Michigans Budget Crisis

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Michigans Budget Crisis

• January 2003
• Citizens Research Council of Michigan
• www.crcmich.org

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The National Situation

• States face Worst Budget Crisis Since World War
  II
• State Revenue Structures Are Mismatched With
  Spending Responsibilities
• Medicaid a Nationwide Budget Problem for the
  States

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The Michigan Budget

• Total State Budget---39 Billion
• States Two Major Funds are Affected
• General Fund---9 Billion
• School Aid Fund---11.5 Billion
• Other State Funds Are Restricted for Other
  Purposes and Cannot be Used For General and
  School Aid Fund Problem

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Causes

• Weak Economy
• Stock Market DeclineCapital Gains Dropped
  Significantly
• Tax Cuts Eroding the Revenue Base
• Failure to Implement Permanent Budget Balancing
  Actions

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The Tax Rate 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

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Michigan is Not Alone

• Most States Experienced Deficits
• Most States Cut Taxes
• Economy and Revenue Performance are Somewhat
  Disconnected
• Capital Gains Plummeted

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But Michigan is Different

• Michigan May Have Done Most of Any State to
  Damage Itself
• Failed to Act Timely
• Used 4.5 Billion of Reserves and One-time
  Actions
• Tax Cuts Continued
• Permanent Solutions Needed Now

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Summary of One-time Resources (in Millions)

• Rainy Day Fund 1,264
• FY2000 School Aid Fund Surplus 984
• FY2000 General Fund Surplus 212
• Medicaid Benefits Trust Fund 561
• Advance State Education Tax Collection Date 474
• Bond for Pay-as you-go Capital Projects 211
• Tobacco Settlement Revenues 259
• Employment Contingent Fund 90
• Sale of Properties 72
• Executive Order 2002-22 204
• Other 168
• Total 4,499

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Tax Rate Cuts

• Rate Reductions in Single Business Tax and
  Personal Income Tax
• FY2001 664 Million
• FY2002 864 Million
• FY2003 1,059 Million
• Three Year Total 2,577 Million
• Incremental Effects of Other Cuts 854 Million

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Budget BalancingActions Relatively Benign

• Spending Reductions Relatively Small
• Inflation Absorbed by Programs
• Early Retirement Program Reduced Workforce
• Choice Between Tax Cuts and Continuing Programs
  Not Made Yet

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Actions so Far Beg the Questions

• Is There a Spending Problem?
• -or-
• Is There a Revenue Problem?
• Answer So Far A Revenue Problem?
• Can We Grow Out of Problem Rather Than Cut
  Spending?

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Effects of the Economy

• Planned to Actual Revenues--FY2002
• Income TaxDown 1,308 M (18)
• Quarterlies/AnnualsDown 609 M (35)
• Single Business Tax--Down 269M (12)
• Sales TaxDown 396M (5.8)
• Total General Fund and School Aid Fund
• 2 Billion (9.9)

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Current StatusFY2003

• Economy not Improving Yet
• Executive Order 2002-22---Cut 460 Million in
  December
• More Adjustments Needed
• Every Month the Upturn is Delayed Makes the
  Situation Worse

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General Fund---FY2003

• 150 Million Shortfall Remains
• Additional Executive Order
• Content of Cuts Under Consideration

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School Aid---FY2003

• Reductions This Fiscal Year
• Revenues 127 Million Short
• Pro-rata Reductions or Specific Categorical
  Programs?
• Pro-rata Reductions Announced

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General Fund School Aid FundOperating Gaps
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Economic Outlook

• Forecasts Reflect Moderate Growth Beginning in
  Winter
• Growth not Evident Yet
• Other Scenarios Less Rosy
• Numbers Could be Far Worse

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Beyond FY2003

• Both Major State Funds Have Very Large Structural
  Deficits
• General Fund----898 Million
• School Aid Fund----743 Million
• Budget Must be Balanced (Michigan Constitution)
• Expenditures Must Eventually Be Balanced with
  Base Revenues

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School Aid---FY2004

• Appropriations Already Made for FY2004No
  Increase from FY2003 Appropriations
• Revenues 366 Million Short
• Revenue Growth Insufficient to Offset Loss of
  One-time Revenues
• Downside Risk

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Balancing FY2004 School Aid Budget

• Schools Face Significant Cost Increases
• -Health Insurance-Double Digit Increases
• -Retirement Contributions
• Enrollment Declines Add to the Problem for Many
  Districts

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Balancing Options

• Spending Cuts
• -Categorical Programs
• -General Fund Grant At Risk--198 Million
• -Foundation AllowanceLast Resort
• Revenue Enhancements
• Two-year Strategy

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Possible Two-year Approach

• FY2004 Gap (366)M
• FY2004 One-time Revenue 366 M
• FY2005 Revenue Growth (4) 494 M
• Potential FY2005 Spending Increase 128 M

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General Fund---FY2004

• Growth in FY2004 and FY2005 Constrained By Income
  Tax Cuts and Federal Tax Reform
• Gap of 1.7 Billion
• Gap is not Eliminated by Sustained Economic
  Growth

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Medicaid Problems Looming

• Temporary Revenues Used to Avoid Cuts -260
  Million
• Federal Limits on Medicaid Special Financing Adds
  430 Million to State Funding Requirements over
  Three Years
• Total Medicaid Problem Exceeds 500 Million in
  FY2004

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Approaches to Balancing General Fund Budget

• Cut Spending
• Raise More Revenue
• Combination
• Must Eventually Find 1.7 Billion in Total
  General Fund Revenues or Spending Reductions
• 19 of General Fund Spending Base

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Cutting Spending--80 of General Fund in Four
Areas

• Higher Education (2.1B)
• Community Health Mental Health, Public Health,
  Medicaid (2.4B)
• Corrections (1.6B)
• FIA Family Services, Juvenile Justice, Public
  Assistance (1.1B)
• --All Other General Fund Programs--1.5 Billion--

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Balancing by Cutting Spending

• Across-the-board Reductions Not Realistic
• Fundamental Changes in Priorities Would Be Needed
  Such As
• Changing Who Pays For Higher Education
• Possibly Discontinuing Some Optional Medicaid
  Services or Eligibility
• Reducing Length of Stay in Prisons

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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
  CutLarger Reductions Might be Made

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Medicaid--States Options Are Limited--Federal
Requirements

• Optional Services---Examples
• Pharmaceuticals
• Nursing Home Care For Medically Indigent
• Dental, Eyeglasses
• Optional EligibilityChildren Above Federal
  Poverty Level, e.g.
• Provider Rates

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Other Community Health Programs

• Community Mental Health (Nearly 1 Billion)
• Mental Health Institutions
• Substance Abuse Prevention Treatment
• Local Public Health Support
• Programs for the Aging

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Corrections

• Most of Budget Spent Housing Prisoners
• 30 Percent of State Workforce in Corrections
• 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 Years8,200 from 12/02-12/06
• Additional 150 Million in FY2004

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Family Independence Agency

• Maximum Grant for Family of Three (459 per
  month) is 38 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

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Local Government

• State Revenue SharingStatutory Payments Already
  Cut by 20 Percent
• Cuts are Likely to be Permanent
• More Reductions Will Likely Occur
• 790 Million Remains of Statutory Allocations
• Constitutional Support Totals 679 Million
• Significant Revenue Source For Local Government
  gt20 Of General Fund Revenues

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Is Increasing Revenue an Option?

• Cigarette Tax and Pausing SBT Tax Cut Provide
  Resources That Will Build in Future The First
  Permanent Revenue Increases Used to Balance
  Budget
• Decouple from Federal Estate Tax---150
  Million
• Delay or Suspend January 2004 Individual Income
  Tax Rate Cut--140 Million

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The Next Steps

• Executive Order Reductions for FY2003
• FY2003 Reductions in School Aid
• FY2004 Executive Budget Proposal Early March

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Citizens Research Council of Michigan

• www.crcmich.org