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

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Presentation on theme: "Michigan Fiscal Update Citizens Research Council of Michigan December 13, 2001 Citizens Research Council of Michigan December 13, 2001."— Presentation transcript:

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

2 Fiscal Update Topics zGeneral Economic and Demographic Environment zRevenue Effects of Slowing Economy zThe Resulting Budget Imbalance zThe Budget Outlook Citizens Research Council of Michigan

3 After a Decade of Good Times, How is Michigan Doing? zSlow Population Growth zPer Capita Income Below National Average zState Revenues Are Declining zState Faces Difficult Budget Pressures Citizens Research Council of Michigan

4 Per Capita Personal Income Michigan & U.S.: Citizens Research Council of Michigan

5 Michigan Gross State Product by Industry: 1977, 1987, 1997 Citizens Research Council of Michigan

6 Total Non-Agricultural Employment, Citizens Research Council of Michigan

7 Unemployment Rate, Michigan & U.S. Citizens Research Council of Michigan

8 Michigan Ranks Low—Recent Measures z49 th Index of Economic Momentum z50 th Personal Income Change (2.7%) z42 nd Employment Change (-.1%) z34 th Unemployment Rate (4.6%) z39 th Population Change (.67% per year) z46 th Change in Tax Revenue (-3.0%) Citizens Research Council of Michigan

9 Michigan Ranks High in Some Areas zSeventh Largest Rainy Day Fund—Over 10% of General Fund Budget zOne of Most Aggressive Programs of Cutting Taxes zWill Account for 18% of State Tax Cuts in Country in FY2002—Second Largest of the States (Minnesota) Citizens Research Council of Michigan

10 Michigan Revenue & Tax Changes zProposal A of 1994 zIntangibles Tax Phase Out zSBT Phase Out zPersonal Income Tax Phase Down zEffects of Federal Tax Reform- Eventual Loss of Estate Tax zProposal A of 1994 zIntangibles Tax Phase Out zSBT Phase Out zPersonal Income Tax Phase Down zEffects of Federal Tax Reform- Eventual Loss of Estate Tax Citizens Research Council of Michigan

11 Revenue Problems zRevenues Started to Decline Late in 2000 zRevenue Forecasts Revised in May 2001 zAdjustments in FY2001 Budget zReliance Was Almost Exclusively on One-time Actions zGovernor’s FY2002 Budget Recommendations Were Modified zOne-time Actions Were the Main Methods to Balance Budget Citizens Research Council of Michigan

12 Revenue Problems Continue zEconomy continued to soften zThe Shock of September 11 zConsumer confidence plummets zNational recession---Yes, but Mild So Far zState recession---Deeper than National Downturn Citizens Research Council of Michigan

13 More Revenue Revisions zOctober Consensus Conference zGF-GP and School Aid Revenues Lowered $728 Million for FY2002 zRevenue Projections Now $1.47 billion (7.2%) Lower Than Original Consensus (Jan. 2001)—Original Budget Proposal Citizens Research Council of Michigan

14 Perspective zFY2002 General Fund Revenues Lower than FY1998 zFY2002 School Aid Fund Revenues $1.1 Billion Higher Than FY1998 (12%) zThe Two Areas Comprise Over 75% of State-raised Revenue Citizens Research Council of Michigan

15 FY2002 General Fund zGap of $500 Million Remained zExecutive Order Was Issued November 6 zLess Than Half of Actions “Permanent” ($250M) zGap of $557 Million Carries Over to FY2003 Citizens Research Council of Michigan

16 FY2002 School Aid zExecutive Order Spared Schools (except Golden Apple) zGap Between Revenues and Appropriations Now $820 Million zBSF Will Cover $327 Million zSurplus of $493 Million Will be Eliminated Citizens Research Council of Michigan

17 The FY2003 Budget zGovernor Engler’s Last Budget zWill be Presented in February 2002 zFor Fiscal Year Beginning October 1, Before the Election zWithout Doubt Will Represent Governor’s Greatest Budget Challenge Citizens Research Council of Michigan

18 The Gaps zSignificant Gap Between “Regular” Revenues and Spending zFY 2002 Structural Gaps Moving into FY2003: z$557 Million GF-GP z$820 Million School Aid Fund Revenue Growth in FY2003 Will Not Come Close to These Amounts—Even if Tax Cuts Are Suspended Citizens Research Council of Michigan

19 General Fund & School Aid Fund Operating Gaps Citizens Research Council of Michigan

20 FY2003 General Fund zBased on RSQE Forecasts zTax Cuts and Federal Tax Reform Erase the Growth ($389 Million) zNet Year-to Year Revenue Reduction- $104M zGap of $557 Million Carries Into FY2003 Citizens Research Council of Michigan

21 FY2003 General Fund (continued) zCritical Added Spending Needs: Bond Interest--$45M (FY2001 Budget Fix) Medicaid Match--$75M Corrections Populations--$60M Problem is at Least $700 Million Before Other Spending Pressures are Considered Citizens Research Council of Michigan

22 FY2003 General Fund (continued) zOther Spending Pressures: General Inflation--$100 M—May Not be Funded Higher Education Inflation--$64M Medicaid Cost/Price Increases--$50 to $75M Citizens Research Council of Michigan

23 General Fund Arithmetic FY02 FY03 Spending Base $9,615 $9,615 Revenues 8,808 8,704 One-time Budget Balancers 557 “Permanent” Budget Balancers Additional Spending Needs (120) Budget Balance 0 FY2003 Problem (781) Could Approach $1 Billion Citizens Research Council of Michigan

24 FY2003 School Aid zNet Revenue Growth $300 (3%) to $400 (4%) zFY2002 Carryover Gap $820 Million zCost of $6,700 Foundation Allowance--- $253 Million 3.1% Growth (RSQE Forecast) Citizens Research Council of Michigan

25 The School Aid Arithmetic FY02 FY03 Spending Base $11,451 $11,711 Revenues 10,189 10,495 GF-GP Grant Fund Balance 493 Rainy Day Fund 327 Other Total Resources $11,472 $10,948 FY2003 Problem ($756)

26 How to Solve the Problems zExpenditures Must Eventually Be Balanced with Base Revenues zWill Probably Require Multi-year Plan zMore One-time Actions Will Be Needed zPermanent Expenditure Cuts will be Necessary so Revenues Can “Catch Up” With Spending Citizens Research Council of Michigan

27 Reducing General Fund Spending z80% of General Fund in Four Areas zHigher Education ($2.1B) zCommunity Health—Mental Health, Public Health, Medicaid ($2.6B) zCorrections ($1.6B) zFIA--Family Services, Juvenile Justice, Public Assistance ($1.2B) Citizens Research Council of Michigan

28 Reducing General Fund Spending (continued) zOther Areas Include: State Police Judiciary Environmental Quality Natural Resources Citizens Research Council of Michigan

29 Reducing School Aid Spending zOver 80% of School Spending is for Personnel zMany Districts Experiencing Declining Enrollment zSignificant Cost Pressures---Especially Insurances zSchool Aid Has Grown More Rapidly Than Other Budget Areas Citizens Research Council of Michigan

30 Temporary Revenue Enhancement Possibilities zRainy Day Fund---$500M Balance—Some Future Commitments---Durant Settlement and Transportation Bonding---State Cash Flow zTaking Balance Below $300 Million Would be Very Risky zMedicaid Special Reimbursement Funds-- $250+M Citizens Research Council of Michigan

31 More Balancing Possibilities--- These Could be Permanent zDelay Scheduled Tax Rate Reductions--- $224M Beginning January 1, 2003 zPersonal Income Tax zSingle Business Tax zTobacco Settlement Funds--$150M?? zMake Permanent Reductions In Revenue Sharing Allocations to Local Units of Government--$68M Citizens Research Council of Michigan

32 School Aid Revenue Possibilities zCollect all State Education Tax Revenues in Summer zCollect all Local School Operating Taxes in Summer zDelay Part or all of August School Aid Payments Until October Citizens Research Council of Michigan

33 May Be the Worst Budget Crisis in 40 Years zWhat Makes it Different? zExpenditure Commitments and Tax Cuts Based on Economy at Peak of Business Cycle zOver-reliance on Temporary Revenue Sources Including Surpluses Citizens Research Council of Michigan

34 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 Citizens Research Council of Michigan

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