1. 1 Michigan Economic and Budget Outlook Robert Kleine State Treasurer Bloomfield Hills School District April 19, 2011

2. 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. 3 Recent U.S. Economic Developments

4. 4 Six Quarters in a Row of GDP Growth Observed 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. 5 ISM Indices Show Expansion Source: Institute for Supply Management. ISM Manufacturing Index May 2011= 53.5 ISM Non-Manufacturing Index june 2011 = 53.3

6. 6 U.S. Has Gained Nearly 1.5 Million Jobs Since February 2010 Source: U.S. Bureau of Labor Statistics, U.S. Department of Labor; 4/1/2011

7. U.S. Retail Sales, % change, year-ago month, 2007-2010 7

8. 8 Source: Bureau of Economic Analysis Corporate Profits Up Sharply in 2009 and 2010 2010 Q4: $1678.3

9. 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

10. Higher Income Groups Capture Most Income Gains 10

11. 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. 12 Recent Michigan Economic Developments

13. 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. 14 Michigan’s Recent Job Gains Have Been Strong Source: RSQE, Michigan Forecast April 2010, and Bureau of Labor Statistics.

15. Michigan Unemployment Rate, Monthly, 2008-2011 15

16. Auto Sales Recovering 16

17. Big 3 Sales Improving 17

18. 18 Michigan Vehicle Employment Transportation Equipment Employment Increases (Thousands) Source: Bureau of Labor Statistics.

19. 19 Michigan Payroll Employment and Vehicle Production Source: Bureau of Labor Statistics & Michigan Department of Treasury 6 Month Moving Average – Year over Year Percent Change

20. 20 State Government Revenue

21. 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. 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. 23 FY ‘10 GF-GP Revenue at FY ‘88 Level Down 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. 24 FY ’10 Inflation Adjusted GF-GP Lowest Since 1965 2010 $6.7B 1965 $6.5B 1999 $14.3B Note: GF-GP figures are presented on a Consensus basis and adjusted for inflation to 2010 dollars using the state and local government price deflator. FY 2010 is the May 2010 Consensus estimate. Billions of 2010$

25. 25 School Aid Revenues FY 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. 26 SAF Revenues Grow in FY 2011 and FY 2012 SAF Revenues Year-Over-Year Pct. Change Source: May 2010 Consensus Conference.

27. 27 SAF Revenue Below FY 2005 Level Consensus Estimate

28. 28 FY ’11 Inflation Adjusted SAF Lowest Since Proposal A Adopted 2011 $10.8B 1995 $11.6B Note: SAF figures are presented on a Consensus basis and adjusted for inflation to 2011 dollars using the state and local government price deflator. FY 2010 & FY 2011 are the May 2010 Consensus estimates. Billions of 2011$ Consensus Est.

29. 29 How Does The State Budget Look?

30. 30 Total State Spending FY 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.

31. 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$160 31

32. 32 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.

33. Proposed Budget Reductions, FY 2012 (Millions) ProgramAmount 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 33

34. 34 Michigan Expenditure Growth Lowest Among States Source: Office of Revenue and Tax Analysis, Michigan Dept. of Treasury, 07/27/10, based on NASBO State Expenditure Surveys 2001 and 2009.

35. 35 Michigan State Government GF/GP Appropriations Dollars in Millions Source: State Budget Office.

36. 36 Michigan State Government Total Appropriations Dollars in Millions Source: State Budget Office.

37. 37 Michigan State Government 10,700 Fewer Employees than 2000 Source: Michigan Department of Treasury

38. 38 Government Not Large Compared to Other States Source: Bureau of the Census, 2008 State and Local Government Employment Survey

39. Proposed Changes to FY 2012 Budget

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

41. 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

42. Weaknesses of proposal (cont.) Corporate income tax is unstable and easy to manipulate Education cuts will hurt economic future

43. 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

44. 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

45. 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. 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.

47. State Business Taxes as % of GDP

48. 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.

49. 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

50. 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

51. 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

52. 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. 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.

54. 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

55. Michigan Property Values Continue to Decline YearTotal SEV GrowthTotal TV Growth 20055.9%5.6% 20065.0%5.8% 20073.8%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. 56 Public School Teachers Average Annual Salaries, 2008-09 Source: National Education Association

57. 10-Year Increase in Teachers Salaries RankState% Increase 1Mississippi46.5% 2Louisiana45.4% 3Arkansas44.8% 4North Carolina44.4% 5Illinois43.4% 19Ohio33.0% 23Minnesota31.3% 38Indiana25.4% 43Wisconsin21.5% 49Michigan16.9% 50Alaska7.9% 57

58. 58 Retirement Contribution Rates as a Percentage of Payroll

59. 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. 61 Gasoline Tax Revenue Declines Over Time Source: Michigan Department of Treasury. FY 2011 - $826.0 million FY 2002 - $938.9 million Forecast

62. 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. 63 Ingham County School Districts Source: Michigan Department of Education

64. 64 Maryland School Districts Are Large Source: Maryland County Public Schools, various websites Note: Montgomery County Public Schools is 16 th largest in the US

65. 65 Federal Finances

66. Total Tax Revenue as % of GDP, selected OECD Countries, 2009 RankCountry% of GDP 1Denmark48.2% 2Sweden46.4% 3Italy43.5% 4Belgium43.2% 5Finland43.1% 20Canada31.1% 31United States24.0% 32Chile18.2% 33Mexico17.5% 66

67. Federal Spending Increases During Recessions YearsExpenditure Increase 1971-197316.7% 1974-197638.0% 1980-198226.2% 1990-199210.2% 2000-200212.4% 2008-201015.9% 67

68. 68 Source: Congressional Budget Office Spending Cuts Needed to Balance Federal Budget (with & without Bush Tax Cuts) billions of dollars

69. 69 Federal Government Spending – FY 2010 Source: Office of Management & Budget

70. 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.

71. 71 Source: Congressional Budget Office Federal Budget: FY 2010 and FY 2020 Projection billions of dollars

72. 72 History of Recessions # of Business Cycles Average Duration Average Expansion 1854-19191622 months27 months 1919-1945618 months35 months 1945-20011010 months57 months Addendum:DurationPeak Unemployment GDP Decline Great Depression43 months35.3% (1933)-26.7% Great Recession19 months (?)10.1% (?)-3.7%