% of our sales volume on instant products is in that jumbo books family
[2:20:42] When we look at what we project for sales in terms of our instant product for the year
[2:20:46] 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
[2:20:56] preferences in the market right now that range would represent about three to
[2:21:02] 4% year over year from a low range to a high range compared to a fiscal year
[2:21:07] 18. Our prize expense which is the driver for the higher price point games we
[2:21:13] will see that about 67.8% this fiscal year on average over the last couple years
[2:21:19] it was about 67.5% once again that's indicative of our players seeking the
[2:21:24] higher price point games, which generally have a higher price payout because it lost
[2:21:28] more winners in those higher price payout games.
[2:21:32] We look at the report on page 4, we talk about our multi-dustational games, multi-dustational
[2:21:40] games being Powerball, Mega Man's, Cash for Life, and a lot of America, and those games
[2:21:50] or the ones that, or primarily jackpot dependent
[2:21:53] with the exception of cash for life, cash for life
[2:21:56] for life type of game,
[2:21:59] and it just does not have an impact in terms of the jackpot.
[2:22:03] But specifically to Powerball,
[2:22:05] if we're looking at Powerball,
[2:22:06] it is the most popular of our multidirectional games.
[2:22:10] It has been for quite a few years.
[2:22:12] It was first game introduced back in late 2004,
[2:22:16] so it's very familiar with our playerbase.
[2:22:19] 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.
[2:22:30] So it is nationwide in terms of acceptance in the market.
[2:22:35] 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.
[2:22:44] The high end does include a projection for us to recognize, in addition to the one jackpot
[2:22:49] that we had recently back in early October of over 600 million, one additional jackpot
[2:22:55] reaching the 500 million level.
[2:22:57] So we do anticipate on the high end that we would expect one other jackpot, just based off
[2:23:02] of how the game is expected to perform within current jackpot cycles.
[2:23:08] If you look at the chart that we're representing here, the chart really gives highlights in terms
[2:23:12] of how the jackpot drives average weekly sales. If you look at the $759 million jackpot to the left
[2:23:19] of the chart back in August of 2017, it generally shows we average about $3.5 million on a weekly basis
[2:23:26] through the entire jackpot cycle. If you look at the jackpot just recently in October of 688 million,
[2:23:34] we average about $3 million weekly on that jackpot cycle. On our expected jackpot cycle,
[2:23:40] we were going to anticipate between 1.8 million on a weekly basis with our expected jackpot between
[2:23:46] 200 and 300 million in terms of how the game is designed. So you can see specifically how the jackpot
[2:23:51] drives sales for Powerball in our market. On page 5, we specifically look at mega-millions,
[2:24:00] which is our second most popular multi-jurisdictional game in comparison to Powerball. As mentioned earlier,
[2:24:08] we did relaunch the game in October 2017 with game enhancements and actually
[2:24:13] lots more chances of the win at the non jackpot levels. So it increased the
[2:24:18] odds of winning any prize and significantly increased the prize the
[2:24:22] odds of winning the second year prize which was a million dollar prize but at the
[2:24:26] same time we also introduced a price point increased to two dollars per
[2:24:31] ticket which allowed for us to obviously grow the jackpot quickly
[2:24:37] from the original jackpot of 15 million to now starting at 40 million and it
[2:24:42] moves up significantly as each draw whether it's not a jackpot winning.
[2:24:48] Currently this game is sold in 46 jurisdictions which is the 44 continent of
[2:24:52] the US States District of Columbia and Virgin Islands so it is once again also a
[2:24:58] motor.
[2:25:00] 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.
[2:25:29] based off of that jackpot. For this fiscal year we're projecting sales in a range
[2:25:36] between 84 and 89 million based off of those results and what we anticipate for
[2:25:41] the fiscal year going forward. We look at the high range is inclusive of two
[2:25:47] additional jackpots reaching the $400 million range which is not too far off what
[2:25:52] we anticipate for the game as it's currently designed in terms of the draw
[2:25:56] cycles. If you look at the chart once again we talk about the average weekly sales as you can see
[2:26:02] for this game we average 3.4 million on a weekly basis through that 1.5 billion cycle
[2:26:08] the end in October. I average weekly sales on a expected jackpot between 250 to 300 million
[2:26:16] is about 900 thousand so you can see the impact jackpot driving those games specifically
[2:26:23] this past October in terms of the mega-millions game.
[2:26:27] Page 6 is the other two games that are multi-jewelstiction games,
[2:26:31] which is a lot of America and cash for life.
[2:26:35] A lot of America currently sold in 17 jurisdictions to date.
[2:26:39] We did start that game in November 2017.
[2:26:43] It's still this game traction here in Tennessee.
[2:26:45] It has not took off in comparison to a hot lot of,
[2:26:50] but we will continue to support that game.
[2:26:52] right now the four year sales are projected between 12 and 13 million for that
[2:26:56] game cash for life which is currently sold in nine jurisdictions as I
[2:27:03] mentioned earlier it is not a jackpot dependent game it is a for life type of
[2:27:07] game there's two prizes there's a thousand dollars a day for life and there's a
[2:27:11] thousand dollars a week for life as the first and second tier prizes for that
[2:27:15] game we have been fortunate enough to have one winner at each of those levels but
[2:27:22] But clearly more winners in Tennessee will be obviously driving factor in terms of sales
[2:27:26] from that game.
[2:27:27] Right now, for your sales, we project that between 8 and 9 million for Cash for Life.
[2:27:33] When we look at our Tennessee only games, those are Cash 3, Cash 4, Tennessee Cash, and
[2:27:39] they're recently launched, you know, the GO games.
[2:27:43] Those games are doing pretty well for us as we move forward.
[2:27:47] With Castering Cache 4, we have a loyal player base.
[2:27:51] We've experienced pretty consistent sales for those games.
[2:27:54] This year actually we've been seeing some increase in terms of Cache 3 sales of almost
[2:28:00] 10% throughout October.
[2:28:02] So we're real excited about how we were performing with that particular game.
[2:28:08] Castering Cache 4 daily draw games three times a day with the exception of Sunday.
[2:28:13] We draw on a once a day on Sunday.
[2:28:16] We expect sales for those games to be between $105 to $109 million for this fiscal year.
[2:28:23] Tennessee Cash, which is a jackpot driven game, specific to Tennessee, the jackpot started
[2:28:28] at $200,000 for that game, drawings of three times a week, went to space sales of around
[2:28:35] $16 million for that game.
[2:28:37] It is jackpot dependent, but it's pretty consistent in terms of how the game has performed
[2:28:41] to how it was designed.
[2:28:43] so we're pretty comfortable with that game as it stands.
[2:28:46] Keno to go, we introduced back in last August 2017.
[2:28:52] Drawings for that game is drawing every five minutes,
[2:28:55] but the luxury of that game is we have it available
[2:28:58] in all of our retail and establishments,
[2:29:01] players can purchase a ticket,
[2:29:03] and it's called Keno to go for a reason,
[2:29:04] they can purchase it, they don't have to stay and watch the draw.
[2:29:07] We make the draw available on our website
[2:29:08] and we also make it available through application and app.
[2:29:12] That's available for players to download if they want to see those drawings
[2:29:17] Even though they don't have to stay there and watch it on the monitors. They can actually see it on their phones
[2:29:21] mobile applications
[2:29:24] We added bullseye to that game, which is a game enhancement, which costs an additional dollar or additional
[2:29:30] Cost to players based off of their base costs. There's two times their base costs to do bullseye
[2:29:36] Which provide for enhanced prizes for that game and so far it seems to be doing pretty well
[2:29:40] We're about a 20% increase incremental in terms of revenues for that add on so we're pretty excited about that
[2:29:47] For this fiscal year. We're looking at between 13 and 14 and a half million for that game this fiscal year on 19
[2:29:56] On page eight is just how likes a pie chart in terms of
[2:30:00] 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
[2:30:29] for instance. As I mentioned earlier, I answered this project at about 67.8% for this fiscal
[2:30:35] year, which is going to in total for all prizes, about 64.4% of the total proceeds available
[2:30:42] prize expense. Retail Commissions, or 6.5% of gross sales projected at 115 million.
[2:30:49] Major gaming vendor fees, which is our gaming system vendor, which is IGT and scientific games,
[2:30:55] which is our instant ticket vendor, ticket product and services, combined is about 33
[2:31:01] millions and obviously that's based off of the terms of the contract that we have associated
[2:31:05] with both of those vendors.
[2:31:07] Our non-derrick expenses, which is all the expenses of doing business, is about 36 million
[2:31:12] is currently budgeted, which is about 2% of projected gross sales with general administration
[2:31:18] being 21 million advertising, about 10 million and then other at about 5 million.
[2:31:24] So when we look at net lottery proceeds,
[2:31:26] our net lottery proceeds right now in terms of budget
[2:31:29] was budgeted at $404 million.
[2:31:32] But if you look at page nine
[2:31:35] in terms of our lottery proceeds chart,
[2:31:38] you to date with $151 million versus $133 million last year,
[2:31:42] which is about 18 million ahead of last year through October,
[2:31:45] 31st, our current full year range
[2:31:48] we're projected in terms of net lottery education proceeds
[2:31:51] of 411 to 422 million and then you look at after school program proceeds which are based off
[2:31:58] of unclaimed prizes, currently we're at 7.5 versus 2.9 million, the driving factor that is
[2:32:07] really just timing of when we close instant games. So when we close instant games on average three
[2:32:13] times a year, that's going to drive the impact of that line item throughout the entire fiscal year.
[2:32:19] So we currently project that to be between 15 and 16 million when it's all sitting done through June 30th of 2019.
[2:32:28] Page 10 just highlights via a worksheet summary where we are, how fiscal 18 results compare to our fiscal 19 projected ranges.
[2:32:39] 518 results was 406 million in a lot of education proceeds,
[2:32:45] 15.2 million for at-school program proceeds,
[2:32:49] and then 519 projected ranges that I mentioned earlier,
[2:32:52] 411 to 422 million, a lot of education,
[2:32:56] and projected ranges for at-school between 15 and 16 million,
[2:33:01] as highlighted on that worksheet.
[2:33:05] page 11 addresses where we are in terms of our projects of fiscal year 23-23 in terms of how
[2:33:13] tail compares to the industry over the five years excluding high and low due to anomalies
[2:33:19] associated with those fiscal years tail has performed quite significantly higher than the industry
[2:33:25] between 4.5% versus industry at about 2.3%. But when we look at our projections in terms of a
[2:33:32] conservative estimate. I estimates in the out years are projected at 2% to 3% in terms
[2:33:38] of the growth rate year over year. And that's what is reflected in that chart at the
[2:33:45] top of page 10. At school program proceeds, as I mentioned earlier, is based on unclaimed
[2:33:50] prizes. We're averaging a little less than 1.5% of prize expense on average over the years
[2:33:56] through inception. And so is budgeted out for the out years based off of our projected
[2:34:01] that prize expense for those fiscal years.
[2:34:04] Those are the highlights of the report that I presented to you.
[2:34:08] As I mentioned earlier, I do have the report available to you that explains why we will
[2:34:12] not return 35% and as we specifically mentioned, the driver to that is going to be an instant
[2:34:18] product.
[2:34:19] Prize expense for instant products is a significant driver for our sales and we've seen that
[2:34:25] that over time our actual return from return to education for projects from our instant
[2:34:31] ticket products have significantly increased year over year even though the proceeds from
[2:34:36] those games are going to be less than 35% and that is reflected in a letter that I'll be
[2:34:40] providing to each of you at the conclusion of this report.
[2:34:44] Do you have any questions?
[2:34:45] Yes, that letter will say your position that by the total amount going to educational
[2:34:55] It will be greater by not having the...
[2:35:03] So the amount of money going to education is greater on a kind of this. Correct. The actual
[2:35:08] dollars increase the over here without percentage increase. That's right. You have any other
[2:35:13] questions? I have this may be more appropriate for Director Hargrave, but you know, traditionally
[2:35:22] Finally, you said that the lottery may be a tax on the poor in order to fund middle-class
[2:35:29] education.
[2:35:31] Of course, most of the proceeds go to the Hope Scholarship, but statistically, the results
[2:35:39] you've seen nationwide off-the-guet Tennessee-Pacific ratios is that all levels of income participate
[2:35:47] about the same percentage in the lottery.
[2:35:51] Is that your understanding?
[2:35:54] That is the information that we've had available to us
[2:35:56] over the years, almost recent years,
[2:35:58] so that it is evenly distributed based off
[2:36:00] of income within classes, not necessarily based off
[2:36:04] of specific demographics.
[2:36:07] And then the, and maybe Mr. Felt should be better.
[2:36:13] the Hope Scholarship is really where most money goes.
[2:36:19] And this goes across all levels of society,
[2:36:23] and not necessarily just the Mr. Clas.
[2:36:26] Yeah, I believe Mr. Feltz will support that.
[2:36:28] I guess it was, you know, this whole thing to me
[2:36:33] is so counterintuitive.
[2:36:35] I can't believe any of it, but it happens every year,
[2:36:40] so I'm again interested.
[2:36:41] Thank you very much.
[2:36:43] Just so we have another question.
[2:36:47] Okay, thank you very much.
[2:36:48] All right.
[2:36:49] Thank you.
[2:37:10] You got the letters.
[2:37:10] Good.
[2:37:23] Morning, Mr. Chairman, member of the board.
[2:37:24] Before you start, is the hope scholarships or the distributed among all pretty much economic
[2:37:32] levels?
[2:37:33] Yes.
[2:37:34] Great question.
[2:37:35] We do look at, there's an annual lottery report that we have that looks at distribution
[2:37:40] across the incomes.
[2:37:42] There is, and if memory serves me correctly, and I can verify the information to be shared.
[2:37:47] But ballpark it's up to, it's about 10% every 10,000, so I think we started like 12,000
[2:37:55] incomes and go up in those increments, but a majority of that does go to the upper income.
[2:38:02] I think it's around 100,000 or more that we have.
[2:38:04] But I'm happy to get that information for you all to be sure.
[2:38:08] Okay.
[2:38:09] Thank you.
[2:38:10] Tim Phelps, Chief Grants, and Scholarships Officer with the T-SAC.
[2:38:15] You should have the copy of our latest memo which provides the estimated expenditures for
[2:38:21] our lottery funded programs.
[2:38:22] As you can see, we've got a baseline estimate for the current year through 22-23.
[2:38:28] The current year estimate we base on actual fall semester expenditures in the lottery programs
[2:38:34] as of just a week ago.
[2:38:36] 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.
[2:38:46] The out-year estimates that we have are based on growth in the projected recipients that take up rate, the scholarship renewal rate.
[2:38:55] 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.
[2:39:05] and be happy to answer any questions that you may have.
[2:39:13] If the estimates that we have for the lottery proceeds are off,
[2:39:23] are you able to adjust with reserves to provide for the current year?
[2:39:29] We do, so we have the lottery for education account,
[2:39:33] which has 110 million that we're able to access.
[2:39:36] So if we have a shortfall in the lottery proceeds, then we're able to make up the difference from that.
[2:39:43] Then once we do that, the next year, we replenish the lottery for education account back up to that amount.
[2:39:49] That's what I wanted to be sure of.
[2:39:50] Yes, sir.
[2:39:51] We have questions.
[2:39:54] Let me get a little bit on that.
[2:39:55] Yeah, I think this is something to make sure we do.
[2:39:58] So, you would be able to take the reserves.
[2:40:00] 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.
[2:40:13] 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?
[2:40:28] But it is, I think, up to the 410 million, if memory serves me correctly, we go back up to that.
[2:40:34] I did not remember that, we take proceeds from each quarterly transfer that will be from the lottery.
[2:40:39] And then we put that back in the library for education account.
[2:40:43] Thank you for clarifying that.
[2:40:44] That's good.
[2:40:45] Other questions?
[2:40:47] Thank you very much.
[2:40:48] Thank you, Mr. Chairman.
[2:40:54] Each year we have a request from the Department of Education for
[2:41:00] a lottery scholarship day that's provided for Intensity Code Annotated Section 451-111-C2V.
[2:41:16] In this request is for $23,000 this year, and this is for enhancement for education programs.
[2:41:26] And I've moved that we approve this request.
[2:41:33] Any discussion?
[2:41:37] All in favor say aye.
[2:41:41] Let's recess the meeting of the State Funding Board until Tuesday the 26th at 1 p.m.
[2:41:51] this room. We will consider a variety of matters, including the red new estimates at that time.
[2:42:03] So we are now in recess. Thank you all very much.