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Michigan’s Budget Problem

Michigan’s Budget Problem. Prospects for the Future July 2002 Citizens Research Council of Michigan. Background. State’s Economy Has Declined State Revenue Performance Still Weak (April Down 10%, May Down 3%, June Flat) Spending Reductions Small So Far — Onetime Revenues Used to Fill Gaps

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Michigan’s Budget Problem

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  1. Michigan’s Budget Problem Prospects for the Future July 2002 Citizens Research Council of Michigan

  2. Background • State’s Economy Has Declined • State Revenue Performance Still Weak (April Down 10%, May Down 3%, June Flat) • Spending Reductions Small So Far — Onetime Revenues Used to Fill Gaps • Future Revenue Growth is Constrained — Income Tax Cuts Will Absorb Significant Increment of Growth

  3. Effects of 1998 Tax 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 • Recent Actions Contradict That Premise

  4. Economy • National Slowdown — Relatively Mild (Probably No Recession) • National Economy Growing Again • State Recession — Mild by Michigan Standards • Current Michigan Indicators Mixed

  5. Revenue Problems • Revenue Declines Started Late in 2000 and Have Continued to Date • Several Budget Adjustments Affecting 3 Years • Heavy Reliance on One-time Actions — Over $3 Billion in Three Years • Structural Deficits Have Evolved in the State’s Two Major Funds

  6. May Revenue Consensus • Latest Bad News • Revenue Forecasts Lowered Again • General Fund Down $672 Million Over Two Years • School Aid Fund Reduced $142 Million • FY2002 Balancing Actions Use One-time Resources

  7. FY2003 Balancing Actions • Legislature Had Great Difficulty Choosing Course • Permanent Revenues Became Final Piece of the Solution • Spending Cuts Minimal

  8. Postponing A Long-term Solution • Gaps Between Ongoing Revenues & Spending • Spending for FY2002 Not Cut Significantly • FY 2002 Structural Gaps Moving Into FY2003 • $933 Million — GF-GP • $853 Million — School Aid Fund

  9. General Fund & School Aid FundOperating Gaps

  10. Economic Outlook Assumptions • Moderate Economic Recovery — Has Already Started Nationally • Moderate Economic Growth in Michigan Assumed to Begin in Summer • Economy Back on Track by End of Year

  11. FY2003 General Fund Revenue Outlook---May Consensus • Net Year-to Year Revenue Reduction — $2 Million • Spending Needs Exceeded Revenues by $1,288 Million • Revenues $1.4 Billion Lower (15%) Than FY2000 • $270 Million Lower than FY1996

  12. Original Budget Proposal: Permanent Spending Cuts $308 Million — Only $145 Million Cut State Programs One-time Resources — $660 Million Rainy Day Fund — $207 Million Tobacco Settlement Revenue-$100 Million Special Medicaid Revenue — $247 Million Employment Trust Fund — $80 Million

  13. Time to Cut Spending? • Legislature Presented Choices—More Revenue or Cut Spending • Sacred Cattle Identified • Legislature Chose to Enhance Revenues

  14. Revenue Enhancements Are Approved • Cigarette Tax—50 cent Increase • 20 cents for School Aid • 30 cents for Other Programs • General Fund Receives 22 cents • Total Revenue Increase $292 Million in FY2003 • SBT Cuts Suspended — $69 Million in FY2003

  15. General Fund Arithmetic FY02 FY03 Projected Appropriations $9,307 $9,235 One-time Spending Adjustments 83 247 Adjusted Spending 9,390 9,482 Revenues 8,406 8,402 Cigarette and SBT Revenues 41 209 One-time Revenues 498 413 Structural Gap ($892) ($771)

  16. FY2003 School Aid • Net Revenue Growth $400 Million ($501 Million with Cigarette Tax Increase) • FY2002 Carryover Gap $841 Million • Increase in Foundation Allowance to $6,700 • How is it Financed?

  17. More One-time Revenues • Rainy Day Fund--$350 Million (In FY2002) • Advance the Due Date for State Education (Property) Tax and Cut the Rate From 6 to 5 Mills for 2003 Only — $494 Million • Total One-time Actions — $844 Million • Small Surplus at End of FY2003 • School Aid Spared Any Cuts in Latest Budget Adjustments

  18. The School Aid Arithmetic FY02 FY03 FY 02 Spending Base $11,458 $11,458 $6,700 Basic Allowance 337 Other Adjustments (39)(114) Total Spending 11,420 11,681 Revenues 10,134 10,534 Cigarette Tax Increase 12 103 Tax Date Shift 494 Fund Balance 695 192 Rainy Day Fund 350 Other 433465 Total Resources $11,624 $11,788 Structural Gap ($841) ($579)

  19. Looking Beyond FY2003 • Both Major State Funds Have Very Large Operating Deficits • Budget Must be Balanced (Michigan Constitution) • Expenditures Must Eventually Be Balanced with Base Revenues • State is Nearly Out of One-time Actions

  20. FY2004 School Aid Outlook • Fund Balance Will Carry Over To FY2004 ($107M) • Revenue Growth Will Likely Be In Range of $475 Million to $600 Million • Probably Enough Growth to Close Gap ($579M) • Significant Year-to-Year Spending Increases in FY2004 Unlikely • Budget Difficulties in Local School Districts will Exceed Those Reported in Recent Months • Spending Can Grow After FY2004

  21. General Fund Longer Term Projections Scenario • Revenues and Spending Out to FY2009 • Steady Revenue Growth Assumed (4.5%) • Income Tax Cuts in State Law Occur on Schedule • “Normal” Spending Increases for Inflation • One-time Revenues Factored Out • Large Increases in Medicaid Factored In

  22. Medicaid Problems Looming • FY 2002 and FY2003 Short $100 to $150 Million in State Funds • Temporary Revenues Used to Avoid Cuts • Replacement Revenues Needed • Federal Limits on Medicaid Special Financing Adds $375 Million to State Funding Requirements over Three Years • Medicaid Reimbursement Rates to Service Providers Under Pressure

  23. General Fund Outlook • Revenue Growth Not Enough to Catch Up With Current Spending • Increases in FY2004 and FY2005 Constrained By Income Tax Cuts and Federal Tax Reform • Under Current Law, Revenues Will Not Grow To FY2002 Spending Level Until FY2006 • Budget Problem in FY2004 Exceeds $1 Billion Even After Cigarette Tax Hike and SBT Cut Pause

  24. The Overall General Fund Result • Gap of $1 Billion For FY2004 • Gap Widens as Federal Medicaid Funding Declines • Reaches $1.2 Billion in FY2006 • Gap Starts to Decline Slowly After FY2006

  25. Time to Decide • Solve the Policy Contradiction • Spending Policy Has Been Validated By Use of One-time Resources • Shortfall in Permanent Revenue Lays Future of Programs Open to Question • Which Direction Will the State Choose? • Does Recent Action Indicate the Future Course?

  26. Approaches to Balancing Budget in FY2004 and Beyond • Cut Spending • Raise More Revenue • Combination of Both Approaches • Must Find $1 Billion in Total Revenues or Spending Reductions • Over 10% of Spending Base

  27. Cutting Spending • 80% of General Fund in Four Areas: • Higher Education ($2.1B) • Community Health — Mental Health, Public Health, Medicaid ($2.7B) • Corrections ($1.6B) • FIA — Family Services, Juvenile Justice, Public Assistance ($1.2B)

  28. The Remaining 20 Percent • Other Areas Include: • State Police • Judiciary • Environmental Quality • Natural Resources • Attorney General • Revenue Sharing at Risk — An Indirect Way to Increase GF-GP Revenues

  29. Balancing by Cutting Spending • Across-the-board Reductions Not An Option • Fundamental Changes in Priorities Would Be Needed — Such As: • Who Pays For Higher Education? • Optional Medicaid Services • Prison Sentencing and Prison Populations

  30. Higher Education • State Pays Half of University Operating Costs (One third of Community Colleges) • Across-the-board Share Of Reductions Implies Over 20% University Tuition Increases • Higher Education Could be a Tempting Place to Cut—Larger Reductions Might be Made

  31. Medicaid--State’s Options Are Limited--Federal Requirements • Two Largest Optional Services: • Pharmaceuticals • Nursing Home Care • Comprise About 40% of Medical Services Spending • Reducing Either Program Would Have Serious Consequences

  32. Other Community Health Programs • Community Mental Health (Nearly $1 Billion) • Mental Health Institutions • Substance Abuse Prevention & Treatment • Women, Infant, and Children Food and Nutrition Programs • Programs for the Aging

  33. Corrections • Most of Budget Spent Housing Prisoners • Use of Less-costly Options Would Require Reductions in Length of Sentence and/or Length of Stay in Prison • Current Policies Imply Larger Prison Populations in Next Several Years

  34. Family Independence Agency • Maximum Grant for Family of Three ($459 per month) is 37% of Poverty Level • Food Stamps Raise Support to 60% of Poverty Level • Caseloads Now One-third of 1994 Level • Juvenile Justice Programs • Foster Care, Adoption, Domestic Violence Programs • Day Care for Working Public Assistance Recipients

  35. Local Government at Risk • State Revenue Sharing—Statutory Payments Already Cut by 13 Percent • Cuts are Likely to be Permanent • More Reductions Could Occur • $868 Million Remains of Statutory Allocations

  36. Local Government • Community Mental Health — Nearly $1 billion in State funds • Transportation—Funds Already Diverted to help General Fund—Revenues not Responsive to Economic Growth • Libraries ($20M) • Local Health Departments ($41M), Other Health Grants ($27M)

  37. Other Programs At Risk • Programs for the Aging ($26M) • Payments in Lieu of Taxes ($18M) • Local Corrections Programs ($82M) • Secondary Road Patrol Grants ($13M) • Arts Grants ($22M)

  38. Is Increasing Revenue an Option? • Cigarette Tax and Pausing SBT Tax Cut Provide Resources That Will Build in Future — The First “Permanent” Revenue Increase Used to Balance Budget • Redirect Tobacco Settlement Revenues — Might Redirect $150 Million Annually — Ballot Proposal Could Render Moot • Delay or Suspend Individual Income Tax Cuts

  39. Delaying/Suspending Income Tax Cuts • If Cuts For January 2003 and Beyond are Delayed — Cumulative Effects — For Each Fiscal Year • FY2003 $144 Million • FY2004 $352 Million • FY2005 $421 Million • FY2006 $440 Million • FY2007 $460 Million • Not Enough to Close Gap

  40. Who Will Solve the Problem? • New Governor • New Legislature — Majority of Legislators May be New • Most Leadership and Experience With Budget Problem of Current Magnitude Will Be Gone

  41. Most Difficult Budget Situation in 40 Years? • What Makes it Different? • Not Economy—Recession Mild by Michigan Standards • Expenditure Commitments and Tax Cuts Made When Economy at Peak of Business Cycle • Over $1 Billion in General Fund Tax Cuts Already • Over-reliance on Temporary Revenue Sources • General Fund Revenue Growth Was Committed to Future Tax Cuts

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

  43. The Overall General Fund Result • Gap of $1 Billion For FY2004 • Gap Widens as Federal Medicaid Funding Declines • Reaches $ 1.2 Billion in FY2006 • Gap Starts to Decline Slowly After FY2006

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