1. Michigan’s Financial Forecast CorNet Michigan Chapter January 14, 2010 Mark P. Haas Chief Deputy Treasurer Michigan Department of Treasury

2. 1  Tax Administration  Tax and Debt Collection  Financial Management  Local Government Services  Financing Higher Education  Investing All State Funds Treasury Responsibilities

3. 2 Treasury Customers 82 175 843 1,858 549,160 720,000 Over 6,000,000 Colleges and Universities Hospitals Public Schools Local Government Units Public Retirees Higher Ed Students Michigan Taxpayers

4. 3 Treasury’s Commitment  Maintain the State’s financial integrity.  Fair and consistent administration of tax laws.  Provide efficient and effective professional services.  Provide access to financial resources for higher education, K-12, local government, and hospitals.

5. 4 2010 Treasury Budget Pass Through Funds Revenue Sharing $1,133.7 Grants $103.8 Debt Service $82.2 Payments in Lieu of Taxes $14.4 _________ _________ $1,334.1 $1,334.1 Operations Funding Revenue Generation $120.6 Student Financial $37.5 Investments $16.7 Local Government $17.4 Customer Service $12.1 State Banking $7.1 Revenue Forecasting $1.5 Bond Finance $1.3 ________ ________ $214.2 $214.2 Revenue Sharing Grants Debt Service ($s in millions) All Funds $1,548,257.3 / General Fund (GF) $135,597.7 Operations PILT

6. 5 Overview  How bad was the recession?  Is it over?  What about Michigan?  Real estate turn around?  How does the State budget look?  What does Michigan need to do?

7. 6 How Bad is the Recession?

8. 7 Current Recession Longest Since Great Depression Number of Months from Peak to Trough U.S. Recessions Source: NBER, Assumes recession ends beginning of 3 rd quarter 2009

9. 8 Current Recession GDP Decline Steepest on Record Percent Change, Economy Peak to Trough Source: Bureau of Economic Analysis, U.S. Department of Commerce. Data not avail for 1937-38 and 1945 recessions.

10. 9 U.S. Employment Decline Third Steepest Percent Change, Economy Peak to Trough Source: Bureau of Economic Analysis, U.S. Department of Commerce. Data not avail for 1937-38 recession.

11. 10 Net Worth Drops 19 Percent From Peak Net Worth Outstanding, Households and Nonprofit Organizations (billions) Source: freelunch.com (Federal Reserve Bank Flow of Funds). $53,423 2009Q3 $66,007 2007Q2

12. 11 One for the Record Books Source: Estimates Compare April 2008 and January 2010 Global Insight Forecasts

13. 12 Is the Recession over?

14. 13 Leading Indicators Point to National Recovery 01/01/10 24.2% Weekly Leading Index, Smoothed Annual Growth Rate Source: Economic Cycle Research Institute.

15. 14 Recovery Observed in 3rd Quarter 2009 Figures are annualized percent change from preceding quarter in 2005 chained dollars. Source: Bureau of Economic Analysis. Forecast quarters in red are the December 2009 Global Insight forecast. 3.0% Growth Real GDP Growth 2009Q3

16. 15 U.S. Has Lost 7.2 Million Jobs Since December 2007 Source: U.S. Bureau of Labor Statistics, U.S. Department of Labor

17. 16 Stock Market Up 68 Percent From March 9 th Low S&P 500 Closing Level Source: freelunch.com, reuters.com 1565 10/09/07 1136 01/12/10 677 03/09/09

18. 17 Blue Chip Economists’ Take on the Recovery  Consensus predicts real GDP will grow slightly exceeding its trend rate (2.8% to 3.1%) over the next five quarters.  Although with growth better than predicted six months ago, the projected rate of growth still falls well short of that typically seen after steep recessions.  Labor markets are expected to improve, but modestly, keeping the unemployment rate from falling back below 10% on a sustained basis until the final quarter of this year. Source: December 2009 Blue Chip Indicators.

19. 18 GDP Generally Strong in Year After Recession Source: BEA and Dept. of Treasury calculations. Peaks and trough are as designated by NBER for economy.

20. 19 Federal Outlays and Receipts Source: US Treasury; Encima Global (last obs. September 2009) Government Outlays are far outpacing receipts.

21. 20 U.S. Federal Government Debt Outstanding Source: Department of Treasury; CBO; Encima Global Government (last obs. 2009, projected by CBO 2010 to 2019) Rise in national debt (marketable debt held by the public) is likely to be much higher than current estimates.

22. 21 Federal Government Debt as % of GDP Source: OMB; CBO; Encima Global Government (last obs. 2009, forecast 2010 to 2019) Debt to GDP ratio heading toward 80% even with optimistic GDP growth assumptions.

23. 22 Social Security and Medicare/Medicaid Spending Source: CBO; Encima Global Government Medicare and Medicaid outlays much bigger than Social Security’s.

24. 23 Volatility in Headline CPI Source: Bureau of Labor Statistics; Encima Global (-1.3 year-over-year for last obs. September 2009, projected to December 2009) 0 Prices and Markets

25. 24 What about Michigan?

26. 25 Michigan Employment Never Recovered in Past Expansion Source: Bureau of Labor Statistics Note: Peak is calculated from Michigan’s June 2000 Peak. Michigan U.S. Ohio Indiana

27. 26 Worst Michigan Employment Drop on Record Source: Bureau of Labor Statistics. Non-seasonally adjusted data. Ten Year Change Nov 1999 – Nov 2009

28. 27 Michigan Loses Nearly 1 Million Jobs Michigan Wage and Salary Employment Y-O-Y Change (In Thousands) Note: Bureau of Labor Statistics. 2009-2011 estimates are from the January 2010 Consensus forecast. Avg. Forecast

29. 28 Michigan Unemployment Rate To Rise Sharply Source: Bureau of Labor Statistics and January 2010 Consensus Forecast Forecast Michigan November Rate was 14.7%

30. 29 Michigan Personal Income Falling Relative to U.S. Source: Department of Treasury calculations from Bureau of Economic Analysis data. Michigan per Capita Income as a Percent of U.S. Per Capita Income 87% 93% 122%

31. 30 - 3% - 2% - 1% 0% 1% 2% Forecast of Michigan Real Disposable Income Growth (1982–1984 $), 2009–2011 20072008200920102011 0.2 0.4 1.3 0.7 – 1.9 RSQE: January 2010

32. 31 Wage and Personal Income Growth 2001– 2008 U.S. Michigan Total personal income37.7% 16.6% Per capita personal income29.1% 16.6% State rank, Michigan per capita income 37 2008 20 2001 RSQE: January 2010

33. 32 Industry Restructuring 25-Year Recovery Cycle  1960  1980  2000 New England Textile Industry Pittsburgh Steel Industry Michigan Auto Industry

34. 33 Real Estate Turnaround?

35. 34 Home Prices Fall Sharply Source: Case Shiller 10-Metro Area Home Price Index. Oct 09 -15.1% U.S. 10 City Detroit Area U.S. Prices Fall After Sharp Run Up

36. 35 (Millions of units) U.S. Home Sales Turning Swung by Homebuyers’ Tax Credit (Millions of units) Source: Global Insight

37. 36 Record Low U.S. Housing Starts Down 75% from Peak Jan 06 2,273 Source: New Privately Owned Housing Units Started (thousands), U.S. Dept of Commerce Nov 09 574

38. 37 Michigan Home Building Falls Precipitously New Private Housing Units Authorized in Michigan Source: U.S. Department of Commerce. 2009YTD through November.

39. 38 Overall Michigan Property Value Growth Slowing Source: State Tax Commission and January 2010 Consensus Conference. Yearly Percent Change

40. 39 Michigan Real Estate Transfer Tax Falls Source: Michigan Department of Treasury Dec 09 -1.2% Year-over-Year Change in 6 Month Trailing Average Sep 04 24.0%

41. 40 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 '63'71'75'83'87'91'95'99'07'67'79'03 '65'69'77'81'93'01'05'73'85'89'97'09 '11 RSQE: January 2010 Michigan Building Permits 1963 – 2008 and Forecast 2009 – 2011 Forecast

42. 41 Mortgage Delinquency Rates Double Source: Economy.com using Mortgage Bankers Association Data

43. 42 Real Estate Market Rebound Depends on Interest Rates ’072008200920102011 Percent 3-Month T-bill 10 Year T-Note Conv. Mortgage RSQE: January 2010

44. 43 How Do State Revenues Look?

45. 44 Difficult Economic Times Reduce Revenue Growth  Recession  Housing Boom/Bust  Auto Industry/ Restructuring Employment Loss and Income Loss Credit Crisis and Consumption Drop Relative Decline in Personal Income Cause Effect

46. 45 GF-GP Revenues Drop Sharply in FY 2009 and FY 2010 GF-GP Revenues Year-Over-Year Pct. Change

47. 46 State GF-GP Revenue at FY ‘91 Level Down 19% Since 2000 2010 $6.9B 1991 $6.9B Billions of Dollars Note: GF-GP figures are presented on a Consensus basis. 2009 and 2010 are estimates. 2000 $9.8B

48. 47 GF-GP and School Aid Revenue Baseline Growth Rates Before Tax Changes Average Agency Forecasts

49. 48 Balancing FY 2011 GF/GP Will Be Difficult Billions Source: Michigan Department of Treasury * ARRA funding available to offset GF expenditures will decline from $1.2 billion in FY10 to $0.2 billion in FY11.

50. 49 Balancing FY 2011 SAF Budget Tough on Schools Source: Michigan Department of Treasury

51. 50 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.

52. 51 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

53. 52 Three Types of State Spending: Grants, Services, and Tax Breaks  Grants - $15.3 Billion  Services - $13.1 Billion  Federal Funds - $14.9 Billion  Tax Expenditures - $35.8 Billion _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _  Pensions and Retirement Benefits

54. 53 Tax Breaks / Expenditures Larger Than Tax Credits Source: House Fiscal Agency Tax Breaks Tax Collections Lisa M Winans

55. 54 Conclusion  U.S. recession worst in decades.  Michigan has been in a recession since 2001 due to auto sector restructuring and U.S. recession.  Michigan recovery will require U.S. recovery, stability in the auto sector, and time.  Michigan real estate market likely at bottom but slow recovery ahead.