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Michigan's Fiscal Challenge: Budget Crisis Solutions

Discover the financial challenges faced by Michigan, causes of revenue gaps, and proposed solutions to address the budget crisis effectively.

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Michigan's Fiscal Challenge: Budget Crisis Solutions

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  1. Michigan’s FY2004 Executive Budget March 2003 Citizens Research Council of Michigan www.crcmich.org

  2. 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

  3. 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

  4. School Aid Revenues and Spending Gaps(in Millions)

  5. Causes • Weak Economy • Stock Market Decline—Capital Gains Dropped Significantly • Tax Cuts Eroding the Revenue Base • Failure to Implement Permanent Budget Balancing Actions

  6. 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

  7. 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

  8. 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

  9. 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

  10. 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

  11. School Aid — FY2003 • Reductions this Fiscal Year • Revenues $127 Million Short • Pro-rata Reductions • Legislative Efforts to Develop Alternative Stalled

  12. General Fund & School Aid FundOperating Gaps

  13. 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

  14. 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

  15. 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

  16. The FY2004 Challenge • General Fund short $1.7 Billion • School Aid Fund short $366 Million • Tax Increases off the table

  17. 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--

  18. 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

  19. 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

  20. 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

  21. 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

  22. 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

  23. 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

  24. 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

  25. 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%

  26. 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

  27. State Government Employment Trends

  28. 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

  29. Family Independence Agency • Caseload Declines Projected • General Fund Budget Down Slightly from Post E.O. 2003-3 Level • Staffing may be Most Significant Concern

  30. 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

  31. 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

  32. 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

  33. 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

  34. 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

  35. 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

  36. 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?

  37. Citizens Research Council of Michigan www.crcmich.org

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