1

Michigan Economic and Budget Outlook

Robert KleineState Treasurer

Bloomfield Hills School DistrictApril 19, 2011

2

Summary

U.S economy doing better than expected 10-year recession in Michigan is over Michigan has revenue problem not spending problem State revenues running well above projections Required spending cuts could do more damage than tax

increases Business tax cuts not likely to create many new jobs Schools districts expected to cut costs and deliver better

results Local govts. facing fiscal crisis- rev. sharing cuts will push

many over edge

3

Recent U.S. Economic Developments

4

Six Quarters in a Row of GDP Growth Observed

-1.3%

2.7%

-1.1%

1.4%

3.5%

2.1%2.0%

0.1%

1.6%

3.2%

6.9%

3.6%2.9%2.9%3.0%

3.5%4.1%

1.7%

3.1%2.1%

5.4%

1.4%0.1%

3.0%

0.9%

3.2%2.3%

2.9%

-0.7%

0.6%

-4.0%

-6.8%

-4.9%

-0.7%

1.6%

5.0%

3.7%

1.7%2.6%

3.2%2.8%3.0%3.5%3.6%

2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1

Figures are annualized percent change from preceding quarter in 2005 chained dollars. Source: Bureau of Economic Analysis. Forecast quarters in red are the September 2010 Global Insight forecast.

3.0%Growth

Real GDP Growth

5

ISM Indices Show Expansion

30

35

40

45

50

55

60

65

Source: Institute for Supply Management.

ISMManufacturing Index

May 2011= 53.5

ISMNon-Manufacturing Index

june 2011 = 53.3

6

U.S. Has Gained Nearly 1.5 Million Jobs Since February 2010

12784

13

-83-72

-185-233

-178-231

-267

-434-509

-802

-619

-820

-726-796

-660

-386

-502

-300-231-236-221

-55-130

-39-35

192277

458

-192

-49-59-29

17193

15268

235194

232

54

Nov 07 Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 11-May

Source: U.S. Bureau of Labor Statistics, U.S. Department of Labor; 4/1/2011

U.S. Retail Sales, % change, year-ago month, 2007-2010

-12.0%-10.0%-8.0%-6.0%-4.0%-2.0%0.0%2.0%4.0%6.0%8.0%

10.0%

7

8

$0

$500

$1,000

$1,500

$2,000

1980Q1 1985Q1 1990Q1 1995Q1 2000Q1 2005Q1 2010Q1

(Bil

lion

s of

Dol

lars

)

Source: Bureau of Economic Analysis

Corporate Profits Up Sharply in 2009 and 2010

2010 Q4: $1678.3

Key Economic Concerns

Rising oil prices Slow recovery of housing market Deep cuts in government spending Continued high unemployment Slow growth in incomes of middle class

9

Higher Income Groups Capture Most Income Gains

10

Average After-Tax Income by Income Group1979-2007 (in 2007 dollars)

Percent DollarChange Change

Income Category 1979 2007 1979-2007 1979-2007

Lowest fifth $15,300 $17,700 16% $2,400Second fifth $31,000 $38,000 23% $7,000Middle fifth $44,100 $55,300 25% $11,200Fourth fifth $57,700 $77,700 35% $20,000Top fifth $101,700 $198,300 95% $96,600

Top 1 Percent $346,600 $1,319,700 281% $973,100

Income Inequality

Louis Brandeis: "We can either have democracy in this country or we can have great wealth concentrated in the hands of a few, but we can't have both."

12

Recent Michigan Economic Developments

13

Michigan’s 10-year recession Comes to an End

Michigan Wage and Salary Employment Year-Over-Year Change(In Thousands)

Note: Bureau of Labor Statistics. 2009-2011 estimates are from the May 2010 Consensus Forecast.

Avg.

Cons. Forecast

14

Michigan’s Recent Job Gains Have Been Strong

Source: RSQE, Michigan Forecast April 2010, and Bureau of Labor Statistics.

Dec 2008 - Mar 2010- Sept 2010-June 2009 Mar 2011 Mar 2011

Wage and Salary Employment -216.7 89.0 97.1 Manufacturing -104.9 38.4 29.1 Private nonmanufacturing -114.1 66.3 77.0 Government 2.3 -15.7 -9.0

Michigan Unemployment Rate, Monthly, 2008-2011

10.4%

0.0%2.0%4.0%6.0%8.0%10.0%12.0%14.0%16.0%

2008 2009 2010 2011

Unemployment Rate

15

Auto Sales Recovering

16

Big 3 Sales Improving

17

18

Michigan Vehicle Employment

Transportation Equipment Employment Increases(Thousands)

Source: Bureau of Labor Statistics.

19

Michigan Payroll Employment and Vehicle Production

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Ve

hic

le P

rod

uc

tio

n

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

Em

plo

ym

en

t G

row

th

6 Month Vehicle Prod 6 Month Payroll

Source: Bureau of Labor Statistics & Michigan Department of Treasury

6 Month Moving Average – Year over Year Percent Change

20

State Government Revenue

21

Michigan Cut Taxes Significantly from 1995 to 2005

FY Tax Cuts in Millions

Source: Michigan Department of Treasury; does not include Proposal A property tax cut

IIT Rate Increase & MBT Surcharge

22

Michigan Taxes Decline as a Percent of Personal Income

Michigan State Tax Revenue as a Percent of Personal Income

Note: FY 2010 tax estimate based on May 2010 Consensus.FY 2010 personal income based on ORTA and consensus estimates May 2010.

23

FY ‘10 GF-GP Revenue at FY ‘88 LevelDown 32% Since 2000

2010$6.7B

1988$6.7B

Billions of Dollars

Note: GF-GP figures are presented on a Consensus basis. 2010 estimated.

2000$9.8B

24

FY ’10 Inflation AdjustedGF-GP Lowest Since 1965

2010$6.7B

1965$6.5B

1999$14.3B

Note: GF-GP figures are presented on a Consensus basis and adjusted for inflation to 2010 dollars usingthe state and local government price deflator. FY 2010 is the May 2010 Consensus estimate.

Billions of 2010$

25

School Aid RevenuesFY 2010 Total Earmarked Resources: $10.7 Billion

Almost half of the School Aid revenues come from the Sales and Use Tax.

Source: May 2010 Consensus

26

SAF Revenues Growin FY 2011 and FY 2012

SAF RevenuesYear-Over-Year Pct. Change

Source: May 2010 Consensus Conference.

27

SAF Revenue Below FY 2005 Level

Consensus Estimate

28

FY ’11 Inflation Adjusted SAF Lowest Since Proposal A Adopted

2011$10.8B

1995$11.6B

Note: SAF figures are presented on a Consensus basis and adjusted for inflation to 2011 dollars usingthe state and local government price deflator. FY 2010 & FY 2011 are the May 2010 Consensus estimates.

Billions of 2011$

Consensus Est.

29

How Does The State Budget Look?

30

Total State SpendingFY 2011 Total Spending: $47.1 Billion

Source: OBDGG, CM, 3/10/10

Over 75% of total budget devoted to health, human services and education spending.

FY 2012 GF/GP Budget Recommendation(Millions of $)

GF/GP Revenue $8,197

Current Services Spending $9,608

Projected Funding Gap -$1,411

Proposals to Close Funding Gap

Tax Reform & Revenue Adjust. $849

Spending Reductions $659

Structural Reforms $324

Investments -$260

Total $1,571

Proj. Year-end Balance $16031

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(dollars in millions)

FY 2010 FY 2011 FY 2012Beginning Balance $238.2 $272.6 $523.8Ongoing Revenue * $10,749.9 $10,979.1 $11,193.7ARRA $450.0 $184.3 $0.0Fed Aid & Other $1,641.1 $2,042.0 $1,688.4Total Revenue $13,079.2 $13,478.0 $13,405.9

Expenditures ** $12,915.9 $12,954.2 $12,995.6

Balance $163.3 $523.8 $410.3

School Aid Fund Budget Outlook

* Ongoing Revenue equals consensus estimate for FY10 & FY11.** Expenditures in FY12 are increased from FY11 by inflation.Source: Michigan Department of Treasury.

Proposed Budget Reductions, FY 2012 (Millions)

Program Amount

Higher Education- 15% reduction $222.4

Community Health, Corrections, Human Services

$209.6

Statutory Revenue Sharing $292.1

County Revenue Sharing $51.8

Employee Compensation $180.0

Other $226.9

School Aid $781.0

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34

Michigan Expenditure GrowthLowest Among States

GF Expenditures Total Exp. Less Federal Aid% Growth Growth % Growth Growth

2001 to 2009 Rank 2001 to 2009 Rank

Illinois 10% 47 14% 49

Indiana 40% 19 34% 42

Michigan -13% 50 0% 50

Ohio 29% 35 29% 45

Wisconsin 15% 43 25% 46

Missouri 9% 48 47% 48

U.S. Avg. 30% 47%

Source: Office of Revenue and Tax Analysis, Michigan Dept. of Treasury, 07/27/10, based on NASBO State Expenditure Surveys 2001 and 2009.

35

Michigan State Government GF/GP Appropriations

Dollars in Millions

Source: State Budget Office.

% ChgSpending Categories: FY 2001 FY 2010 % Chg After Inflation

Universities & CC $2,101 $1,551 -26.2% -65.5%School Aid 386 30 -92.2% -131.5%Corrections 1,620 1,920 18.5% -20.8%Community Health 2,674 2,303 -13.9% -53.2%Human Services 1,216 897 -26.3% -65.6%State Police 321 268 -16.6% -55.9%Other 1,427 942 -34.0% -73.3%

Total $9,745 $7,911 -18.8% -58.2%

Revenue Sharing $1,600 $992 -38.0% -77.3%

36

Michigan State Government Total Appropriations

Dollars in Millions

Source: State Budget Office.

% ChgSpending Categories: FY 2001 FY 2010 % Chg After Inflation

Universities & CC $2,236 $1,912 -14.5% -53.8%School Aid 10,892 12,707 16.7% -22.7%Corrections 1,700 1,996 17.5% -21.9%Community Health 8,572 13,414 56.5% 17.1%Human Services 3,720 6,104 64.1% 24.8%Transportation 3,026 3,227 6.6% -32.7%Revenue Sharing 1,601 992 -38.0% -77.4%Other 5,252 4,813 -8.4% -47.7%

Total $36,998 $45,164 22.1% -17.3%

Federal Aid 9,566 18,816 96.7% 57.4%

37

Michigan State Government 10,700 Fewer Employees than 2000

Number Non-CorrectionsFiscal State State CorrectionsYear Governor Employees Employees Employees

1973 Milliken 52,673 50,316 2,357 1978 Milliken 64,456 59,990 4,466 1989 Blanchard 64,560 52,038 12,522 2000 Engler 61,493 43,841 17,652 2010 Granholm 50,615 35,672 14,943 2011 Snyder 47,607 33,141 14,466

% Change 1978-2011 -26% -45% 235%% Change 2000-2011 -23% -24% -18%

Source: Michigan Department of Treasury

38

Government Not LargeCompared to Other States

Source: Bureau of the Census, 2008 State and Local Government Employment Survey

State and LocalGovt. Employees

Per 10,000State of Population Rank

Indiana 554 27Ohio 538 32Minnesota 536 34Illinois 504 42Wisconsin 504 42Michigan 475 48

U.S. Average 549

Proposed Changes to FY 2012 Budget

Strengths of Proposal

Treats tax expenditures as spending- finally Improves horizontal equity $200 million for OPEB funding Addresses structural budget deficit Simplifies business tax

Weaknesses of Proposal

Increases income inequality Shifts burden from business (particularly well off

professionals) to seniors and low income families

Employee concessions excessive- requires 8.5% pay cut plus 20% payment for health care

Increased taxes on individuals will offset benefits of lower business taxes

Revenue sharing cuts will be devastating

Weaknesses of proposal (cont.)

Corporate income tax is unstable and easy to manipulate

Education cuts will hurt economic future

Priorities

Retain all or most of EITC Reduce revenue sharing cuts Reduce tax burden on low-income seniors Reduce tax cuts for non-corporate

businesses Reduce education cuts

Proposed Changes

Extend 6% corporate income tax to business income with a possible exemption of $250,000-raises $550-$700 million

Retain a 0.1% gross receipts tax on all business- raises $250 million

Impose a tax on selected services such as sports tickets and service contracts

Provide a $20,000 pension exemption for individual returns and $40,000 for joint returns, or at minimum phase out exemption

Proposed Changes (cont.)

Leave the income tax at 4.35%- saves average taxpayer less than $1 a week- raises $165 million

Retain or possibly reduce EITC to 10 or 15% for two years

Use revenue in excess of estimates to restore revenue sharing cuts or cut in EITC- revenues likely to be at least $200 million higher in both FY 2011 and FY 2012

Add one tax credit for all charitable contributions- $150/$300

46

Michigan Business Tax

• A Business Income Tax at 4.95%• A Modified Gross Receipts Tax at 0.8%• Surcharge added at 21.99% capped at $6 million per

taxpayer.• Provides over 30 tax credits.• Increases reliance on profits, so revenue will be more

volatile than SBT.• Revenue: $2.3 billion in FY09 and an estimated $1.9 billion

in FY10 & $2.2 billion in FY11.• Businesses with gross receipts of < $350,000 do not have

to file a return and businesses with < $20 million in gross receipts only pay a tax of 1.8% of profit.

State Business Taxes as % of GDP

48

Corporate Income Tax Pros & Cons

PROS

• Only corporations making a profit would pay.

• Widely used, therefore multistate companies would have lower compliance costs.

• Longer legal history provides more certainty

CONS

• Revenue stream is extremely volatile (federal corporate income tax revenue declined 55% in FY 2009).

• Many businesses (noncorporations) avoid the tax.

• No direct relationship between profitability and dependence on government services.

Business Tax Cuts Will Not Create Many New Jobs

Business tax cuts offset by tax increases on individuals and families and spending cuts

Most of tax relief goes to non-mobile retail and service businesses

Business taxes are only 5% of state GDP and tax cut amounts to only 0.5% of GDP

49

Business Tax Cuts by Sector

Services- $575 million Prof.& Tech services- $181 million Manufacturing- $279 million Retail Trade- $153 million Wholesale trade- $139 million Real Estate- $110 Million Construction- $90 million Finance & Ins.- $75 million Other- $112 million

50

Business Tax Options

6% Corporate income tax $778 million

3.5% Business income tax $780 million

2.5% BI tax plus 0.1% gross rec. tax $830 million

6% Business income tax $1,.4 billion

4% BI tax plus 0.1% gross receipts tax $1.2 billion

6% BI tax with $250,000 exemption $1.25 billion

Potential Revenue Sources

Sales tax on services- up to $0.8 billion Change business tax proposal- up to $0.6

billion Keep income tax rate at 4.35%- $160 million Increased revenue growth- $0.4-0.5 billion

53

Major Taxes: Revenue Growth Improving

Note: FY 2008 large increase in MBT due to surcharge and because the MBT is also replacing some local property taxes and large increase in income tax withholding payments due to the tax rate increase.

Source: ORTA, Michigan Dept. of Treasury; FY 2011 & FY 2012, January 2011 consensus estimates.

FY 2011 FY 2012 Last ThreeFY 2008 FY 2009 FY 2010 Est. Est. Months

Sales Tax 3.4% -10.3% 1.3% 2.9% 1.5% 7.0%

Use Tax -0.2% -6.8% 5.2% 3.7% 4.3% 3.7%

Withholding 10.4% -6.0% -1.7% 3.1% 1.5% 8.1%

SBT/MBT 35.8% -6.2% -17.6% 10.4% 17.7% 11.7%

RETT -28.5% -32.3% 1.4% 10.2% 10.2% 3.9%

SET -0.1% -1.9% -7.2% -3.2% -3.2% 5.2%

Revenue Sharing Cuts for Selected Cities

Detroit- $176 million Lansing- $6.3 million Grand Rapids- $6.1 million Pontiac- $6 million Saginaw- $4.8 million Highland Park- $2 million Hamtramack- $1.7 million Ecorse- $0.84 million

Michigan Property Values Continue to Decline

Year Total SEV Growth Total TV Growth

2005 5.9% 5.6%

2006 5.0% 5.8%

2007 3.8% 5.2%

2008 -1.3% 1.4%

2009 -5.4% -0.8%

2010 -9.2% -6.6%

2011 est. NA -4.0%

2012 est. NA -1.3%

55

56

Public School Teachers Average Annual Salaries, 2008-09

Source: National Education Association

Avg. Public SchoolTeachers Pay

2008-09 Rank

California $66,986 1New York $65,234 2Connecticut $63,976 3Illinois $62,787 5Michigan $57,327 10Ohio $54,925 15Minnesota $51,938 19Wisconsin $50,424 20Indiana $49,198 2410 Most Populous States $56,03410 Least Populous States $50,544

US Average $53,910

10-Year Increase in Teachers Salaries

Rank State % Increase

1 Mississippi 46.5%

2 Louisiana 45.4%

3 Arkansas 44.8%

4 North Carolina 44.4%

5 Illinois 43.4%

19 Ohio 33.0%

23 Minnesota 31.3%

38 Indiana 25.4%

43 Wisconsin 21.5%

49 Michigan 16.9%

50 Alaska 7.9%57

58

Retirement Contribution Rates as a Percentage of Payroll

FY09 FY10 FY11 FY12State Emp. Retirement SystemDefined Benefit Pension 18.84% 21.36% 23.98% 37.15%Defined Benefit Health Care 11.80% 11.90% 13.40% 14.00%Total Defined Benefit Costs 30.64% 33.26% 37.38% 51.15%

Defined Contribution Pension 5.91% 5.91% 6.00% 6.00%Defined Contribution Health Care 11.80% 11.90% 13.40% 14.00%Total Defined Contribution Costs 17.71% 17.81% 19.40% 20.00%

Public School Employees Retirement SystemDefined Benefit Pension 9.73% 10.13% 12.16% 15.96%Defined Benefit Health Care 6.81% 6.81% 8.50% 8.50%Total Defined Benefit Costs 16.54% 16.94% 20.66% 24.46%

59

What Does Michigan Need to Do?

60 60

What Does Michigan Need to Do?

Consolidate government services at both the state and local level.

Reform the state’s tax structure so that it will grow with the State’s economy and not discourage economic growth.

Slow the growth of government healthcare and tax expenditures.

Maintain or increase the investment in education.

Reform local pensions

61

Gasoline Tax Revenue Declines Over Time

Source: Michigan Department of Treasury.

FY 2011 - $826.0 million

FY 2002 - $938.9 million

Forecast

62

Too Many Units of Government

Local Governments– 83 Counties– 275 Cities– 258 Villages– 1,240 Townships

K-12 Schools– 551 Local School Districts– 230 Charter Schools– 57 Intermediate School Districts

Colleges and Universities– 15 Public Universities– 29 Community Colleges

63

Ingham County School Districts

Source: Michigan Department of Education

Students

School District Fall 2009

East Lansing 3,445

Lansing 14,148

Dansville 904

Haslett 2,722

Holt 5,902

Leslie 1,380

Mason 3,030

Okemos 4,016

Stockbridge 1,668

Waverly 2,992

Webberville 668

Williamston 1,906

Total 42,782

64

Maryland School DistrictsAre Large

Source: Maryland County Public Schools, various websites

Note: Montgomery County Public Schools is 16th largest in the US

School District Students

Montgomery County Public Schools 141,777

Prince George's County Public Schools 129,723

Anne Arundel County Public Schools 74,200

Howard County Public Schools 49,748

65

Federal Finances

Total Tax Revenue as % of GDP, selected OECD Countries, 2009

Rank Country % of GDP

1 Denmark 48.2%

2 Sweden 46.4%

3 Italy 43.5%

4 Belgium 43.2%

5 Finland 43.1%

20 Canada 31.1%

31 United States 24.0%

32 Chile 18.2%

33 Mexico 17.5%

66

Federal Spending Increases During Recessions

Years Expenditure Increase

1971-1973 16.7%

1974-1976 38.0%

1980-1982 26.2%

1990-1992 10.2%

2000-2002 12.4%

2008-2010 15.9%

67

68Source: Congressional Budget Office

Spending Cuts Needed to Balance Federal Budget (with & without Bush Tax Cuts)

billions of dollars

Spending Cuts Needed When: FY 2015 FY 2020

Tax Cuts Are Not Extended ($650) ($817)

Tax Cuts Are Extended: Revenue Loss ($453) ($753) Spending Cuts Needed ($1,103) ($1,570)

69

Federal Government Spending – FY 2010

Source: Office of Management & Budget

70

Federal Deficit as a Percent of GDP Spikes in 2010

Source: Congressional Budget Office, March 2010. Deficit based on President Obama’s proposed budget. Deficit totals are the total budget deficit.

71Source: Congressional Budget Office

Federal Budget: FY 2010 and FY 2020 Projection

billions of dollars

Spending Item: FY 2010 FY 2020

MandatorySocial Security $701 $1,191Medicare $519 $929Medicaid $273 $542Other Health $18 $149Income Security $435 $293Federal Retirement $140 $192Veterans Programs $58 $83Other Mandatory Programs ($38) $68Offsetting Receipts ($179) ($306)

DiscretionaryDefense $692 $880Other NonDefense $666 $742Interest on Debt $202 $778Total $3,487 $5,541

72

History of Recessions

# of Business Cycles

Average

Duration

Average Expansion

1854-1919 16 22 months 27 months

1919-1945 6 18 months 35 months

1945-2001 10 10 months 57 months

Addendum: Duration Peak Unemployment

GDP Decline

Great Depression 43 months 35.3% (1933) -26.7%

Great Recession 19 months (?) 10.1% (?) -3.7%