Michigan Fiscal Update Citizens Research Council of Michigan December 13, 2001 Citizens Research Council of Michigan December 13, 2001

Michigan Fiscal UpdateMichigan Fiscal Update

Citizens Research Council of Michigan

December 13, 2001


December 13, 2001

Fiscal Update TopicsFiscal Update Topics

General Economic and Demographic Environment

Revenue Effects of Slowing EconomyThe Resulting Budget ImbalanceThe Budget Outlook



After a Decade of Good Times, How is Michigan Doing?

After a Decade of Good Times, How is Michigan Doing?

Slow Population GrowthPer Capita Income Below National

AverageState Revenues Are DecliningState Faces Difficult Budget

Pressures



Per Capita Personal Income Michigan & U.S.: 1971 - 2000Per Capita Personal Income Michigan & U.S.: 1971 - 2000

90%92%94%96%98%

100%102%104%106%108%110%

(10

0 =

U.S

. To

tal)



Michigan Gross State Product by Industry: 1977, 1987, 1997Michigan Gross State Product by Industry: 1977, 1987, 1997

0%

5%

10%

15%

20%

25%

30%

35%

40%

Ag., Forest &

Fish Mining

Construction

Manufacturing

Trans. Utilit

ies

Wholesale tra

de

Retail trade

F.I.R.E.

Services

Government



Total Non-Agricultural Employment, 1995 - 2001Total Non-Agricultural Employment, 1995 - 2001

100

102

104

106

108

110

112

114

116

(10

0 =

Ja

nua

ry 1

99

5)

Michigan

U.S. Total



Unemployment Rate, 1991 - 2001Michigan & U.S. Unemployment Rate, 1991 - 2001Michigan & U.S.

0%

2%

4%

6%

8%

10%

12%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Michigan

U.S. Total



Michigan Ranks Low—Recent MeasuresMichigan Ranks Low—Recent Measures

49th Index of Economic Momentum50th Personal Income Change (2.7%)42nd Employment Change (-.1%)34th Unemployment Rate (4.6%)39th Population Change (.67% per

year)46th Change in Tax Revenue (-3.0%)



Michigan Ranks High in Some AreasMichigan Ranks High in Some Areas

Seventh Largest Rainy Day Fund—Over 10% of General Fund Budget

One of Most Aggressive Programs of Cutting Taxes

Will Account for 18% of State Tax Cuts in Country in FY2002—Second Largest of the States (Minnesota)



Michigan Revenue & Tax ChangesMichigan Revenue & Tax Changes

Proposal A of 1994Intangibles Tax Phase OutSBT Phase OutPersonal Income Tax Phase

DownEffects of Federal Tax Reform-

Eventual Loss of Estate Tax

Proposal A of 1994Intangibles Tax Phase OutSBT Phase OutPersonal Income Tax Phase

DownEffects of Federal Tax Reform-

Eventual Loss of Estate TaxCitizens Research Council of

MichiganCitizens Research Council of

Michigan

Revenue ProblemsRevenue Problems

Revenues Started to Decline Late in 2000Revenue Forecasts Revised in May 2001Adjustments in FY2001 BudgetReliance Was Almost Exclusively on One-

time ActionsGovernor’s FY2002 Budget

Recommendations Were ModifiedOne-time Actions Were the Main Methods

to Balance Budget



Revenue Problems ContinueRevenue Problems Continue

Economy continued to softenThe Shock of September 11Consumer confidence plummetsNational recession---Yes, but Mild So

FarState recession---Deeper than

National Downturn



More Revenue RevisionsMore Revenue Revisions

October Consensus ConferenceGF-GP and School Aid Revenues

Lowered $728 Million for FY2002Revenue Projections Now $1.47

billion (7.2%) Lower Than Original Consensus (Jan. 2001)—Original Budget Proposal



PerspectivePerspective

FY2002 General Fund Revenues Lower than FY1998

FY2002 School Aid Fund Revenues $1.1 Billion Higher Than FY1998 (12%)

The Two Areas Comprise Over 75% of State-raised Revenue



FY2002 General FundFY2002 General Fund

Gap of $500 Million RemainedExecutive Order Was Issued

November 6Less Than Half of Actions

“Permanent” ($250M)Gap of $557 Million Carries Over to

FY2003



FY2002 School AidFY2002 School Aid

Executive Order Spared Schools (except Golden Apple)

Gap Between Revenues and Appropriations Now $820 Million

BSF Will Cover $327 MillionSurplus of $493 Million Will be

Eliminated



The FY2003 BudgetThe FY2003 Budget

Governor Engler’s Last BudgetWill be Presented in February 2002For Fiscal Year Beginning October 1,

2002---Before the ElectionWithout Doubt Will Represent

Governor’s Greatest Budget Challenge



The GapsThe Gaps

Significant Gap Between “Regular” Revenues and Spending

FY 2002 Structural Gaps Moving into FY2003:

$557 Million GF-GP$820 Million School Aid Fund

Revenue Growth in FY2003 Will Not Come Close to These Amounts—Even if Tax Cuts Are Suspended



($1,000)

($800)

($600)

($400)

($200)

$0

$200

$400

$600

($ in

Mill

ion

s)

FY00 FY01 FY02 FY03

School Aid Fund

General Fund

General Fund & School Aid FundOperating GapsGeneral Fund & School Aid FundOperating Gaps



FY2003 General FundFY2003 General Fund

Based on RSQE ForecastsTax Cuts and Federal Tax Reform

Erase the Growth ($389 Million)Net Year-to Year Revenue Reduction-

$104M Gap of $557 Million Carries Into

FY2003



FY2003 General Fund (continued)FY2003 General Fund (continued)

Critical Added Spending Needs:Bond Interest--$45M (FY2001 Budget Fix)Medicaid Match--$75MCorrections Populations--$60M

Problem is at Least $700 Million Before Other Spending Pressures are Considered



FY2003 General Fund (continued)FY2003 General Fund (continued)

Other Spending Pressures:General Inflation--$100 M—May Not be FundedHigher Education Inflation--$64MMedicaid Cost/Price Increases--$50 to $75M



General Fund ArithmeticGeneral Fund Arithmetic

FY02 FY03Spending Base $9,615 $9,615Revenues 8,808 8,704One-time Budget Balancers 557 “Permanent” Budget Balancers 250 250Additional Spending Needs (120) Budget Balance 0 FY2003 Problem (781)

Could Approach $1 Billion



FY2003 School AidFY2003 School Aid

Net Revenue Growth $300 (3%) to $400 (4%)

FY2002 Carryover Gap $820 MillionCost of $6,700 Foundation

Allowance---$253 MillionProblem--$756M @ 3.1% Growth

(RSQE Forecast)



The School Aid ArithmeticThe School Aid Arithmetic

FY02 FY03Spending Base $11,451 $11,711Revenues 10,189 10,495GF-GP Grant 206 206Fund Balance 493 Rainy Day Fund 327 Other 237 237 Total Resources $11,472 $10,948

FY2003 Problem ($756)

How to Solve the ProblemsHow to Solve the Problems

Expenditures Must Eventually Be Balanced with Base Revenues

Will Probably Require Multi-year PlanMore One-time Actions Will Be

NeededPermanent Expenditure Cuts will be

Necessary so Revenues Can “Catch Up” With Spending



Reducing General Fund SpendingReducing General Fund Spending

80% of General Fund in Four AreasHigher Education ($2.1B)Community Health—Mental Health,

Public Health, Medicaid ($2.6B)Corrections ($1.6B)FIA--Family Services, Juvenile Justice,

Public Assistance ($1.2B)



Reducing General Fund Spending (continued)Reducing General Fund Spending (continued)

Other Areas Include: State Police Judiciary Environmental Quality Natural Resources



Reducing School Aid SpendingReducing School Aid Spending

Over 80% of School Spending is for Personnel

Many Districts Experiencing Declining Enrollment

Significant Cost Pressures---Especially Insurances

School Aid Has Grown More Rapidly Than Other Budget Areas



Temporary Revenue Enhancement PossibilitiesTemporary Revenue Enhancement Possibilities

Rainy Day Fund---$500M Balance—Some Future Commitments---Durant Settlement and Transportation Bonding---State Cash Flow

Taking Balance Below $300 Million Would be Very Risky

Medicaid Special Reimbursement Funds--$250+M



More Balancing Possibilities---These Could be PermanentMore Balancing Possibilities---These Could be Permanent

Delay Scheduled Tax Rate Reductions---$224M Beginning January 1, 2003

Personal Income TaxSingle Business Tax

Tobacco Settlement Funds--$150M??Make Permanent Reductions In

Revenue Sharing Allocations to Local Units of Government--$68M



School Aid Revenue PossibilitiesSchool Aid Revenue Possibilities

Collect all State Education Tax Revenues in Summer

Collect all Local School Operating Taxes in Summer

Delay Part or all of August School Aid Payments Until October



May Be the Worst Budget Crisis in 40 YearsMay Be the Worst Budget Crisis in 40 Years

What Makes it Different?Expenditure Commitments and Tax

Cuts Based on Economy at Peak of Business Cycle

Over-reliance on Temporary Revenue Sources Including Surpluses



Budget Crisis (continued)Budget Crisis (continued)

-Record Rainy Day Fund Balance Tempted Policy-makers to Avoid Cutting Spending

-Huge Gaps Have Opened Up Between Base Revenues and Spending

-Significant Future Revenue Growth Already Committed to Future Tax Cuts

-Significant Restructuring of State Government Finances May Be Necessary





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Documents

Michigan Fiscal Update Citizens Research Council of Michigan December 13, 2001 Citizens Research Council of Michigan December 13, 2001