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Michigan’s Budget Problem

Michigan’s Budget Problem

Prospects for the Future

July 2002

Citizens Research Council of Michigan

Prospects for the Future

July 2002

Citizens Research Council of Michigan

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BackgroundBackground

State’s Economy Has DeclinedState Revenue Performance Still Weak

(April Down 10%, May Down 3%, June Flat)Spending Reductions Small So Far —

Onetime Revenues Used to Fill GapsFuture Revenue Growth is Constrained —

Income Tax Cuts Will Absorb Significant Increment of Growth

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Effects of 1998 Tax CutsEffects 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

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EconomyEconomy

National Slowdown — Relatively Mild (Probably No Recession)

National Economy Growing AgainState Recession — Mild by

Michigan StandardsCurrent Michigan Indicators

Mixed

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Revenue ProblemsRevenue 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

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May Revenue ConsensusMay Revenue Consensus

Latest Bad NewsRevenue Forecasts Lowered AgainGeneral Fund Down $672 Million Over

Two YearsSchool Aid Fund Reduced $142 MillionFY2002 Balancing Actions Use One-

time Resources

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FY2003 Balancing ActionsFY2003 Balancing Actions

Legislature Had Great Difficulty Choosing Course

Permanent Revenues Became Final Piece of the Solution

Spending Cuts Minimal

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Postponing A Long-term SolutionPostponing 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

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($1,200)

($1,000)

($800)

($600)

($400)

($200)

$0

$200

$400

$600

($ in

Mill

ion

s)

FY00 FY01 FY02 FY03 FY04

School Aid Fund

General Fund

General Fund & School Aid FundOperating GapsGeneral Fund & School Aid FundOperating Gaps

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Economic Outlook AssumptionsEconomic 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

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FY2003 General Fund Revenue Outlook---May ConsensusFY2003 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

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Original Budget Proposal: Original Budget Proposal:

Permanent Spending Cuts $308 Million — Only $145 Million Cut State Programs

One-time Resources — $660 MillionRainy Day Fund — $207 MillionTobacco Settlement Revenue-$100 MillionSpecial Medicaid Revenue — $247 MillionEmployment Trust Fund — $80 Million

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Time to Cut Spending?Time to Cut Spending?

Legislature Presented Choices—More Revenue or Cut Spending

Sacred Cattle Identified

Legislature Chose to Enhance Revenues

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Revenue Enhancements Are ApprovedRevenue 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

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General Fund ArithmeticGeneral Fund Arithmetic

FY02 FY03Projected Appropriations $9,307 $9,235One-time Spending Adjustments 83 247Adjusted Spending 9,390 9,482 Revenues 8,406 8,402Cigarette and SBT Revenues 41 209One-time Revenues 498 413 Structural Gap ($892) ($771)

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FY2003 School Aid FY2003 School Aid

Net Revenue Growth $400 Million ($501 Million with Cigarette Tax Increase)

FY2002 Carryover Gap $841 MillionIncrease in Foundation Allowance to

$6,700

How is it Financed?

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More One-time RevenuesMore 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 MillionSmall Surplus at End of FY2003School Aid Spared Any Cuts in Latest

Budget Adjustments

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The School Aid ArithmeticThe School Aid Arithmetic

FY02 FY03FY 02 Spending Base $11,458 $11,458$6,700 Basic Allowance 337Other Adjustments (39) (114)Total Spending 11,420 11,681Revenues 10,134 10,534Cigarette Tax Increase 12 103Tax Date Shift 494Fund Balance 695 192 Rainy Day Fund 350 Other 433 465 Total Resources $11,624 $11,788 Structural Gap ($841) ($579)

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Looking Beyond FY2003Looking 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

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FY2004 School Aid OutlookFY2004 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 UnlikelyBudget Difficulties in Local School Districts will

Exceed Those Reported in Recent MonthsSpending Can Grow After FY2004

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General Fund Longer Term Projections ScenarioGeneral Fund Longer Term Projections Scenario

Revenues and Spending Out to FY2009Steady Revenue Growth Assumed (4.5%)Income Tax Cuts in State Law Occur on

Schedule“Normal” Spending Increases for InflationOne-time Revenues Factored Out Large Increases in Medicaid Factored In

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Medicaid Problems LoomingMedicaid Problems Looming

FY 2002 and FY2003 Short $100 to $150 Million in State Funds

Temporary Revenues Used to Avoid CutsReplacement Revenues NeededFederal Limits on Medicaid Special

Financing Adds $375 Million to State Funding Requirements over Three Years

Medicaid Reimbursement Rates to Service Providers Under Pressure

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General Fund OutlookGeneral 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

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The Overall General Fund ResultThe Overall General Fund Result

Gap of $1 Billion For FY2004Gap Widens as Federal Medicaid

Funding DeclinesReaches $1.2 Billion in FY2006Gap Starts to Decline Slowly

After FY2006

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Time to DecideTime to Decide

Solve the Policy Contradiction Spending Policy Has Been Validated By

Use of One-time ResourcesShortfall in Permanent Revenue Lays

Future of Programs Open to QuestionWhich Direction Will the State Choose?Does Recent Action Indicate the Future

Course?

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Approaches to Balancing Budget in FY2004 and BeyondApproaches to Balancing Budget in FY2004 and Beyond

Cut Spending Raise More RevenueCombination of Both ApproachesMust Find $1 Billion in Total

Revenues or Spending ReductionsOver 10% of Spending Base

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Cutting SpendingCutting 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)

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The Remaining 20 PercentThe Remaining 20 Percent

Other Areas Include:State PoliceJudiciaryEnvironmental QualityNatural ResourcesAttorney General

Revenue Sharing at Risk — An Indirect Way to Increase GF-GP Revenues

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Balancing by Cutting SpendingBalancing 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

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Higher EducationHigher 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

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Medicaid--State’s Options Are Limited--Federal RequirementsMedicaid--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

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Other Community Health ProgramsOther Community Health Programs

Community Mental Health (Nearly $1 Billion)

Mental Health InstitutionsSubstance Abuse Prevention &

TreatmentWomen, Infant, and Children Food

and Nutrition ProgramsPrograms for the Aging

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CorrectionsCorrections

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

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Family Independence AgencyFamily 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 ProgramsFoster Care, Adoption, Domestic Violence

ProgramsDay Care for Working Public Assistance

Recipients

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Local Government at RiskLocal Government at Risk

State Revenue Sharing—Statutory Payments Already Cut by 13 Percent

Cuts are Likely to be PermanentMore Reductions Could Occur$868 Million Remains of Statutory

Allocations

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Local GovernmentLocal 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)

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Other Programs At Risk 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)

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Is Increasing Revenue an Option?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

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Delaying/Suspending Income Tax CutsDelaying/Suspending Income Tax Cuts

If Cuts For January 2003 and Beyond are Delayed — Cumulative Effects — For Each Fiscal Year

FY2003 $144 MillionFY2004 $352MillionFY2005 $421 MillionFY2006 $440 MillionFY2007 $460 Million

Not Enough to Close Gap

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Who Will Solve the Problem?Who Will Solve the Problem?

New GovernorNew Legislature — Majority of

Legislators May be NewMost Leadership and Experience

With Budget Problem of Current Magnitude Will Be Gone

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Most Difficult Budget Situation in 40 Years?Most Difficult Budget Situation in 40 Years?

What Makes it Different?Not Economy—Recession Mild by Michigan

StandardsExpenditure Commitments and Tax Cuts Made

When Economy at Peak of Business CycleOver $1 Billion in General Fund Tax Cuts

Already Over-reliance on Temporary Revenue Sources General Fund Revenue Growth Was Committed

to Future Tax Cuts

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Citizens Research Council of Michigan

Citizens Research Council of Michigan

www.crcmich.org

www.crcmich.org

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The Overall General Fund ResultThe Overall General Fund Result

Gap of $1 Billion For FY2004Gap Widens as Federal Medicaid

Funding DeclinesReaches $ 1.2 Billion in FY2006Gap Starts to Decline Slowly

After FY2006