1 Michigan’s FY2004 Executive Budget March 2003 Citizens Research Council of Michigan March 2003 Citizens Research Council of Michigan

2 The National Situation States face Worst Budget Crisis Since World War II State Revenue Structures Are Mismatched With Spending Responsibilities Spending Growth Outpacing Revenue Increases Medicaid a Nationwide Budget Problem for the States

3 The FY2003 Michigan Budget Total State Budget — $39 Billion State’s Two Major Funds are Affected General Fund — $8.8 Billion School Aid Fund — $11.5 Billion Other State Funds are restricted for other purposes and generally cannot be used for General and School Aid Fund Problem

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5 School Aid Revenues and Spending Gaps (in Millions)

6 Causes Weak Economy Stock Market Decline—Capital Gains Dropped Significantly Tax Cuts Eroding the Revenue Base Failure to Implement Permanent Budget Balancing Actions

7 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

8 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 During Recession

9 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 Fund561 Advance State Education Tax Collection Date474 Bond for Pay-as you-go Capital Projects211 Tobacco Settlement Revenues259 Employment Contingent Fund 90 Sale of Properties 72 Executive Order Other168 –Total $4,499

10 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

11 Current Status—FY2003 Economy not Improving Yet Executive Order —General Fund Cut $460 Million in December Executive Order —General Fund Cut $158 Million in February School Aid Cut $127 Million Revenues Up Slightly in February Risk Still Downside

12 School Aid — FY2003 Reductions this Fiscal Year Revenues $127 Million Short Pro-rata Reductions Legislative Efforts to Develop Alternative Stalled

13 General Fund & School Aid Fund Operating Gaps

14 School Aid — FY2004 Appropriations Already Made for FY2004—No Increase from FY2003 Appropriations Revenues $366 Million Short—3% Revenue Growth Insufficient to Offset Loss of One-time Revenues Downside Risk

15 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

16 Broadening the Base for the Solution Tobacco Settlement Revenues—Eliminate Some Programs and Reallocate Revenue Raise Fees to Supplant General Fund Revenues Cut Local Revenue Sharing—Revenue Stays in the General Fund Use One-time Resources to Buy Time

17 The FY2004 Challenge General Fund short $1.7 Billion School Aid Fund short $366 Million Tax Increases off the table

18 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--$1.7 Billion--

19 Reshaping The Structure Across-the-board Cuts Avoided Priorities Evident Health Care and Assistance for Poor Protected Higher Education Support Dropped Significantly Corrections Policy Changes Advocated Revenue Sharing Cuts Continue Tax “Loopholes” Closed

20 Closing the Gap General Fund — $1.7 Billion Problem -Cuts $937M -One-time Actions 42M -School Aid Fund Subsidy 198M -Corrections Policy Changes 122M -Revenue Enhancements (Fees, Tax Loopholes) 234M -Revenue Sharing—Continue Past Cuts 153M -Other Resources 14M Total $1,700M

21 Another Perspective Revenues and Other Resources $288M Corrections Policy Change 122M Medicaid 174M Higher Education — New Cuts 127M Revenue Sharing — New Cuts 116M Continue Previous Revenue Sharing Cuts 153M Continue Executive Order Cuts 133M Other Spending Reductions 587M Total $1,700M

22 School Aid $366 Million Revenue Problem - New Revenue-Lottery & Tax Loopholes $ 70M -School Bond Loan Fund Bond Refinance 100M -Durant Bond Refinance 40M -Cut Categorical Programs 138M -Modify Enrollment Count Weighting 40M -Eliminate General Fund Grant (198M) -One-time Savings From Revenue Sharing 199M Total 389M

23 Categorical Program Reductions Career Preparation ($22M), Partnership for Adult Learning ($20M), Math & Science Centers ($10M), Gifted & Talented ($5M), and Six Others ($11M) Eliminated Adult Education Cut 74 Percent $58M ISD Operations Cut 7 Percent 6M Other Reductions 5M Total Categorical Cuts $138M

24 School Aid Increases School Lunch Payments $3.2M Renaissance Zone Reimbursement 17.7M Court-placed Children 2.0M Total $22.9M Other Budget Assistance—Retirement Contributions Made By Districts Temporarily Held at 12.99% of Payroll

25 School Aid First Year-to-Year Decline in School Aid Spending since Proposal A ($78 million) One-time Resources concentrated in School Aid First $299 Million of FY2005 revenue growth will be needed to offset FY2004 one-time revenues FY2005 potential spending increases will be very small

26 Higher Education Appropriations Cut 6.5 Percent $120M Private College Degree Reimbursement Eliminated 7M Total $127M FY2003 Cuts continued—2-Year cuts equal 9.9% Double Digit Tuition Increases Likely—Some Will Exceed 20%

27 Corrections Largest State-Operated Program Over 30 Percent of State Workforce $150 Million Increase in Bed Space and Health Costs Largely Avoided $33 Million Increase Recommended Conditional Reintegration Program Eliminates need for 1,375 Beds Increased Use of Community-based Sanctions

28 State Government Employment Trends

29 Community Health--Medicaid Federal Waiver Constraining Health Benefits to Health Adults $110M Pharmaceutical Purchase Collaboration 40M Quality Assurance Assessment 57M Declining Caseloads Projected EPIC Coverage Increased (15,000 to 42,000) 38M

30 Family Independence Agency Caseload Declines Projected General Fund Budget Down Slightly from Post E.O Level Staffing may be Most Significant Concern

31 Local Revenue Sharing Previous Cuts Maintained $153M Total Payments Reduced 3 Percent From FY2003 Levels 44M Total FY2004 Earmarked Growth Captured 72M Total $269M All Reductions Taken From Statutory Portion (27%) Statutory Percentage Equals 21.3% of Sales Tax at 4 Percent Rate Proposed Allocation is 15.5% Statutory Revenue Sharing Will Be Eliminated for Some Units Soon if Cuts Continue

32 Other Areas Increases in Employee Compensation Not Funded ($140M) — Concessions Expected — 3,000 Jobs at Stake Arts Grants Cut 50%$12M Library Grants Cut 10% 2M Strategic Fund Cut 12% 5M Merit Scholarships Cut From $2,500 to $500— Eventual Savings Nearly $100M

33 FY2005 Outlook—General Fund Revenue Growth Still Constrained by Tax Cuts --Remaining Income Tax Cut $43M --Estate Tax Eliminated-Federal Tax Reform 55M --Federal Dividend Elimination??? 95M Total $193M Growth also must cover $42 Million of One-time Revenues 4 Percent Growth Produces About $350M

34 General Fund Structural Deficit Is It Eliminated? One More Year of Very Constrained Budgets Will Be Needed Pressures For Spending (Cost) Increases (e.g. Health Care, Corrections) are Likely to Outpace Revenue Growth Only Fundamental Structural Changes Will Solve the Problem -Revenue Structure -Program Responsibilities Federal/State

35 FY2005 Outlook—School Aid State Perspective Revenue Growth Must Cover $299 Million of One-time Revenues 4 Percent Growth Produces About $440 Million Small Spending Increase Possible — Roughly One Percent Increased Retirement Contribution Percentage May Be Required — 10+ Percent Increase in Rate

36 FY2005 Outlook—School Aid Local Perspective Increased Retirement Contribution Percentage could claim entire increase in State Funding Pressures on Health Insurance Premiums will continue Another Year of Austerity

37 The Next Steps “The Governor Proposes and The Legislature Disposes” — Senator Harry Gast, Appropriations Chair for 18 Years It Is Now The Legislature’s Turn Will It Be A Long Hot Summer?

38 Citizens Research Council of Michigan