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Michigan’s FY2004 Executive Budget

Michigan’s FY2004 Executive Budget

March 2003

Citizens Research Council of Michiganwww.crcmich.org

March 2003

Citizens Research Council of Michiganwww.crcmich.org

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The National Situation

• States face Worst Budget Crisis Since World War II

• State Revenue Structures Are Mismatched With Spending Responsibilities

• Spending Growth Outpacing Revenue Increases

• Medicaid a Nationwide Budget Problem for the States

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The FY2003 Michigan Budget

• Total State Budget — $39 Billion• State’s Two Major Funds are Affected• General Fund — $8.8 Billion • School Aid Fund — $11.5 Billion

• Other State Funds are restricted for other purposes and generally cannot be used for General and School Aid Fund Problem

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The General Fund

Structural Problem

$5,000.0

$6,000.0

$7,000.0

$8,000.0

$9,000.0

$10,000.0

$11,000.0

FY 98 FY 00 FY 02 FY 04 FY 06

Mill

ion

s

Revenues

Expenditures

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School Aid Revenues and Spending Gaps(in Millions)

$8,000

$9,000

$10,000

$11,000

$12,000

1997 1998 1999 2000 2001 2002 2003 2004

Base Revenues Non-Federal Spending

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Causes

• Weak Economy• Stock Market Decline—Capital

Gains Dropped Significantly• Tax Cuts Eroding the Revenue

Base• Failure to Implement Permanent

Budget Balancing Actions

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The 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 With A Third Less Revenue

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Michigan May Have Done Most of Any State to Damage Itself

• Failed to Act Timely

• Used $4.5 Billion of Reserves and One-time Actions

• Tax Cuts Continued During Recession

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Summary of One-time Resources (in Millions)

• Rainy Day Fund $1,264 • FY2000 School Aid Fund Surplus 984 • FY2000 General Fund Surplus 212• Medicaid Benefits Trust Fund 561• Advance State Education Tax Collection Date 474• Bond for Pay-as you-go Capital Projects 211• Tobacco Settlement Revenues 259• Employment Contingent Fund 90• Sale of Properties 72• Executive Order 2002-22 204• Other 168

– Total $4,499

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Tax Rate Cuts

• Rate Reductions in Single Business Tax and Personal Income Tax:

• FY2001 $664 Million• FY2002 $864 Million• FY2003 $1,059 Million

– Three Year Total: $2,577 Million• Incremental Effects of Other Cuts $854 Million

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Current Status—FY2003

• Economy not Improving Yet

• Executive Order 2002-22—General Fund Cut $460 Million in December

• Executive Order 2003-3—General Fund Cut $158 Million in February

• School Aid Cut $127 Million

• Revenues Up Slightly in February

• Risk Still Downside

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School Aid — FY2003

• Reductions this Fiscal Year

• Revenues $127 Million Short

• Pro-rata Reductions

• Legislative Efforts to Develop Alternative Stalled

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($1,600)

($1,400)

($1,200)

($1,000)

($800)

($600)

($400)

($200)

$0

$200

$400

$600

($ in

Mill

ion

s)

FY00 FY01 FY02 FY03 FY04

School Aid Fund

General Fund

General Fund & School Aid FundOperating Gaps

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School Aid — FY2004

• Appropriations Already Made for FY2004—No Increase from FY2003 Appropriations

• Revenues $366 Million Short—3%

• Revenue Growth Insufficient to Offset Loss of One-time Revenues

• Downside Risk

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General Fund — FY2004

• Growth in FY2004 and FY2005 Constrained By Income Tax Cuts and Federal Tax Reform

• Gap of $1.7 Billion

• Gap is not Eliminated by Sustained Economic Growth

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Broadening the Base for the Solution

• Tobacco Settlement Revenues—Eliminate Some Programs and Reallocate Revenue

• Raise Fees to Supplant General Fund Revenues

• Cut Local Revenue Sharing—Revenue Stays in the General Fund

• Use One-time Resources to Buy Time

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The FY2004 Challenge

• General Fund short $1.7 Billion

• School Aid Fund short $366 Million

• Tax Increases off the table

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Cutting Spending — 80% of General Fund in Four Areas:

• Higher Education ($2.1B)• Community Health — Mental Health, Public

Health, Medicaid ($2.4B)• Corrections ($1.6B)• FIA — Family Services, Juvenile Justice, Public

Assistance ($1.1B)

--All Other General Fund Programs--$1.7 Billion--

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Reshaping The Structure

• Across-the-board Cuts Avoided• Priorities Evident• Health Care and Assistance for Poor Protected• Higher Education Support Dropped Significantly• Corrections Policy Changes Advocated• Revenue Sharing Cuts Continue• Tax “Loopholes” Closed

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Closing the Gap

• General Fund — $1.7 Billion Problem

-Cuts $937M -One-time Actions 42M

-School Aid Fund Subsidy 198M -Corrections Policy Changes 122M

-Revenue Enhancements (Fees, Tax Loopholes) 234M

-Revenue Sharing—Continue Past Cuts 153M -Other Resources 14M

Total $1,700M

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Another Perspective

• Revenues and Other Resources $288M• Corrections Policy Change 122M• Medicaid 174M• Higher Education—New Cuts 127M• Revenue Sharing—New Cuts 116M• Continue Previous Revenue Sharing Cuts 153M• Continue Executive Order 2003-3 Cuts 133M• Other Spending Reductions 587M

Total $1,700M

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School Aid

• $366 Million Revenue Problem

-New Revenue-Lottery & Tax Loopholes $ 70M

-School Bond Loan Fund Bond Refinance 100M -Durant Bond Refinance 40M -Cut Categorical Programs 138M-Modify Enrollment Count Weighting

40M-Eliminate General Fund Grant (198M)-One-time Savings From Revenue Sharing 199M

Total 389M

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Categorical Program Reductions

• Career Preparation ($22M), Partnership for Adult Learning ($20M), Math & Science Centers ($10M), Gifted & Talented ($5M), and Six Others ($11M) Eliminated

• Adult Education Cut 74 Percent $58M• ISD Operations Cut 7 Percent 6M• Other Reductions 5M• Total Categorical Cuts $138M

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School Aid Increases

• School Lunch Payments $3.2M

• Renaissance Zone Reimbursement 17.7M

• Court-placed Children 2.0M

Total $22.9M

Other Budget Assistance—Retirement Contributions Made By Districts Temporarily Held at 12.99% of Payroll

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School Aid

• First Year-to-Year Decline in School Aid Spending since Proposal A ($78 million)

• One-time Resources concentrated in School Aid

• First $299 Million of FY2005 revenue growth will be needed to offset FY2004 one-time revenues

• FY2005 potential spending increases will be very small

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Higher Education

• Appropriations Cut 6.5 Percent $120M• Private College Degree

Reimbursement Eliminated 7M

Total $127M

• FY2003 Cuts continued—2-Year cuts equal 9.9%

• Double Digit Tuition Increases Likely—Some Will Exceed 20%

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Corrections

• Largest State-Operated Program• Over 30 Percent of State Workforce• $150 Million Increase in Bed Space and

Health Costs Largely Avoided• $33 Million Increase Recommended• Conditional Reintegration Program

Eliminates need for 1,375 Beds• Increased Use of Community-based

Sanctions

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State 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

yme

nt

Corrections

All OtherDepartments

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Community Health--Medicaid

• Federal Waiver Constraining Health Benefits to Health Adults $110M

• Pharmaceutical Purchase Collaboration 40M• Quality Assurance Assessment 57M• Declining Caseloads Projected• EPIC Coverage Increased

(15,000 to 42,000) 38M

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Family Independence Agency

• Caseload Declines Projected

• General Fund Budget Down Slightly from Post E.O. 2003-3 Level

• Staffing may be Most Significant Concern

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Local Revenue Sharing

• Previous Cuts Maintained $153M• Total Payments Reduced 3 Percent From FY2003 Levels

44M• Total FY2004 Earmarked Growth Captured 72M

Total $269M

• All Reductions Taken From Statutory Portion (27%)• Statutory Percentage Equals 21.3% of Sales Tax at 4

Percent Rate• Proposed Allocation is 15.5%• Statutory Revenue Sharing Will Be Eliminated for Some

Units Soon if Cuts Continue

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Other Areas

• Increases in Employee Compensation Not Funded ($140M) — Concessions Expected — 3,000 Jobs at Stake

• Arts Grants Cut 50% $12M• Library Grants Cut 10% 2M• Strategic Fund Cut 12% 5M• Merit Scholarships Cut From $2,500 to $500—

Eventual Savings Nearly $100M

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FY2005 Outlook—General Fund

• Revenue Growth Still Constrained by Tax Cuts

--Remaining Income Tax Cut $43M

--Estate Tax Eliminated-Federal Tax Reform 55M

--Federal Dividend Elimination??? 95M

Total $193M Growth also must cover $42 Million of One-time Revenues

• 4 Percent Growth Produces About $350M

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General Fund Structural DeficitIs It Eliminated?

• One More Year of Very Constrained Budgets Will Be Needed

• Pressures For Spending (Cost) Increases (e.g. Health Care, Corrections) are Likely to Outpace Revenue Growth

• Only Fundamental Structural Changes Will Solve the Problem-Revenue Structure-Program Responsibilities Federal/State

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FY2005 Outlook—School AidState Perspective

• Revenue Growth Must Cover $299 Million of One-time Revenues

• 4 Percent Growth Produces About $440 Million

• Small Spending Increase Possible — Roughly One Percent

• Increased Retirement Contribution Percentage May Be Required —

10+ Percent Increase in Rate

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FY2005 Outlook—School AidLocal Perspective

• Increased Retirement Contribution Percentage could claim entire increase

in State Funding• Pressures on Health Insurance Premiums

will continue• Another Year of Austerity

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The Next Steps

“The Governor Proposes and The Legislature Disposes” — Senator Harry Gast, Appropriations Chair for 18 Years

• It Is Now The Legislature’s Turn

• Will It Be A Long Hot Summer?

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Citizens Research Council

of Michigan

Citizens Research Council

of Michigan www.crcmich.orgwww.crcmich.org