Michigan’s Budget Problem: Michigan’s Budget Problem Prospects for the Future July 2002 Citizens Research Council of Michigan


Background: Background State’s Economy Has Declined State Revenue Performance Still Weak (April Down 10%, May Down 3%, June Flat) Spending Reductions Small So Far — Onetime Revenues Used to Fill Gaps Future Revenue Growth is Constrained — Income Tax Cuts Will Absorb Significant Increment of Growth


Effects of 1998 Tax Cuts: Effects 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


Economy: Economy National Slowdown — Relatively Mild (Probably No Recession) National Economy Growing Again State Recession — Mild by Michigan Standards Current Michigan Indicators Mixed


Revenue Problems: Revenue 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


May Revenue Consensus: May Revenue Consensus Latest Bad News Revenue Forecasts Lowered Again General Fund Down $672 Million Over Two Years School Aid Fund Reduced $142 Million FY2002 Balancing Actions Use One-time Resources


FY2003 Balancing Actions: FY2003 Balancing Actions Legislature Had Great Difficulty Choosing Course Permanent Revenues Became Final Piece of the Solution Spending Cuts Minimal


Postponing A Long-term Solution: Postponing 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


General Fund & School Aid FundOperating Gaps: General Fund & School Aid Fund Operating Gaps


Economic Outlook Assumptions: Economic 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


FY2003 General Fund Revenue Outlook---May Consensus: FY2003 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


Original Budget Proposal:: Original Budget Proposal: Permanent Spending Cuts $308 Million — Only $145 Million Cut State Programs One-time Resources — $660 Million Rainy Day Fund — $207 Million Tobacco Settlement Revenue-$100 Million Special Medicaid Revenue — $247 Million Employment Trust Fund — $80 Million


Time to Cut Spending?: Time to Cut Spending? Legislature Presented Choices—More Revenue or Cut Spending Sacred Cattle Identified Legislature Chose to Enhance Revenues


Revenue Enhancements Are Approved: Revenue 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


General Fund Arithmetic: General Fund Arithmetic FY02 FY03 Projected Appropriations $9,307 $9,235 One-time Spending Adjustments 83 247 Adjusted Spending 9,390 9,482 Revenues 8,406 8,402 Cigarette and SBT Revenues 41 209 One-time Revenues 498 413 Structural Gap ($892) ($771)


FY2003 School Aid : FY2003 School Aid Net Revenue Growth $400 Million ($501 Million with Cigarette Tax Increase) FY2002 Carryover Gap $841 Million Increase in Foundation Allowance to $6,700 How is it Financed?


More One-time Revenues: More 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 Million Small Surplus at End of FY2003 School Aid Spared Any Cuts in Latest Budget Adjustments


The School Aid Arithmetic: The School Aid Arithmetic FY02 FY03 FY 02 Spending Base $11,458 $11,458 $6,700 Basic Allowance 337 Other Adjustments (39) (114) Total Spending 11,420 11,681 Revenues 10,134 10,534 Cigarette Tax Increase 12 103 Tax Date Shift 494 Fund Balance 695 192 Rainy Day Fund 350 Other 433 465 Total Resources $11,624 $11,788 Structural Gap ($841) ($579)


Looking Beyond FY2003: Looking 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


FY2004 School Aid Outlook: FY2004 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 Unlikely Budget Difficulties in Local School Districts will Exceed Those Reported in Recent Months Spending Can Grow After FY2004


General Fund Longer Term Projections Scenario: General Fund Longer Term Projections Scenario Revenues and Spending Out to FY2009 Steady Revenue Growth Assumed (4.5%) Income Tax Cuts in State Law Occur on Schedule “Normal” Spending Increases for Inflation One-time Revenues Factored Out Large Increases in Medicaid Factored In


Medicaid Problems Looming: Medicaid Problems Looming FY 2002 and FY2003 Short $100 to $150 Million in State Funds Temporary Revenues Used to Avoid Cuts Replacement Revenues Needed Federal Limits on Medicaid Special Financing Adds $375 Million to State Funding Requirements over Three Years Medicaid Reimbursement Rates to Service Providers Under Pressure


General Fund Outlook: General 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


The Overall General Fund Result: The Overall General Fund Result Gap of $1 Billion For FY2004 Gap Widens as Federal Medicaid Funding Declines Reaches $1.2 Billion in FY2006 Gap Starts to Decline Slowly After FY2006


Time to Decide: Time to Decide Solve the Policy Contradiction Spending Policy Has Been Validated By Use of One-time Resources Shortfall in Permanent Revenue Lays Future of Programs Open to Question Which Direction Will the State Choose? Does Recent Action Indicate the Future Course?


Approaches to Balancing Budget in FY2004 and Beyond: Approaches to Balancing Budget in FY2004 and Beyond Cut Spending Raise More Revenue Combination of Both Approaches Must Find $1 Billion in Total Revenues or Spending Reductions Over 10% of Spending Base


Cutting Spending: Cutting 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)


The Remaining 20 Percent: The Remaining 20 Percent Other Areas Include: State Police Judiciary Environmental Quality Natural Resources Attorney General Revenue Sharing at Risk — An Indirect Way to Increase GF-GP Revenues


Balancing by Cutting Spending: Balancing 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


Higher Education: 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 Cut—Larger Reductions Might be Made


Medicaid--State’s Options Are Limited--Federal Requirements: Medicaid--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


Other Community Health Programs: Other Community Health Programs Community Mental Health (Nearly $1 Billion) Mental Health Institutions Substance Abuse Prevention & Treatment Women, Infant, and Children Food and Nutrition Programs Programs for the Aging


Corrections: Corrections 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


Family Independence Agency: Family 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 Programs Foster Care, Adoption, Domestic Violence Programs Day Care for Working Public Assistance Recipients


Local Government at Risk: Local Government at Risk State Revenue Sharing—Statutory Payments Already Cut by 13 Percent Cuts are Likely to be Permanent More Reductions Could Occur $868 Million Remains of Statutory Allocations


Local Government: Local 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)


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)


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


Delaying/Suspending Income Tax Cuts: Delaying/Suspending Income Tax Cuts If Cuts For January 2003 and Beyond are Delayed — Cumulative Effects — For Each Fiscal Year FY2003 $144 Million FY2004 $352 Million FY2005 $421 Million FY2006 $440 Million FY2007 $460 Million Not Enough to Close Gap


Who Will Solve the Problem?: Who Will Solve the Problem? New Governor New Legislature — Majority of Legislators May be New Most Leadership and Experience With Budget Problem of Current Magnitude Will Be Gone


Most Difficult Budget Situation in 40 Years?: Most Difficult Budget Situation in 40 Years? What Makes it Different? Not Economy—Recession Mild by Michigan Standards Expenditure Commitments and Tax Cuts Made When Economy at Peak of Business Cycle Over $1 Billion in General Fund Tax Cuts Already Over-reliance on Temporary Revenue Sources General Fund Revenue Growth Was Committed to Future Tax Cuts


Citizens Research Council of Michigan : Citizens Research Council of Michigan www.crcmich.org


The Overall General Fund Result: The Overall General Fund Result Gap of $1 Billion For FY2004 Gap Widens as Federal Medicaid Funding Declines Reaches $ 1.2 Billion in FY2006 Gap Starts to Decline Slowly After FY2006