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1
Legislative BanquetKent Intermediate Association
of School Boards
April 22, 2004
Tom ClayDirector of State Affairs
Citizens Research Council of Michiganwww.crcmich.org
Michigan’s Budget CrisisAn Update
Michigan’s Budget CrisisAn Update
2
Citizens Research Council of MichiganCitizens Research Council of Michigan
• Founded in 1916• Statewide• Non-partisan• Private Not-for-profit• Promotes sound policy for state
and local governments through factual research
• Relies on charitable contributions of Michigan businesses, foundations, and individuals
• Founded in 1916• Statewide• Non-partisan• Private Not-for-profit• Promotes sound policy for state
and local governments through factual research
• Relies on charitable contributions of Michigan businesses, foundations, and individuals
3
Five Years of Budget ProblemsFive Years of Budget Problems
• Declining General Fund Revenues• Slow Growth - School Aid Fund
Revenues
• Situation Cyclical or Structural?
• Prospects for Improvement?
• Declining General Fund Revenues• Slow Growth - School Aid Fund
Revenues
• Situation Cyclical or Structural?
• Prospects for Improvement?
4
The National SituationThe National Situation
• Worst State Budget Crisis Since World War II
• Revenue Structures Mismatched With Spending Responsibilities
• Spending Demands Outpacing Revenue Increases
• Medicaid a Nationwide Problem • Corrections Growing Rapidly in Michigan
and Some Other States
• Worst State Budget Crisis Since World War II
• Revenue Structures Mismatched With Spending Responsibilities
• Spending Demands Outpacing Revenue Increases
• Medicaid a Nationwide Problem • Corrections Growing Rapidly in Michigan
and Some Other States
5
• Total State Budget - $39.1 Billion• State’s Two Major Funds:
General Fund - $8.7 Billion School Aid Fund - $12.5 Billion
• Other State Funds Restricted for Other Purposes, e.g. Transportation, Federal Revenues
• Total State Budget - $39.1 Billion• State’s Two Major Funds:
General Fund - $8.7 Billion School Aid Fund - $12.5 Billion
• Other State Funds Restricted for Other Purposes, e.g. Transportation, Federal Revenues
The Michigan BudgetThe Michigan Budget
6
General Fund Budget General Fund Budget
83% of General Fund Spending in 4 Areas:• Higher Education ($1.8 B)• Community Health — Mental Health, Public
Health, Medicaid ($2.5 B)• Corrections ($1.7 B)• FIA — Family Services, Juvenile Justice,
Public Assistance ($1.1 B)
All Other General Fund Programs - $1.5 B
83% of General Fund Spending in 4 Areas:• Higher Education ($1.8 B)• Community Health — Mental Health, Public
Health, Medicaid ($2.5 B)• Corrections ($1.7 B)• FIA — Family Services, Juvenile Justice,
Public Assistance ($1.1 B)
All Other General Fund Programs - $1.5 B
7
School AidSchool Aid
• State Provides About 80% of Total State & Local Revenues to Local Districts & Charter Schools
• Almost All of the Revenue Base Earmarked Specifically for Schools
• Sales Tax is Principal Revenue Source (41%)
• State Provides About 80% of Total State & Local Revenues to Local Districts & Charter Schools
• Almost All of the Revenue Base Earmarked Specifically for Schools
• Sales Tax is Principal Revenue Source (41%)
8
External Causes of the Budget Problem
External Causes of the Budget Problem
• Weak Economy
• Stock Market Decline
• Michigan’s Deteriorating Share of Auto and Light Truck Market
• Weak Economy
• Stock Market Decline
• Michigan’s Deteriorating Share of Auto and Light Truck Market
9
How Weak is the Economy?How Weak is the Economy?
Michigan’s Recent Statistics:
-46th in Personal Income Growth
-48th in Unemployment Rate
-49th in Employment Growth (Decline for Michigan)
-49th in Index of Economic Momentum (Population, Personal Income, Employment)
Michigan’s Recent Statistics:
-46th in Personal Income Growth
-48th in Unemployment Rate
-49th in Employment Growth (Decline for Michigan)
-49th in Index of Economic Momentum (Population, Personal Income, Employment)
10
Michigan Job LossesMichigan Job Losses
• 285,000 Jobs Lost in Three Years
• Manufacturing Employment Down 174,000
• 19% Fewer Manufacturing Jobs
• 61% of Job Losses in Manufacturing
• 285,000 Jobs Lost in Three Years
• Manufacturing Employment Down 174,000
• 19% Fewer Manufacturing Jobs
• 61% of Job Losses in Manufacturing
11
The Stock MarketThe Stock Market
• Michigan Income Tax Receipts From Non-Salary Income Dropped Over $500 Million in Three Years (Nearly 40 Percent)
• Affected General Fund and School Aid
• Hangover Will Remain For Several Years
• Michigan Income Tax Receipts From Non-Salary Income Dropped Over $500 Million in Three Years (Nearly 40 Percent)
• Affected General Fund and School Aid
• Hangover Will Remain For Several Years
12
Total U.S. Vehicle Sales & Big 3 Share 1992-2003
0
5,000,000
10,000,000
15,000,000
20,000,000
Sale
s Le
vel
52%54%56%58%60%62%64%66%68%70%72%
Total U.S. Sales Light Vehicles Big 3 Share of Total Sales
13
Internal Causes of the ProblemInternal Causes of the Problem
• Revenue Structure Mismatched With Spending Responsibilities
• Spending Growth Outpacing Revenue Increases-Medicaid a Nationwide Budget Problem for the States-Corrections Growing Rapidly -Some Programs Are Being Crowded Out of Budgets
• Tax Cuts Eroding the Revenue Base• Failure to Implement Permanent Budget-
balancing Changes
• Revenue Structure Mismatched With Spending Responsibilities
• Spending Growth Outpacing Revenue Increases-Medicaid a Nationwide Budget Problem for the States-Corrections Growing Rapidly -Some Programs Are Being Crowded Out of Budgets
• Tax Cuts Eroding the Revenue Base• Failure to Implement Permanent Budget-
balancing Changes
14
The Tax Rate CutsThe Tax Rate Cuts
• Single Business Tax - 26% of General Fund Revenue
• Individual Income Tax Cut - 8% of General Fund Revenue
• Implication: State Could Afford to Finance Existing Programs w/1/3 Less Revenue
• Roughly 13 Percentage Points of 34 Percentage Points Gone ($1.3 B)
• Single Business Tax - 26% of General Fund Revenue
• Individual Income Tax Cut - 8% of General Fund Revenue
• Implication: State Could Afford to Finance Existing Programs w/1/3 Less Revenue
• Roughly 13 Percentage Points of 34 Percentage Points Gone ($1.3 B)
15
Summary of One-time Resources
(in Millions)
Summary of One-time Resources
(in Millions)
Rainy Day Fund $1,363
FY2000 School Aid Fund Surplus 984
FY2000 General Fund Surplus 212
Medicaid Benefits Trust Fund 561
Advance State Education Tax Collection Date 455
Tobacco Settlement/Merit Award Revenues 317
Temporary Federal Fiscal Assistance 655
Bond for Pay-as-you-go Capital Projects 211
Revenue Sharing Accounting Change 181
Refinance Bonds 209
Employee Wage Concessions 110
Other 759
$6,017
16
($1,200)
($1,000)
($800)
($600)
($400)
($200)
$0
$200
$400
$600
($ i
n M
illi
on
s)
FY00 FY01 FY02 FY03 FY04 FY05
School Aid Fund
General Fund
($1,200)
($1,000)
($800)
($600)
($400)
($200)
$0
$200
$400
$600
($ i
n M
illi
on
s)
FY00 FY01 FY02 FY03 FY04 FY05
School Aid Fund
General Fund
General Fund & School Aid Operating Deficits
General Fund & School Aid Operating Deficits
17
Perspective On RevenuesPerspective On Revenues
• Actual General Fund Revenues in FY03, FY04, & FY05 Below FY1995
• 10 Years of Higher Costs & Increased Needs Go Unfunded
• Some Programs Crowding Out Others• School Aid Revenues Up $3.5 B Over
Same Period (45%)
• Actual General Fund Revenues in FY03, FY04, & FY05 Below FY1995
• 10 Years of Higher Costs & Increased Needs Go Unfunded
• Some Programs Crowding Out Others• School Aid Revenues Up $3.5 B Over
Same Period (45%)
18
FY2004 Review—General FundFY2004 Review—General Fund
• Budgets Cut $1.7 Billion– General Fund - $1,335 Million– School Aid - $361 Million
• Onetime Resources & Savings - $807 M
• Fees & Other Revenues - $453 M
• Other Changes - $155 M
• Tax Increases Off the Table
• Budgets Cut $1.7 Billion– General Fund - $1,335 Million– School Aid - $361 Million
• Onetime Resources & Savings - $807 M
• Fees & Other Revenues - $453 M
• Other Changes - $155 M
• Tax Increases Off the Table
19
FY2004 School Aid ReviewFY2004 School Aid Review
• School Aid Down Year to Year— $128 Million
• First Decline Since Proposal A
• Retirement Percentage Held at 12.99%--Reserves Used to Postpone Increase
• School Aid Down Year to Year— $128 Million
• First Decline Since Proposal A
• Retirement Percentage Held at 12.99%--Reserves Used to Postpone Increase
20
Summary of Other Budget CutsSummary of Other Budget Cuts
• Higher Education Cut 14% in 2 Years - $297 M
• Revenue Sharing Cut 15% in 3 Years - $293 M
• State Workforce Down 8,500 in 3 Years (14%) - Smallest Workforce Since 1974
• Higher Education Cut 14% in 2 Years - $297 M
• Revenue Sharing Cut 15% in 3 Years - $293 M
• State Workforce Down 8,500 in 3 Years (14%) - Smallest Workforce Since 1974
21
Revenue Sharing PaymentsFiscal Years ’93 through ‘04 Revenue Sharing PaymentsFiscal Years ’93 through ‘04
$800.0
$1,000.0
$1,200.0
$1,400.0
$1,600.0
$1,800.0
Fiscal Year
In M
illio
ns
Statutory/Constitutional
Actual/Proposed$800.0
$1,000.0
$1,200.0
$1,400.0
$1,600.0
$1,800.0
Fiscal Year
In M
illio
ns
Statutory/Constitutional
Actual/Proposed
22
MedicaidMedicaid
• Spending Up 40 Percent in 4 Years - Nearly Double Digit Increases
• Caseload Up 27 % During Same Period• Program Now Covers 1.35 Million
Michigan Citizens• Pressures on Rates Paid Providers -
Could Add Significantly to Growth in Future
• Spending Up 40 Percent in 4 Years - Nearly Double Digit Increases
• Caseload Up 27 % During Same Period• Program Now Covers 1.35 Million
Michigan Citizens• Pressures on Rates Paid Providers -
Could Add Significantly to Growth in Future
23
CorrectionsCorrections
• Largest State-Operated Program• Most State Revenue Goes to Other
Organizations - Universities, Schools, Hospitals, Local Government, etc.
• 50,000 Prisoners• Over 30% of State Workers• Share of Budget Has Increased 4
Percentage Points Since FY2000
• Spending Up $253 Million (17%)
• Largest State-Operated Program• Most State Revenue Goes to Other
Organizations - Universities, Schools, Hospitals, Local Government, etc.
• 50,000 Prisoners• Over 30% of State Workers• Share of Budget Has Increased 4
Percentage Points Since FY2000
• Spending Up $253 Million (17%)
24
States With More Than 500 Prisoners Per 100,000 Residents
States With More Than 500 Prisoners Per 100,000 Residents
25
Shares of the General Fund Budget
0.05.0
10.015.020.025.0
Fiscal Year
Per
cen
t of T
ota
l
Corrections
Higher Education
School Aid
Shares of the General Fund Budget
0.05.0
10.015.020.025.0
Fiscal Year
Per
cen
t of T
ota
l
Corrections
Higher Education
School Aid
26
State Government Employment TrendsState Government
Employment Trends
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
1980
1985
1990
1995
2000
2002
2003
Fiscal Year
Em
plo
ym
en
t
Corrections
All OtherDepartments
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
1980
1985
1990
1995
2000
2002
2003
Fiscal Year
Em
plo
ym
en
t
Corrections
All OtherDepartments
27
State Employee CompensationState Employee Compensation
• Increases in Employee Compensation Costs Not Funded In FY2004 Appropriations
• Pay Raises Negotiated in 2001—Three Year Contract—2%(‘03), 3%(’04), 4%(’05)
• Other Increases—Group Insurance & Retirement Contribution Rate
• General Fund Costs---$140 Million• Concessions Preventing Loss of 3,000 Jobs in
Place
• Increases in Employee Compensation Costs Not Funded In FY2004 Appropriations
• Pay Raises Negotiated in 2001—Three Year Contract—2%(‘03), 3%(’04), 4%(’05)
• Other Increases—Group Insurance & Retirement Contribution Rate
• General Fund Costs---$140 Million• Concessions Preventing Loss of 3,000 Jobs in
Place
28
Areas of Continuing RiskAreas of Continuing Risk
• Economic and Revenue Outlook
-Traditional Michigan Recovery not Likely
-Auto and Light Truck Sales Already Strong
-Incentives, Rebates and Low Interest Loans Borrowed Sales From Future
-Big Three Losing Sales Share
• Revenues Not Likely to Hit Forecasts
• Economic and Revenue Outlook
-Traditional Michigan Recovery not Likely
-Auto and Light Truck Sales Already Strong
-Incentives, Rebates and Low Interest Loans Borrowed Sales From Future
-Big Three Losing Sales Share
• Revenues Not Likely to Hit Forecasts
29
Revenue Forecasts for FY2005 January Consensus Agreement
Revenue Forecasts for FY2005 January Consensus Agreement
• Recovery and Steady Growth Projected for Economy
• Economic Forecast Produces
4% Percent Revenue Growth
• Most of Growth Needed to Replace FY04 One-time Revenues
• Recovery and Steady Growth Projected for Economy
• Economic Forecast Produces
4% Percent Revenue Growth
• Most of Growth Needed to Replace FY04 One-time Revenues
30
The FY2005 General Fund Budget Challenge
The FY2005 General Fund Budget Challenge
• Projected Deficit of $1.15 Billion• Projected Revenues $234 Million Below FY2004
Appropriations• Additional Requirements---$916 Million
– Medicaid---$447 Million– Employee Compensation-Existing Contract and
Expiring Concessions---$246 Million– Corrections---$44 Million – Family Independence Agency---$25 Million– Higher Education Tuition Restraint---$52 Million– Other---$102 Million
• Projected Deficit of $1.15 Billion• Projected Revenues $234 Million Below FY2004
Appropriations• Additional Requirements---$916 Million
– Medicaid---$447 Million– Employee Compensation-Existing Contract and
Expiring Concessions---$246 Million– Corrections---$44 Million – Family Independence Agency---$25 Million– Higher Education Tuition Restraint---$52 Million– Other---$102 Million
31
FY2005 Proposed Revenue ChangesFY2005 Proposed Revenue Changes
• Increase Cigarette Tax $.75 - $295M• Decouple From Federal Estate Tax-$94M• Increase Liquor Markup - $32M• Merit Scholarship Accounting Change -
$64M (One-time)
• Increased Revenue Enforcement - $30M• Most of Revenue Earmarked for Medicaid
• Increase Cigarette Tax $.75 - $295M• Decouple From Federal Estate Tax-$94M• Increase Liquor Markup - $32M• Merit Scholarship Accounting Change -
$64M (One-time)
• Increased Revenue Enforcement - $30M• Most of Revenue Earmarked for Medicaid
32
FY2005 Proposed General Fund Spending Changes
FY2005 Proposed General Fund Spending Changes
• Eliminate Revenue Sharing for Counties-$183 M - Create One-time Fund For Counties By Collecting All Property Taxes In Summer
• Close Women’s Prison - $23 M• Proposed Employee Savings & Concessions -
$148 M• Eliminate Private College Scholarships - $65 M• Limit Payments in Lieu of Taxes - $10 M• Reduce GF Grant to School Aid - $196 M
• Eliminate Revenue Sharing for Counties-$183 M - Create One-time Fund For Counties By Collecting All Property Taxes In Summer
• Close Women’s Prison - $23 M• Proposed Employee Savings & Concessions -
$148 M• Eliminate Private College Scholarships - $65 M• Limit Payments in Lieu of Taxes - $10 M• Reduce GF Grant to School Aid - $196 M
33
Closing The General Fund GapClosing The General Fund Gap
• Revenues - $451 M
• Spending Reductions - $705 M
• One-time Resources - $104 M
• Total - $1.260 B
• Revenues - $451 M
• Spending Reductions - $705 M
• One-time Resources - $104 M
• Total - $1.260 B
34
The FY2005 School Aid ProposalThe FY2005 School Aid Proposal
• Foundation Allowance Minimum at $6,700• General Fund Grant Reduced by $196 M to
$132M---Lowest in More Than 25 Years• Membership Count Change “Saves” $43M• Project Great Start Partly Funded By Decreasing
ISD Operations Support• Total Spending Lower Than FY2003, $104M
Above FY2004• Retirement Rate up 1.88 Percentage Points to
14.87 Percent
• Foundation Allowance Minimum at $6,700• General Fund Grant Reduced by $196 M to
$132M---Lowest in More Than 25 Years• Membership Count Change “Saves” $43M• Project Great Start Partly Funded By Decreasing
ISD Operations Support• Total Spending Lower Than FY2003, $104M
Above FY2004• Retirement Rate up 1.88 Percentage Points to
14.87 Percent
35
FY2005 School Aid Will Cause Significant Financial PressuresFY2005 School Aid Will Cause Significant Financial Pressures
• Retirement Percentages Will Consume More Than The Small Increase
• Districts Will Have Large Increases in Health Insurance Costs to Fund
• No Room for Other Higher Costs Without Cutting Staff or Using Fund Balance (a slippery slope)
• Retirement Percentages Will Consume More Than The Small Increase
• Districts Will Have Large Increases in Health Insurance Costs to Fund
• No Room for Other Higher Costs Without Cutting Staff or Using Fund Balance (a slippery slope)
36
The Current Situation—FY2004The Current Situation—FY2004
• Revenue Collections Lagging Behind Forecasts—Problem Could Exceed $200 Million
-Sales Tax Weak---73% To School Aid
-Income Tax Weak—25% To School Aid• Other Budget Problems
-Medicaid---$100 to $200 Million
-Sale of State Property--$65 Million
-Higher Education Tuition Commitment---$52 Million
• Revenue Collections Lagging Behind Forecasts—Problem Could Exceed $200 Million
-Sales Tax Weak---73% To School Aid
-Income Tax Weak—25% To School Aid• Other Budget Problems
-Medicaid---$100 to $200 Million
-Sale of State Property--$65 Million
-Higher Education Tuition Commitment---$52 Million
37
The Implications For FY2005The Implications For FY2005
• Most of the FY2004 Problems Flow Through To FY2005
• Revenues Would Have to Grow Faster From a Lower Base to Make Forecasts
• Medicaid Costs Will Likely Add to FY2005 Proposal Under Consideration
• Many Elements of Proposal At Risk
• Most of the FY2004 Problems Flow Through To FY2005
• Revenues Would Have to Grow Faster From a Lower Base to Make Forecasts
• Medicaid Costs Will Likely Add to FY2005 Proposal Under Consideration
• Many Elements of Proposal At Risk
38
The Ongoing General Fund Structural Problem - The Budget
Beyond FY2005
The Ongoing General Fund Structural Problem - The Budget
Beyond FY2005
• Pressures On Health Care & Corrections Spending to Outpace Future Revenue Growth
• Only Fundamental Structural Changes Will Solve the Problem• Revenues - Antiquated Tax Structure• Medicaid Responsibilities -
Federal/State• Corrections Policies• Eliminate Some Programs
• Pressures On Health Care & Corrections Spending to Outpace Future Revenue Growth
• Only Fundamental Structural Changes Will Solve the Problem• Revenues - Antiquated Tax Structure• Medicaid Responsibilities -
Federal/State• Corrections Policies• Eliminate Some Programs
39
The School Aid Outlook Beyond FY2005
The School Aid Outlook Beyond FY2005
• FY2005 Proposal Balances Spending & Ongoing Revenues
• Continued Economic Growth Translates to Budget Growth in FY2006
• Continued Revenue Growth Could Permit: • About 4% Spending Growth in FY2006 & Beyond• Foundation Allowance Increases• Retirement and Health Insurance Will Continue to Claim
Larger Shares of Revenues
• FY2005 Proposal Balances Spending & Ongoing Revenues
• Continued Economic Growth Translates to Budget Growth in FY2006
• Continued Revenue Growth Could Permit: • About 4% Spending Growth in FY2006 & Beyond• Foundation Allowance Increases• Retirement and Health Insurance Will Continue to Claim
Larger Shares of Revenues
40
Revenue Structure IssuesRevenue Structure Issues
• Level of Revenues-Sufficient to Finance Desired
Programs -Now or in the Future?
• Source of Revenues-Equitable?-Representative of Economy?
• Level of Revenues-Sufficient to Finance Desired
Programs -Now or in the Future?
• Source of Revenues-Equitable?-Representative of Economy?
41
Level of RevenuesLevel of Revenues
• Jury Still Out
• Elected Officials Have Not Yet Devised Permanent Solution
• Actions So Far Suggest Level Insufficient
• Economic Growth Will Not Solve Problem
• Jury Still Out
• Elected Officials Have Not Yet Devised Permanent Solution
• Actions So Far Suggest Level Insufficient
• Economic Growth Will Not Solve Problem
42
Source of RevenuesSource of Revenues
• Tax System
• Narrow Base for Sales and Use Taxes• Single Business Tax Scheduled for Repeal
in 2010• Revenues Increase More Slowly than
Michigan Economy
• Overhaul of Tax System May be Desirable
• Tax System
• Narrow Base for Sales and Use Taxes• Single Business Tax Scheduled for Repeal
in 2010• Revenues Increase More Slowly than
Michigan Economy
• Overhaul of Tax System May be Desirable
43
State Taxes as a Percent of Michigan Personal Income
0.0
2.0
4.0
6.0
8.0
10.0
Year
Pe
rce
nt
Percent of Personal Income
State Taxes as a Percent of Michigan Personal Income
0.0
2.0
4.0
6.0
8.0
10.0
Year
Pe
rce
nt
Percent of Personal Income
44
Broadening the Sales and Use Taxes Base
Broadening the Sales and Use Taxes Base
• Most Services not Taxed• Services Constitute More Than 1/2 Private
Economic Activity• If Starting Point is Revenue-neutral,
Significant Rate Reduction Could Occur• Revenues Would Grow Faster Than Current
Sales & Use Taxes• Some Services Might be Excluded - e.g.
Health Care, Educational Services
• Most Services not Taxed• Services Constitute More Than 1/2 Private
Economic Activity• If Starting Point is Revenue-neutral,
Significant Rate Reduction Could Occur• Revenues Would Grow Faster Than Current
Sales & Use Taxes• Some Services Might be Excluded - e.g.
Health Care, Educational Services
45
Reform Business TaxesReform Business Taxes
• Is it Realistic to Eliminate SBT Without Replacement?
• Is it Time to For Many to Replace One?
• SBT Replaced 7 Taxes in 1970s
• Is Business Paying the Wrong Share of Taxes?
• Should Taxes Focus on Wealth? Profits?
• SBT Produces About 25 Percent of General Fund Revenue
46
A Medium-Range General Fund Budget Scenario
A Medium-Range General Fund Budget Scenario
• Assumed Revenue Growth - 4%
• Community Health Growth - 9%
• Corrections Growth - 7%
• Remaining Programs Grow 3% • Projections Begin w/FY2005 Proposed
Budget
• Assumed Revenue Growth - 4%
• Community Health Growth - 9%
• Corrections Growth - 7%
• Remaining Programs Grow 3% • Projections Begin w/FY2005 Proposed
Budget
47
General Fund Projections to FY2010
$6.0
$7.0
$8.0
$9.0
$10.0
$11.0
$12.0
Fiscal Year
Bill
ion
s Revenues
SpendingPressures
General Fund Projections to FY2010
$6.0
$7.0
$8.0
$9.0
$10.0
$11.0
$12.0
Fiscal Year
Bill
ion
s Revenues
SpendingPressures
48
Citizens Research Council
of Michigan
Citizens Research Council
of Michigan www.crcmich.orgwww.crcmich.org