Joint Legislative Economic Outlook and Revenue Assessment Committee


2003 Minutes


February 6, 2003
February 7, 2003
February 13, 2003
February 14, 2003


DATE: February 6, 2003
TIME: 1:00
PLACE: House Majority Caucus Room
MEMBERS: Co-Chairmen Rep. Hilde Kellogg and Sen. John Goedde; Representatives. Max Black, Dolores Crow, Lee Gagner & Charles Cuddy; Senators Hal Bunderson, Brad Little, Robert Geddes, Brent Hill & Mike Burkett


Representative Mike Moyle
GUESTS: See list of speakers on agenda

The meeting was called to order at 1:07 by Rep. Hilde Kellogg. Jason Hancock presented the Gold Packet and gave an overview of the four meetings. He said we would hear from the Industrial sector today. Tomorrow will be general information on the economy. Next Thursday we will hear the Governor's projections, and there will be a period of time for discussion. The Committee will then put together its forecast. Members will be given an opportunity to make their individual projections which will be turned in Thursday evening. Friday, Jason will present the average of the members' projections. The Committee will review the various projections and will come to a resolution on the revenues for FY 2004. They can adopt the Governor's projections, or they can make a motion to adopt a different number. However, FY 2003 must be decided first.

Larry Branen, of the U of I College of Agriculture, spoke on the forecast for Agriculture.

The total cash receipts from agriculture continued to climb last year to over 4 billion. That was a 5% increase over 2001. R. G. Taylor, of the U of I, was in the audience. He does an analysis each year. Dairy produces the most revenue, and potatoes are second. Cattle and calves come third. Crops were up 24% and livestock was down 12%. So, crops produced more income last year.

Cattle were down 14% and prices were down 8%. Milk receipts have been going up. They are down 11% due to prices going down16%, even though production is up 6%.

The revenue from potatoes is up 61%. Prices were up 45% and productions was up 11%. They expect the prices to go down as production goes up. Wheat and sugar beets are both up in production and prices. Hay production went up 12% and prices went down 7%. Over the years, wheat and potatoes go up and down. We are a "milk and potatoes" state. Greenhouses and nurseries continue to be good producers. Idaho barley is up 7%, although national production is the lowest since 1937. This is due to the malt barley being raised in eastern Idaho.

The record high for income from agriculture was in 2002, but adjusting for inflation, it is not a record. The Year 2002 was 14% above the 30 year average. The all-time high was 1976. Adjusting for inflation, agriculture has been pretty stable over the last few years.

Government payments for 2002 were half of what they were in 2001. There were a lot of emergency payments in 2001. Idaho is less dependent on government payments than the rest of the US. Government payments have dropped off considerably in the last few years.

In regards to revenue, a strong crop sector compensated for lower livestock receipts and lower government payments. In regards to expenses, there were modest cost increases, but property taxes were down 12% and manufactured inputs are down 5%. Net farm income is up 11%. This is a 50 year high, but adjusted for inflation, the true high was in 1974 Since the 1990s, things have been fairly stable in agriculture.

This forecast for 2003 from the UI Ag Economists was prepared by Eborn, Gray, Patterson & Taylor.

The consumption of beef is going up 1%, exports are stable and prices for fed cattle are expected to stay about the same. In dairy, consumption of cheese per capita is down for the first time in years because pizza production is down around 2 percent. Production has to go down and prices aren't expected to go up. Again, it should stay pretty stable. Prices are above the break-even level.

Barley is up due to the malting demand. This brings a premium of $1.10 more per bushel. General barley prices are expected to go up. Globally there is still a need for wheat. Prices were good in 2002, but are expected to go up a little more. The production of dry beans and hay is up, but the prices are expected to go down.

Mr. Branen continued with the things to watch in 2003. The first is the general economic conditions--is the recession over? Also what will happen to the consumer demand--domestic (milk and cheese), and global (crops and beef). In the area of production, higher costs for inputs could be important. They are particularly concerned about the availability of water, and that depends upon the snow pack.

Overall, agricultural income for 2003 should experience a 0 to 1% increase.

The long term factors for agriculture: General factors include bio-security concerns--we haven't seen any problems so far, but we need to be alert. Governmental policies--the new farm bill has a change in direction from 1996, but not new policy. There is increased direct support, but without supply constraints. This provides a safety net by providing effective commodity prices. Each safety net is tied to a different production base and thus it is complicated. Acreage limitations have been removed, but now farmers must comply with conservation and wetlands regulations.

Lack of profitability is still a long-term factor. We will continue to see consolidation. Mr. Branen believes that the demand for food will grow. Idaho is supportive of agriculture. It has productive soil, an excellent climate, a strong infrastructure, a highly skilled level farmers, and less competition for land.

Dr. Garth Taylor of the U of I spoke. He gave some facts. Agribusiness has a large impact upon Idaho's economy. The health of Idaho's economy is immune to changes in Idaho farm income. The impact is that it brings in new money to the economy, which then multiples within the economy. However it is a small part of the economy. There is backwards and forwards linkage.

Dr. Taylor responded to the question of why what happens in agriculture doesn't seem to affect the overall Idaho economy. He said there are three reasons.

1) The Teeter-totter effect. If one area goes down, another area profits. For example, if hay prices are down, the rancher's income from feeding cattle will go up. If milk prices go down, the cheese processor's income will go up. Overall, sales in agriculture stay the same in total because of linkages­they sell to each other

2) Farm land is never idle--linkage still stays the same. If a farmer goes out of business raising one crop, someone will buy the land and raise another crop.

3) "Still must buy fertilizer." (A farmer still has to feed the cow). The inputs stay the same.

Sen. Bunderson commented that milk is a success because we are processing it. We don't process cattle and calves, even though that is our second largest area. How can we encourage more food processing. Mr. Branen said the U of I is working on bringing in more food processing. They are teaching courses to assist food processors on the web. Sen. Bunderson mentioned the closing of the Heyburn french fry plant, which moved to Canada. He asked what is happening with food processing--are they merging? Mr. Branen said they are working on drawing processors to Idaho. Some processors have been here a long time, and plants become too old. There is a problem with replacing buildings--but in another state or country. It takes a lot of work to keep processors here in Idaho. The college had to drop back 100 positions. Fifty of them will now be rehired. However, they are missing some of their potato specialists to help in this area.

Senator Little commented that with the currency difference, it would be cheaper to process the food in Canada. However, if the dollar doesn't stay as strong, this might help the situation. Mr. Branen said they believe the dollar will slide. Dr. Taylor said we are blessed in Idaho. Many of our crops lead themselves to processing or value added. In the Midwest, crops leave the state as soon as they are harvested.

Rep. Black mentioned the Heyburn plant closing down. What about the plant in Glenns Ferry? Will it increase. Mr. Branen said Glenns Ferry produces dried potatoes--flakes, so they won't pick up any of the lost french fry business. It takes number 1 potatoes for french fries, Glenns Ferry takes cull potatoes.

Mr. Pat Takasugi, Director Idaho Department of Agriculture, spoke. Agriculture in Idaho is very dependent upon such things as water­he held up "The Drought Report." In the north and south-east it isn't looking good for this year. The weather is a large factor in agriculture. The economy is still recovering from 9/11. In some areas the economy has not recovered. As to large expansions, the dairy expansion near Burley is on hold. He is not aware of any other major expansions. Twenty per cent of the state's economy is tied to agriculture. With the right decisions, agriculture in Idaho can continue to grow. In Idaho, agriculture has moderate stability. Farmers are tied to the land--they owe mortgages, so they continue to produce crops. Weather can change the stability. Drought is an issue for this coming spring. The next year will also be a problem as all the water will used up, none will be left over in the reservoirs.

There are problems with the disaster relief bill for farmers. In the future there may not be the federal help in hard times for the farmers. There is a move to conservation. He expects to see more on conservation. This will change the mix. He is not sure about the impact this will have on agriculture.

Mr. Takasugi continued with other challenges: There are food security issues which include more than just bio-security. It makes the task in the food-world very difficult. Al Qaeda knows our vulnerabilities in the food system. There is concern that the toxins can pollute the 40% of our food supply that comes from overseas.

Mr. Takasugi said that more development money can bring in food processors. For example, they were successful in convincing several processors that Idaho has the best malting barley, and we can supply the three companies moving here. (Barley will displace some wheat). We will get more jobs and more property taxes. Investments in those kinds of projects are needed. It takes marketing money and development staff. We need a business-friendly environment. Environmental regulations are driving businesses out of Idaho. Businesses don't want the exposure to fines. Our right-to-work laws are a positive for our state.

He concluded with a mention of disturbing trends. The migration of processors away from Idaho due to Canada's favorable exchange rate is one. He said Canada plays the "game very well." Canada has positioned themselves well to profit from a global economy. They have full-time people who know our rules better than we do. Consolidation is also a problem. The world population is expanding, but people don't have the money to buy food. Global regulations are a concern as are third-party lawsuits which can drive production out of this country, too. Growers are contracting to sell crops before they plant them which ties the growers to the big producers.

As to the list of commodities, not everything is tracked.

Mr. Don Gerhardt, of the USDA Statistics Service, spoke. He said he would echo concerns expressed by previous speakers. The diary industry is struggling. We need to watch it. Dairy was increasing, but the increase rate has dropped these last two years. The cattle-feeding industry in the state fell in 2002. The issue was profitability, not the availability of cattle. He urged the Committee to watch the monthly numbers of cattle on feed. Potatoes jumped last year after a disastrous year in 2001. Some growers were forced out of business in 2001. He is a bit cautious about potatoes. The price hasn't gone up, although a lot of potatoes have been produced. The demand for french fries seems to be flat. Wheat is a world market, so it is difficult to predict. Winter wheat plantings are up. US stocks of wheat are down 19%, even though the price has improved.

Mr. Gerhardt said we produce a lot of alfalfa hay, but the price isn't as rosy as they would like to see. Barley is a positive, and sugar beets is fairly positive. He said for the Committee to watch the national sugar programs--what happens with exports and imports. With sugar, prices aren't out until two or three years later as that is when the growers are paid.

Sen. Bunderson asked why seed is not listed. Mr. Gerhardt said we have some numbers and there is a factor put in for it. It is a proprietary industry and they don't give the numbers out. However, the grass seed people in Northern Idaho have now asked for a study. They realize that not giving out numbers has been to their disadvantage. Sen. Bunderson said there is processing as the seed is cleaned and packaged. He suggested that malt barley be separated from regular barley in reporting. Mr. Gerhardt said it is broken out, but was combined for this report.

Jane Gorsuch, of the Intermountain Forest Association, spoke. Prices for forest products were very low in 2002. The housing market was at an all time high, but Canada is dumping a great deal of lumber in our markets. Even with the 27% dumping tariff on Canadian lumber, a tremendous amount of lumber was still imported from Canada. The US is asking for major restructuring of the way Canada does their business. Negotiations are continuing between the two countries. Poor economic conditions around the world further hurt lumber exports, especially in the Pacific Rim. There were no major mill closures in Idaho in 2002, which is good news. Forty-five per cent of plants in Idaho made some improvements in technology. The same number of people were employed, so that is a somewhat stable employment picture. Prices have continued to drop these last three years. Board feet production is down 2%. The strong dollar also hurt the forest industry.

The significantly reduced amount in timber harvested from federal and state lands hurts all of Idaho. They are hoping for better business in 2003. Lumber mills use a lot of energy, especially fuels. If energy prices spike, this could hurt the lumber industry. Fifty-five per cent of those in the industry expect a better year in 2003. Fifty per cent of them also said timber availability, especially Federal lands, will be an issue in the future. Some mills have converted to handling only small logs under 18 inches in diameter, as the big logs from federal lands are not available.

Environmental expenses have increased. The cost of paperwork processing has multiplied four times. Budget roll backs have hurt the forest practice advisors availability to be out in the field. They support the raising of fire suppression fees and fees that pay for the forest practice advisors to the levels requested by the State Department of Lands. They are concerned about possible litigation that might shut down the timber harvest around Priest Lake. The Tussock moth outbreaks seems to have been contained.

They work with the various state agencies and have put up a $100,000 grant for those interested in checking on drinking water purity. She thanked the Committee for the Legislature's help in various programs throughout these past years.

She concluded with the comments that for 2003, the industry will face continued challenges. Resolution with Canada on the dumping of lumber, the dollar strength, and energy prices will all have an affect.

In response to Senator Goedde's question, Ms. Gorsuch said the costs of wood products in a home today are less than 1% of the total cost of the home. Rep. Gagner inquired as to the motivation for Canada to reconsider their lumber dumping. Ms. Gorsuch said several provinces are very dependent upon their import of soft wood products from our country. There was a restriction on the imports into our country. When that restriction expired, Canada started shipping in a great deal more lumber. Our Administration has taken a new stand. The provincial government subsidizes the mills to make sure they have full employment. The tariff is hurting them substantially. There is an appeal in a world court and Canada is hoping to get the tariff money back that has being held. The mills are running 24 hours a day, 7 days a week. The US government pressure is finally making an impact. The western provinces are interested in settling this issue because it is costing them money.

Senator Bunderson commented that the average salary in timber and wood products puts it 6th highest in the state, but it has declined on the list in the last five years. What is the trend? Are we going to be wiped out? Ms. Gorsuch said her members are in for the long run. The mills are upgrading. The loggers and truckers are doing the same thing. They are working on the sustainable forest initiative. They want to stay in business.

Mills have worked to reduce dust, organic air-born particles, etc. Fifty per cent of recent improvements is due to environment regulations. However, there can be overkill. Businesses can be forced out.

Alex LaBeau of Idaho Association of Realtors, spoke. In 2002, the real estate market and construction industry defied conventional wisdom and rose. It can be a barometer of the over-all confidence of the citizens. There isn't a "housing bubble" as in the stock market bubble. People are buying houses to live in.

In 2002 they only tracked single family homes. Commercial sales were not tracked because there are very few commercial specialists, and they have a hard time tracking them. Commercial sales don't run through multiple listing services. In the future, they should be able to get better information on commercial sales. They will work on this. In 2002, the number of single family units was up 9%--over 9000 homes were built. The dollar value was up over 15%. This was 1000 more in sales and .3 billion in dollars more than they had projected. They expect to go over 21,000 sales, and over 3 billion dollars in sales in 2003. He is more confident of these numbers than he was of last year's numbers. The thirty-year fixed mortgage rate is 5.37 per cent--1 per cent lower than last year. This reduces annual income qualifications by $3000 as monthly payments are less. This especially helps first-time home buyers and those low on the economic scale. Anything below 8% is considered cheap money. People are continuing to refinance their homes. Interest rates on mortgages is more tied to ten-year bonds than the prime interest rate. They expect interest rates to stay the same throughout 2003, or drop slightly. Last year there was an increase in delinquencies and foreclosures, but it has leveled off. Home ownership is 68% nationally overall, and 72% in Idaho. High tech manufacturing has an impact on our Idaho economy. The federal laws eliminating the capital gains tax on those who sell their homes has benefitted Idaho. It unlocked two trillion dollars of wealth in the nation.

Mr. LaBeau referred to John Eaton of the Idaho Builders' Association who produced a handout. There was a 6% increase in home building last year. Investment properties have been hurt some as there are high vacancy rates. However, people are buying real estate as they are concerned about further losses in stock market.

Mr. LaBeau said his organization represents between 80 to 85% of all realtors, and all of those who are making money. They have over 5000 members for the first time in history. This is a dramatic increase. Total construction, home furnishings, home improvement, title insurance, mortgage companies, etc. all support the Idaho economy.

For every 1000 homes built, 2000 plus incomes are impacted. The economic benefits continue long after the homes are built with taxes, upkeep and maintenance expenses. Between 12 and 15 per cent of the gross domestic product in US and Idaho is connected to housing. The increase expected for Idaho in 2003 is higher than the national 2.5 increase predicted.

In the urban areas, the manufacturing, especially the high-tech manufacturing had a large effect on home sales. Rep. Black asked about the reduction of high tech jobs--plants closing and such. Has Nampa been hurt? What is happening to those who lose their jobs? Mr. LaBeau said anecdotal stories show some drop in high tech jobs, but small businesses have picked up those jobs. The unemployment rate has gone up, yes, but people are moving into Idaho. Many of them are telecommuting. Their job might be in Washington D. C. Investment in communications is very important as this makes those kinds of jobs possible.

Rep. Gagner said he was at a convention. Someone predicted a 10% reduction in home building. Mr. LeBeau said he would not agree. Mr. LaBeau said he anticipated an increase of 5% in tract homes. Sen. Geddes inquired, with conventional mortgage rates at an all-time low, what is the federal government doing to help first-time home buyers. Mr. LaBeau said there are all kinds of programs to help people. The number of programs is overwhelming. The federal programs have led the way and proved the markets are viable. He said that war-time jitters does cause concern as well as the tightening of credit. He said he would be stunned if we dropped in housing.

Pam Eaton, of the Idaho Retailers Association, spoke. Employment and sales tax figures have already been given. They would like to see sales tax streamlined. They are against an increase in sales tax. In answer to questions submitted, she said sales tax figures show the current state of retail sales, but it is a bit of a roller coaster. The last couple of months have been a bit disappointing, but retailers are feeling pretty lucky, considering the state of the country and world. Consumer confidence is pretty good. They are just now starting to see the impact of the recession. Members are projecting a 2.2 increase this year and 2.3 increase in 2004. In the past, members have predicted much larger numbers, but not this year. Some independent retailers are going out of business, but that always happens. The numbers are not a great deal higher than in years past. Some of this is due to the competition of large companies coming in to an area. Low interest rates have helped the retail spending. Electronic stores, car dealerships, and appliance stores have been able to offer low interest rates in order to encourage sales. Speciality and clothing stores have not been helped by these low rates. Since 9/11 retailers have to use big sales and big mark-downs in order to move merchandise. Customers have gotten used to this, and expect it. Weaning customers off huge sales at any given time will be a challenge. Small and independent retailers are hurt the most by this trend.

The retail industry provides the majority of the sales tax revenue which goes directly into the general fund. The retail industry employment is growing. It is one of the fastest growing industries in the state. Idaho is only one of five states that is not participating in the sales tax streamlining. This especially helps big companies to do business. It is estimated that Idaho lost 44 million in uncollected sales tax revenue from online and catalog sales. Passage of this type of legislation would also help main street businesses by making the "playing field more level." She urged caution in a sales tax increase. A sales tax increase will greatly harm the retail business in Idaho. We have two neighboring states with no sales tax--in Washington there is no sales tax on food. We could have border counties without local stores and it will force people out of state for their purchases. Inland, it will reduce the disposable income. A sales tax increase could really hurt retailers and the citizens of Idaho. Historically, the sunset clauses have not worked. As far as the cigarette increases--when states increased cigarette tax, they lost volume in sales. People just went to states without such high taxes. Or they ordered them on line, or went to tribal-owned areas. If we raise sales taxes, we will lose more to catalog and on-line sales without the streamlining of sales tax.

Sen. Hill asked for her suggestions on balancing the budget. Ms. Eaton said they are waiting to see the figures. They think there are still more cuts that can be made.

Nancy Vannorsdel, President & CEO of Boise Metro Chamber of Commerce, spoke. Negative effects have been felt in Boise less than the rest of the nation. We have a diverse and competitive economy with a consistent cost of doing business. HB 70 was a critical move to help business. Our business-friendly climate was rated by to be low in the cost of doing business. They feel that the protective legislation to help business needs to stay in effect. They think the current economic situation is just normal cyclical events. There are "gently rising" unemployment rates in the Treasure Valley. Jabil, and the Sears closing have hurt the job market. Micron is in a down time. Some of the new call centers have helped take up the slack. The call centers seem to be increasing, if anything. There are concerns about communications infrastructure which is necessary for this sector to survive.

Ms. Vannorsdel said the residential real estate boom is due to the low interest rates, but they feel this is a short-term rise. They expect it to go down in 2003.

In Boise, they are encouraged by the purchase of the 8th Street Market Place and major redevelopment. They support the expansion of the Boise Convention Center, and the bond issue defeat was a big blow. They still hope the bond issue will pass. It will generate new jobs and economic activity. A new hotel is waiting to move in if the bond issue passes. She is concerned about health care and technology which are experiencing a shortage of qualified personnel. As our economy recovers, this problem will only be amplified. Special attention and adequate funding is needed for the higher education programs that produce these workers.

Sen. Bunderson inquired as to what standards people look for in a magnet for high tech or a stabilizing factor for high tech. Ms. Vannorsdel said businesses look for an available and high-level workforce. They also need the cost of doing business to be low. Good transportation is also needed, which includes the improvements at our Boise airport. Education K-12 is also important.

Dr. Bill Shipp, President & Lab Director of INEEL (Idaho National Engineering and Environmental Laboratory), spoke. He referred to Page 2 of his report. There is a great deal of uncertainty about the next six months. The 2004 Federal Budget just came out, but they haven't had time to look at it in detail. They think there will be a slight increase in spending.

They are Eastern Idaho's largest employer, and the number two employer in Idaho. Their annual payroll is 420 million dollars. They have invested two million in economic development and charitable contributions. They have a priority to "Buy Idaho."

Their budget exceeds a billion dollars a year. He didn't have a firm number for 2003, he should by the end of the month.

As to the Department of Energy, he expects a continuing increase in funding for nuclear energy. He gave thanks to the Governor and our congressional delegation for their help in obtaining funds. Employment at INEEL has stayed stable. They expect it to remain the same in this coming year. They expect to buy a little less of Idaho's products this year due to a change in items purchased, but it still will be 77 million dollars. They invest in pre-college and university programs, and sponsor the Jason curriculum which deals with science. They also provide education for their own work force, and invest money across the state.

Dr. Shipp said in looking ahead, they have a new DOE sponsor. Their environmental clean-up job remains the economic base on which to build the rest of their company. Having an advocate in DOE headquarters is a tremendous asset to them. They have been assigned a leading role in the new generation of nuclear reactors.

As they finish clean-up operations which consists of "getting it cleaned up and getting it out," new skill-sets will be needed. They are looking forward to new test facilities over the next few years.

INEEL has been a major economic force in Idaho for 54 years. They have a number of third-generation workers. There may be four generations now and they are looking forwards to 5 and 6 generations of workers.

They expect to have a 100 million dollar increase in 2007 for the environmental clean-up which is to continue through 2012. Then there will be a large drop after that as the clean-up will be done. Employment will drop to about 4000 or less.

Rep. Gagner inquired on the "Buying in Idaho" slide as to the awards to businesses in Idaho. What brought about the drop. Dr. Shipp said it was a change in the kind of work being done that year. Next year it will probably go up. It depends upon the character of the job. Rep. Gagner said the company has been a good partner to Idaho business.

Sen. Bunderson asked about the nuclear reactor facility. There is an attitude change in Washington, D.C. However there is still resistance from extreme groups. What do you see for the future, is INEEL the major player, or is there anyone else? Dr. Shipp said they are doing research and development on a Generation 4 reactor. INEEL is the center for this development. The 20-10 program is designed to get the equivalent of an advanced current reactor built and operating by 2010. It is a program to jumpstart a new reactor and get it built. They are trying for a one-step licensing. Generation Four is a co-operation of 10 countries, who narrowed all the choices to six reactors. The US will probably invest in only two of those. Others will invest in the ones they prefer. The research agenda will then be determined. In order to make hydrogen economically possible, they need a high-temperature gas reactor that makes the hydrogen. They would like to see one of those built in Idaho. The other type of reactor the US will invest in is a fast reactor which facilitates the destroying and burning of nuclear wastes. This leaves a fraction of the original material which needs to be deposited in Yucca Mountain. These next 18 months are pivotal for them to leverage on what they already have.

Rep. Gagner asked as to the time for the permitting process. What is the goal? Dr. Shipp said with the one-step process where the license and construction permits are issued at the same time--it would be within three years. Up to now it has taken up to 10 years. The controlling agency is the Nuclear Regulatory Commission.

Karl Tueller, Deputy Director, Idaho Department of Commerce, spoke. He gave insights on four or five areas. A public opinion poll showed encouraging signs. People seem encouraged, manufacturers seem encouraged, 51% of CFOs in the State expect the economy to get better by the second quarter of 2003.

Travel and tourism is over a 2 billion dollar business in Idaho. Tourism in 2000 created 28,000 jobs in this state. For the first time ever, we had a dip in tourism last year. His department predicts a 4.8% growth for 2003. There are lots of new activities all over the state. The expansion of airport and the possibility of becoming a hub for cargo could bring in a large number of dollars.

In response to Sen. Bunderson's question about airport expansion, Mr. Tueller said the third runway is 5000 feet long, but can be expanded to 10,000 feet. They now need a new tower. They are looking for some federal money. They had to make changes at the airport after 9/11. The timing of new tower depends on getting the needed funding.

Rural grant programs are bringing businesses to rural areas. They have received positive feed back on the direction they are taking.

Exports have been growing in the past years. Sixty-eight per cent of all our exports are technology related, and this area has slowed down. The Pacific Coast dock strike jammed things up. We are working aggressively to build relations in the Pacific Rim. Both big and little manufacturers are losing jobs off-shore. We are also losing our engineering, accounting and design jobs to the Philippines, China, and other Pacific Rim countries. The five companies that carry the major burden of high tech are very important to our state. Mr. Tueller said his department has been working to strengthen technology around the state. They have set up several centers around the state.

In the area of economic and rural development, they are working on providing training. They are seeing some nice progress. The 3.9 million funding has produced quite a few jobs, but not all these jobs have actually been filled. Construction on facilities is starting this spring in some cases. Other facilities are built, but hiring hasn't actually started as yet.

There are not a lot of major new companies coming in. People are moving from California. There are some good things happening. The small rural areas are still losing jobs in the timber areas.

He closed with the comment that California, Oregon, and Washington are hurting far worse than we are.

Rep. Gagner asked about the rural initiative­down town improvements and industrial parks. He wanted to know how the funding worked. Mr. Tueller said grants for this aren't given without commitments from companies that they will move in if the project is built or is done. The county or city is held liable if the jobs aren't created.

Sen. Bunderson inquired as to the problems with neighboring states. What are we doing to attract the good businesses from these states? Mr. Tueller said they are very aggressive in terms of intent, but they have a very limited budget. They are attending trade shows. Have a couple of ads, but need more funds to run the number of ads they feel is needed. The Buck Knife Company decided to move to Idaho rather than Washington or Oregon. Sen. Bunderson suggested that smaller, but more frequent ads in certain magazines might work better. Karl, said they have to use good judgement. Some of our own local areas have more money to share and can help his Department with the costs.

The meeting was adjourned at 5:10.

DATE: February 7, 2003
TIME: 1:03
PLACE: Gold Room
MEMBERS: Co-Chairmen Rep. Hilde Kellogg and Sen. John Goedde; Representatives. Max Black, Dolores Crow, Mike Moyle, Lee Gagner & Charles Cuddy; Senators Hal Bunderson, Brad Little, Robert Geddes, Brent Hill & Mike Burkett

Jim Adams from the Idaho Department of Labor, spoke. He introduced Janell Hyer of his department. Her presentation will focus on 2002. He also introduced Dwight Johnson of the Department. He said he felt a good analysis of the year past is necessary to understand this next year. Their remarks will concern employment in the State today. He concluded that this is a particularly challenging time to testify. There are some very big unknowns­among some is the national recession and a possible war with Iraq. They are aware of the need for them to present accurate data to the Committee.

Janell Hyer of the Department of Labor, spoke She said the news is good and not so good as far as employment. For the 12th consecutive year there was an increase. There were 652,000 jobs in Idaho in 2002, which was up from over 648,000 in 2001. However, the unemployment rate is up. Throughout 2002, we were recovering from significant lay-offs in 2001 and early 2002. Farm payroll went down slightly. Employment is a count of people by where they live, rather than where they work. It also includes self-employed people. Farm employment counting occurs in the place where the farm is, not where the person lives. If a person holds more than one job, they can be counted for each job.

Idaho is beginning to follow national economy more than in the past as we have broadened into technology. We are not as bad off as the national economy Unemployment was 5.6 in December for Idaho and 6.0 for the US. The national rate is 5.7 today. Idaho's rate won't be known for two more weeks.

Senator Bunderson asked if we follow the national number. Ms. Hyer said historically we are below the national unemployment rate. We would assume ours will drop when the numbers come out, but we don't know until all the data comes in. The drop in US is considered a positive thing for the US and for Idaho.

During 2002 the Department of Labor paid out 275 million dollars in unemployment benefits, plus 31.5 million in extended benefits. That is over 200 million dollars. This amount has helped stem a possibly worse situation in the Idaho economy. Those payments go right back into the economy.

Senator Bunderson asked how are unemployment benefits trending now--up or down? Dwight Johnson said the trend is 100 million, 145 in 2001, 275 million in 2002. Tracked on a week by week basis, we dipped below 2001 tracking, and the trend has continued of being below 2002 so far in 2003.

Senator Bunderson asked for a weekly trend chart. Dwight Johnson said they would be happy to provide it. (He brought the report in later during the meeting.)

Ms. Hyer said construction has slowed throughout the state. The population immigration has slowed down. Lumber and wood products have had tough times in 2002. The price for lumber is down as are the markets. They don't anticipate much change.

Layoffs in electronics began in April of 2001. The period from July 2001 to July 2002 was time with the hardest hit. The companies are no longer laying off, and they are starting to hire people again. Some of those laid off received very high wages, and unemployment compensation didn't cover their life style. The State lost a lot of high-paying jobs. Hopefully, these jobs will come back, but the Department doesn't expect the levels of 1 ½ years ago.

Food processing was stable in our State until Simplot announced they were going to close the Heyburn plant. Those loss of those 600 jobs will have a dramatic impact on the food processing industry.

The Chemical industry has had high paying jobs. Four hundred jobs were lost in Pocatello when a plant closed. In 2003 Buck announced they are going to north Idaho. They will be bringing 80 people, but 200 will be hired locally. Retail selling is slowing down. The big guys are hurting the "local guys." WOW Warehousing of Wisconsin--a logistics moving company, opened in Jerome this year.

In health services, our population is ageing. We need more health services. Health services is beginning to slow in growth.

Business services did not do well this year, such as call centers, and temporary help agencies. Temporary workers lose their jobs first in a tight economy. Temporary agencies are starting to hire again. Call centers don't have business when people aren't buying. Several companies had to cut back. However, the Del Computer company has been an astonishing success. They are very happy with Twin Falls in Idaho. They are up to 700 workers, and still expanding.

As far as tourism, water is needed for tourism as well as crops. Tourism was OK this year. A new water park up north is coming, and that should bring in more people.

Good things are being heard from other areas. North Central is hoping Lewis & Clark Commemoration will help their area. They have had double-digit unemployment. Also, small development agencies are working hard to provide jobs.

The Year 2002 wasn't the best year, but we had worse in the 1980s. Only one county had below 3% unemployment last year--that was Madison County.

Senator Little asked if the 200 million in unemployment payments was federal funds. He said the Gold Book has a smaller number. Dwight Johnson said the unemployment in the gold book was that part that was from Idaho state monies. (Page 15.)

Jim Adams gave the forecast in recap. Many of our industries will be based on the national recovery. We make many things that businesses buy. This was a business produced recession. There are signs things are slowly getting better, but there will be a lag for the next six months. Analysts say consumer confidence held the economy together. The Department expects the economy to improve as long as there is low inflation. Overall, they don't see too many wage gains. Skyrocketing health insurance costs is an issue. Oil and gas prices are a big unknown, especially with the middle east countries. They still expect growth in the civilian labor force, but they think the general unemployment rate will jump around to an average 5.5% for the next 18 months. They don't see much change in the local unemployment rates. Urban centers will drive the rate because that is where the population is. Page 9 in the Gold Book lists their summary. They have concern about transportation costs. They are hopeful in the area of computer and electronics manufacturing. State and local governments are an unknown factor. State governments, and local government employees make up a large number of our employment population. The State of Idaho is the largest employer in Idaho. They expect some improvement in most areas. He concluded that Idaho will survive the recession in fairly good shape.

Senator Burkett asked why the pay is increasing in agriculture and high tech?

Mr. Adams said agriculture is a funny industry to deal with in regards to wages. Sales plays a big part. The workers are not covered by unemployment insurance. Smaller farms are disappearing, so the larger farms are producing most of the food. They do pay unemployment insurance. In high tech, there are a lot of well-paid engineers. Production is very efficient and cost-effective. For the future they need new products, so that is where the higher paid jobs are needed. Ms. Hyer said the increase is the projected number for 2003. The wages have been going down in the high tech in the last two years, so they expect it to go up. Agriculture numbers are from larger corporations with workers covered y workmen's compensation. These are some of the large dairy businesses.

Bob Maynard, Investment Manager for PERSI, spoke on the state of the economy. He said he would give a review of past markets, and current expectations of markets. Also he said he would cover the dangers, and impact of the war.

He said he would be giving us the general expectations--a consensus. What is the economy going to do--what are the people's feelings?. Two-thirds of our economy is driven by consumer spending, and one-third by business spending. He would also cover what is happening to business profits--in equity and corporate bonds. The market is driven by expectations. We need to look and see what those expectations are.

Sources are surveys and the market itself. Consensus economics makes the report.

Current expectations are for a mixed, but slowly growing economy. However, the economy is still nervous. Expectations are for lower than normal profits and returns before business spending kicks in. Expectations go up and down, especially since Sept 11. The bond yields are at historic lows. They think the market is slightly undervalue. Expectations are for a "generally medium tepid" business recovery.

The possibility of war with Iraq is currently paralyzing the economy because of uncertainty. They don't expect a long effect if there is a war. The market has factored in the expectations of a short, victorious war. Most people think the oil supplies are safe. A terrorist attack or serious oil disruption could hurt the economy.

The recession is over, but the shape of recovery is unclear. Credit spreads and equity risks premium are higher than normal.

Globally, there is more capacity for production than is being used. Mortgaging refinancing gave people money to spend. However, this money has been spent. Delinquency rates have stayed fairly steady. Both Europe and the US expect a modest revenue increase. Corporate profits seem to be moving to the positive side. The return on equity is rebounding, but still far below "normal" levels. The last three years have been the worst bear market since 1930s. The collapse in corporate earnings brought the market down. Even with the last three bad years, the average of the last ten years' return levels have been "normal." The market expects about a 9% return over the next ten years.

The US consumers will lead the recovery, not overseas consumers. We should expect the Fed to keep interest rates low. Expect a modest recovery. Tech and telecom will not drive the recovery. Japan is a "basket case."

The market has expectations--the Fed Funds Futures--guesses on the what the Fed rate will be. There is expectations of no change over the next six months. Starting in late summer, they expect a slight rise. The predictions over the next 18 months on cash returns should be up slightly. Fixed income yields are higher than normal, but down from a few months ago. The market expecting a 2.2 to 2.5 per cent inflation.

The Profit to Earning (P/E) ratios are reflections of attitudes, not values. The reliance on current earnings vs. future earnings, and how far out people are looking affects expectations. The interest rate is more important than inflation on the P/E rates. The expectations of P/E ratios is less than the average of the last ten years.

Inflation is expected to be 2.1%, rising from the current 1.5%. Equity returns are expected to be 9.7%, which assumes a 2.3 GDP (Gross Domestic Product) growth, a 2% dividend yield Corporate profits should come back.

The risks start on page 16 of his report. Once the war starts, the market should no longer drop. If there is confidence that there will be no major shocks, the market will go up. All the wars since Viet Nam have been quick, short and successful. If it isn't, then that is a problem.

Sen. Bunderson, asked how the market will factor in the market in the President's stimulus package. Mr. Maynard said it is already factored in. The tax relief bill won't go through as requested. He expects higher bond rates once we get through the recovery period. Sen. Bunderson asked what happened to the bond market? Mr. Maynard said the run up in bonds was similar to the run up of stocks. It will blow off as did stocks. It is unsustainable. Every bond PERSI has is a loser right now as they need 8%. It is a concern, but they expect things to go back to normal.

John Church, Consulting Economist, presented his report. His news is not good. Idaho experienced the first year of negative employee growth since 1983. It has been substantial and broadly felt. Almost every sector of the state's economy has lost jobs. Food processing continues to suffer. They lost 2%, they will continue to lose jobs, but at a more moderate pace over the next 5 years. Timber will continue to lose jobs. Paper and allied products has overseas competitors. A weaker value of dollar may not help. The area of chemicals is facing permanent operations closures due to demand being down. In some cases, substitutes are available at a lower cost. High energy costs threaten other chemical plants.

Glass has done well because of construction industry. The high tech market is declining substantially and recovery is a question. Troubled times ahead trying to get market share back .in Idaho. HDTV might help if things get settled and there is enough programming available. Business investment in high tech could lead us out of this, but in the area of business applications, there isn't a need for that much better computers. What they have is fine for now. A host of companies is producing chips, etc. It will be tough to make a profit. Mining is down 5 to 6% and expects a further drop of .5% in 2003 and a modest gain of .4% in 2004. The general area of mining is hurting. The switch to digital cameras will hurt the silver mining.

Construction industry is losing jobs, and the housing sector will slow, but so far it hasn't been as great a decline as the national average. Those who can get in a home and want to have done so by now. The interest rates are at the bottom.

In the area of transportation, utilities and communications will have a slow growth. Wholesale and retail trade is negative at the moment. Sales for Christmas 2002 was as bad as 2001. Store sales were down, but internet sales were up at Christmas. Finance and real estate have been strong, but he expects these areas to run out of steam. The refinancing of homes will be finished soon.

The medical sector continues to grow. Other services continue to grow also­the airport screeners bumped up this number last year. Ag employment was down .5% 2002, but slight growth is expected in 2003. It may be the second or third lowest of the last three or four years.

Population gains are slowing also. Last year seemed pretty slow. It may improve next year, but immigration has slowed to a trickle. Retirees are coming back to Idaho, but that won't have that much effect. Income growth was slightly less than the nation. The outlook is 4.6 per cent for the next couple years in Idaho. The Boise MSA (Metropolitan Statistical Area)has been the engine of growth in Canyon and Ada county in the last five years.

The Ada/Canyon County area has been the hot spot for the economy, and now it is down in almost every category. We have been down further, but we are not falling as fast now. Government employment is slightly negative, too. This area is going down faster than state-wide.

The economy will recover in 2003. The wild cards are Iraq especially as it concerns the gasoline prices. People are frightened so prices went up 10 cents a gallon last week. If oil prices go up and stay up, can the American economy handle it? It could send the economy backwards. American consumer confidence index is showing concern for the risks of this war. People are frightened by the possibilities. Terrorist attacks could also be a factor.

Mr. Church felt there could be a rather "handsome" recovery the last six months of this year.

The Boise air port expansion helped spike the Ada county reports last year. However, it was a one-time project, as was the Ada County Courthouse. Factor these out, and the trend has been down since 2000.

Senator Geddess asked what does a tax increase do to the recovery of the economy. Mr. Church said a tax increase is a drag, but so is lessening spending. If the state government spends a tax increase, it gets spent in Idaho.

Senator Bunderson commented that the Governor talked about 65 million for construction projects for universities around the state. What effect would that have. Mr. Church said it would be positive if it keeps jobs in Idaho.

Rep. Gagner mentioned a convention he attended recently at which a speaker thought there might be a 10% loss for Idaho in the housing market this year. Mr. Church said he thinks the housing market won't drop that much. The last two months of the year, construction was down 10%, but he believes it will bounce back.

Senator Little asked about effects of savings rate and spending rate on economy. Mr. Church said that the economists want it both ways. In one sense when we had surpluses at federal level, it was forced savings. The federal government was buying back bonds. Money was reinvested back in market place. When the government demands money, he expects the interest rates to go up.

The next presentation was made by Geoffrey Black, and Donald Holley from Boise State University; ISU Scott Benson of Idaho State University; and Ismail Genc and Steven Peterson of the University of Idaho.

Scott Benson, of ISU, was the next presenter, with the help of Geoffrey Black. Their current forecasts FY 2003 revenue is 1768.9 million, a 4% increase. For FY 2004, they predict 1856.5 million with a 5% growth rate. The growth rates for general fund revenue are not following current rates. The projected growth rates for FY 2003 and FY 2004 are below recent rates.

Individual income tax FY 2002 835.5 million, down 18.4%. For FY 2003, it is expected to be 865.0 million, a growth of 3.5%. For FY 2004, they expect 903 million, an increase of 4.4%.

Corporate income tax revenue was down 46% in 2002, in FY 2003 they expect an increase of 20.6%. (The group of presenters battled over this number a great deal.) For FY 2004 they expect a 17.8% increase. The 20.6 growth is over the low in 2002. Corporate income tax is the most volatile and always has been. Sales tax was up 1.5% in 2002. They expect a 3.5 % in 2003, and an 4.3% increase in 2004. They believe consumer purchases and retail sales will continue to increase.

The total revenue was in 2002 was $1,700.4 million. In 2003 they expect 1,768.9 million and in 2004 1,856.5 million.

Most other sources expect the income growth to stay at a steady rate.

Senator Bunderson inquired as to the effect of the proposed cigarette tax increase. What is the elasticity and how will it translate in collected taxes? Will the purchases move elsewhere? Mr. Benson said if the bill would also tax cigarette sales on Reservations, it would seem to make sense. However the Reservations won't like that. Dr.. Holly said he did not work up figures on the proposed cigarette tax increase. Ismail Genc, of the U of I, said it is safe to say it will be a very small per cent of the total budget. It won't result in much of an increase in revenue.

Senator Bunderson, asked why an increase won't generate much revenue. Mr. Benson said the demand is not elastic, except in the case of teenagers. It might help to reduce teenage smoking, however

As to the national economy, Mr. Benson said this appears to have been the mildest recession in the past 30 years. The national economy is slowly emerging from the recession. Growth will be slower than we have experienced lately, There are still pockets of distress. The Bureau of Economic Research hasn't said for sure when the end of this recession was or will be.

Investment will begin to increase. Given a 4 to 5 year cycle on the useful life of office technology, we see an increase as computers and other machinery are replaced. There is ample excess capacity, so that production can increase as demand increases. The downside is that there will be less fixed business investment in the early part of the recovery.

Consumers have been, and appear ready to continue, to be a source of strength on the demand side of the economy.

Weaknesses: Consumers may not continue to have the money to spend. Productivity appears to show a slow-down in productivity increases. This has been a big source of recent economic growth. These increases in output will require more employment than we would otherwise expect. Internationally, most economies in the world are in worse shape than the US. Traditional trade partners are not strong. There is uncertainty stemming from 9/11 and the continued fear of further terrorist attacks. Consumers and businesses appear more reluctant to undertake certain expenditures.

DATE: February 13, 2003
TIME: 1:33
MEMBERS: Co-Chairmen Rep. Hilde Kellogg and Sen. John Goedde; Representatives. Max Black, Dolores Crow, Mike Moyle, Lee Gagner & Charles Cuddy; Senators Hal Bunderson, Brad Little, Robert Geddes, Brent Hill & Mike Burkett

Mike Ferguson, Division of Financial Management Executive, gave the Revenue Projection for FY 2003 and FY 2004. He presented the Executive Budget Forecast. This is the Governor's projections. Derek Santos was there to offer assistance. Mr. Ferguson said he is responsible for Idaho Outlook, a monthly publication that tracks revenue on a month-to-month basis. From Global Insights, they get information they use for a quarterly report and they get the national forecast. Once a year, the General Fund Revenue Book is published. The middle section is the revenue forecast.

Mr. Ferguson said he would talk about the general revenue forecast. He handed out a synopsis of the larger report. They agree with much of what the Committee has heard already as to the current situation and the outlook. There is clearly a tremendous amount of uncertainty in the economy today. Iraq is the major concern. Consumers and businesses are reluctant to make decisions. Other factors are the collapse in business investments. The capacity utilization rate is at 70%. It bottomed out in December of 2001. It started up after that, but has recently been drifting downward. Consumer confidence has slid in the past months, i.e. Christmas shopping. In terms of current economic downturn, this is the mildest recession since 1920. Yet, we are still having problems. Idaho missed the 1990s recession--it was just a "blip" on our screen. Nationally we have a mild recession concentrated in business, which hits Idaho harder as we produce more business goods than consumer goods.

They believe there will be a quick solution to the problem with Iraq. They expect the second half of this year to show signs of meaningful improvement.

They made adjustments to show better comparisons on the chart on page 2 of the handout that shows the revenue history. (For the forecast they put them back in.) They project a growth of 1.3% for 2003. They project that receipts will grow in the following year with the increase in jobs over 5%. They expect corporate income tax to be flat this year, and grow next year.

The personal income tax of 2002 was down because of the one-time refunds granted on the basis of 2001 taxes. More was collected in 2002 than ended up in the budget. That hit won't recur in 2003.

The estimate for the current year is 1.8% growth and next year 4.1% growth in revenue. A lot of attention has been paid to the month-by-month revenue stream. Page 3 shows month-by-month results for the five major revenue categories. They try to predict the fiscal year as a whole. They look at historical patterns to predict the month-by-month receipts. If there is a variance, they look to see what happened. In January, 2003 the receipts were lower than expected. The economic situation has deteriorated, even though revenue collection was higher than expected for some months last year. At the end of the year, the numbers were done. December and January figures look worse than they actually are.

July through November of 2002, sales tax was higher than predicted. They collected extra monies due to strong withholding taxes. The higher corporate income tax revenues were related to prior tax years, they weren't a sign of things to come. However the forecast was raised.

In December, the number dropped below expectations. Withholding dropped by 3 million. Now the January numbers are out. The revenue is down 16.9 million from predictions. Receipts are down 20 million cumulative for the last two months.

Miscellaneous is down by 900,000 due to estate tax ($300,000) interest earnings, unclaimed monies, and kilowatt hours taxes.

Sales tax was off $600,000. That reflects December sales. However, that number was better than expected. The growth from the year before was 3%. The biggest hit was corporate and individual income tax. Two-thirds was due to excessive refunds. They predicted ½ million for January 2003 refunds, they paid out over 6 million. This seem to be related to years past--01 and 02. This is very unusual. This is the highest amount of refunds for January since 1986. Only once before did the refunds exceed 1 million.

Of the 8.2 million paid out, half is due to refunds. Refunds are being paid much quicker due to Turbo Tax and the internet filing of returns. They may see large numbers in February, but they expect the numbers to drop off in March and April.

Mr. Ferguson said withholding collections were off by 5.2 million in January, and 3.2 million in December. That is a number that concerns him. Some of the December drop may have beenfrom lack of hiring for the Christmas sales season. They are seeing a lot more volatility in the numbers than in the past. They will need to watch February and March's figures on withholding and sales taxes. That is the only useful information they will get until numbers from April, which will be released in May. That will be very revealing. April "did them in last year." The shortfall from expectations on income tax was much higher than expected.

They are slightly ahead in prepayment of taxes so people could deduct the amounts from their federal income tax. This could be good news.

Revenue predictions for this year are $1,773,100 million. The situation is not as bad as appears, but it isn't great.

Page 4 had the General Fund Revenue Forecast Comparisons besides the predictions of the other speakers the Committee has heard so far. Mr. Ferguson said that Randy Nelson told him he might change his forecast due to the numbers that came out this week.

Mr. Ferguson compared the forecasts for the different years over the various months' revisions. Last April things were looking brighter for the year, but expectations fell by July. By October of 2002 the predictions were down. They raised the predictions slightly for January, 2003, however, it is still not good for 2003 as a whole.

The current best estimate for 2002 is now a -.7% drop in jobs. It doesn't materially change their outlook for 2003, but it doesn't give them room to expect much better.

At present they figure a 2.4% growth for 2002, and a 3% growth for 2003. (Alan Greenspan just lowered his forecast to 3.25 from 3.5%)

Page 5 shows the expectations of revenue from income taxes. He felt the high refunds were only a timing issue. Corporate revenue came in good July through November of 2002, but they don't think that will continue. They expect corporate revenue to drop.

Sales tax was high last year due to the sales in big ticket items such as cars. It is unrealistic to expect the same kind of growth in the future. The interest rates have been low, so mortgage refinancing has given people more money to spend.

Page 6 gives the budget situation from other states produced by the Wall Street Journal. There are big states with enormous problems. Washington State is about the same as us--a 10% shortfall. Law changes were overstated in terms of impact. One-third of our gap is due to tax reductions, and two-thirds are due to forces external to us--things that would have happened anyways. The other states did not have the tax reductions, so they are in worse shape than we are. The situations happening all across the country are having a big impact on the national economy.

Regardless whether we have tax increases, or reductions in spending, it will be a down situation for Idaho's economy. Every day the numbers seem to get worse.

Sen. Little asked why the FY 2003 numbers differ between various sources. Mr. Ferguson said the numbers are basically the same, there are just different ways of accounting.

Rep. Gagner asked how much of the down-turn is due to Iraq. Also, how would university bonding for building affect the economy. He asked, too, if the failures of Boise Towers and the Convention Center entered into his figures. Mr. Ferguson said neither of these items are in this forecast. They would help if they did materialize, but he is not sure of the over-all economic impact if they aren't built. As far as the Iraq situation, he didn't have the numbers, but he promised to get the information to Rep. Gagner.

Rep. Ganger asked why did the income tax revenues go up in one six-month period, and down in another. Mr. Ferguson said the comparisons are to that month in the previous year. There were some unusual payment in that time.

Rep. Cuddy asked Mr. Ferguson if he accounted for the effects on the water situation and its effect on income. Mr. Ferguson said not specifically. In Agriculture, they predicted a drop-off in growth rate, but still a small growth. In past drought years, it has been hard to correlate numbers with drought conditions. Farmers are good at making adjustments. We don't know what the amount of water will be. Rep. Cuddy commented that the energy world is very different today from a year ago. He asked if he factored in any of that. Mr. Ferguson said their Agriculture model is done on a less sophisticated basis than the U of I's presentation. Farm income is incredibly volatile and can be revised for several years after the fact. There is an absence of correlation between farm income and state income revenues. If drought led to an absence of production, that would have an affect. Rep. Cuddy said he was thinking of a broader scope when talking about energy. Mr. Ferguson said this is difficult to predict. An energy crises will more likely hit the nation as a whole, and there will be some who make a profit, and many others who lose money.

Sen. Mike Burkett asked about the effect of sales tax changes in Idaho law to collect from sales made out of the state. Mr. Ferguson, said his forecast did not take into effect that as it was made in December before it was discussed.

Rep. Gagner presented a synopsis of Economist Kelly Matthews' report. Rep. Gagner has been in the construction market for commercial development the last 18 to 20 years. The vacancy for multi-family buildings is 13%, which is high. Five per cent is normal. As far as having an Olympics here in Boise, once you build the buildings, they may sit empty. Multi-family building doesn't look good for the next year. Numbers were good for 2002, but mobile home sales were down. Individual homes construction was up 3 to 8%, and multifamily building down. He expects s 3-4% downturn overall.

Rep Gagner referred to the last page which shows Idaho bankruptcies have been on the increase.

Jason Hancock made his presentation. At the request of the co-chairs, a graph was shown on the Insurance Premium Tax revenue, showing that the forecasts of the Department of Insurance have been 5% below actual collections. This money makes up the fourth-largest sector in the General Fund--about 55 million a year.

Page 11 of the Gold Book gives initial unemployment Insurance claims by each month. Some things are backwards-looking in the revenue stream. Unemployment claims are fairly current. The "u" shape of line is not important, as employment varies throughout the year. However, the comparison to the previous year is important. In 2002 January through July, each month was worse than same month the prior year. Starting in August, the numbers became mixed, approximately every other month was better than the year before. This showed a leveling-off trend, which was good.

In FY 2001, monthly individual income tax started down. FY 2002 saw negative numbers (this included the tax cut.) In FY 2003, things start to be good some months. The overall trend line is generally positive in this area. Withholding was up 8% from the prior January.

The area of sales tax has been quite erratic. FY 2003, which started in July, shows some increase in sales tax revenue. The General Fund Revenues show the same trend.

Second page of the Legislative Revenue Report, shows the five categories of receipts month by month. He pointed out predictions and actual collections. December looks strange, because all the adjustments at the 6 months' time are dumped in there.

Rep. Black asked about the premium tax. Where does it figure in? Mr. Hancock said it is part of the miscellaneous revenue category. It comes in erratically, not at an even monthly rate.

Mr. Hancock said the Legislative Council asked for another model to compare with the DFM forecast that allocates revenue out month by month. It is a mathematical model that looks over revenue month-by-month. It figures it out to a percentage month-by-month and plugs it in. It shows that we are ahead by 2.9 million dollars. DFM has some revised numbers which may even be lower today. This will lower the second model. The main difference is the predictions for the April collections. DFM predicts we will be 18 million behind, the second model says we will be 3 million up. April was bad last year, but there were one-time revenue numbers that dragged it down. More tax was collected and then refunded out last year. There was a one-time tax reduction on capital gains. Mr. Hancock said he has some cautious optimism that we might make up some of the deficit this April.

Over the last 23 years we have had an annual average increase in revenues of over 7%. Last year it went down dramatically. In the 1980s inflation made the numbers go up. There were also several rounds of tax increases--in both sales and income. However, looking at the last 10 years, the average growth has been 6.2 and this includes the negative number of over 8% last year.

Sen. Geddes asked about the model when one has a bad year after 9 good years. Mr. Hancock said it is a radical shift. Five per cent of the decline was due to tax reduction, but it still was down. The economy was in good shape prior to last year. People were making more money and spending more money. There was a hyper inflated stock market that was driving up capital gains to extremely high levels. People were making big gains when they sold their stocks, and then paid taxes on capital investment. In terms of dollars, the chart would not be nearly as dramatic.

He presented some benchmarks for the Committee to consider in their forecasts. The Committee revenue worksheet has been reprinted at the request of the Committee members to include some extra information.

Sen. Little asked with the loss of deductibility of inheritance tax, what will be the effect. Mr. Hancock said that number has already been put in. It would likely be between 1 and 2 million.

Sen. Burkett asked about the change in Federal Taxes affecting Idaho. Mr. Hancock said it would depend upon how Idaho chose to handle these changes. We typically make changes in our code to make our laws match the changes in Federal Code. We are not matching the depreciation bonus that the Feds passed last year. That would lower our revenues 25 million dollars a year for three years if we adopted it. Rep. Crow, Chairman of House The Revenue & Taxation Committee said her Committee voted not to make these changes to Idaho code.

The meeting was adjourned at 3:20.

DATE: February 14, 2003
TIME: 1:33
MEMBERS: Co-Chairmen Rep. Hilde Kellogg and Sen. John Goedde; Representatives. Max Black, Dolores Crow, Mike Moyle, Lee Gagner & Charles Cuddy; Senators Robert Geddes, Brent Hill & Mike Burkett


Senators Hal Bunderson and Brad Little
MOTION The meeting was called to order at 1:36 by Sen. Goedde. Rep. Kellogg moved to approve the minutes of Feb. 6, 7 and 13. Rep. Crow seconded the motion. The minutes were approved by voice vote.
Jason Hancock addressed the Committee. He presented the results of the various projections that the Committee members made yesterday for FY 2003 and FY 2004.

The Committee's medium and average projections were below the Governor's projections for 2003 and while the Committee's average projection for 2004 was above the Governor's, the median was below. He presented a chart and table showing the various predictions--the Governor's, the Committee Median, the Committee Average, the Universities, and the Associated Taxpayers. He said since the Committee's number is lower than the Governor for 2003, the Committee's prediction for 2004 shows as a higher percentage, although the number is still below the Governor's, but to a lesser extent. He said the Committee needed to vote to select numbers for FY 2003 and FY 2004.

Rep. Gagner asked if we threw out the extremes of both ends and average the rest, what would be the results. Mr. Hancock said in order to get a median, you cross off highest and lowest by pairs until you only have one number left--or an average of the two left. Doing as Rep. Gagner suggested, the number would be slightly lower than the Committee "average".

MOTION Rep. Kellogg moved to accept the Committee Median of $1,753.1 million as the number to report to JFAC for projected revenues for 2003. Rep. Gagner seconded. By voice vote the motion passed.
MOTION Rep. Kellogg moved to accept the Committee Median of $1,828.7 million as the number to report to JFAC for projected revenues for 2004. Rep. Cuddy seconded. By voice vote the motion passed. Voting nay were Sen. Geddes and Rep. Crow.
ACTION Mr. Hancock said he would draft a letter to be sent to JFAC. The Co-Chairmen will sign the letter.

In answer to questions, he said the Committee is a little more pessimistic than the Governor.

Rep. Gagner was concerned that other Legislators understand that for both years, the Committee came in below the Governor's prediction. Mr. Hancock agreed saying that using dollar amounts, rather than percentages, would be a better way to explain it.

Sen. Goedde said the letter should also mention the "Wild Cards"--Iraq, and energy prices, and advise the JFAC Committee to use caution.

ADJOURN The meeting was adjourned at 1:57