1. 1 State Budget Overview FY2004 and Beyond December 2003 Tom Clay, Senior Research Associate Citizens Research Council of Michigan www.crcmich.org December 2003 Tom Clay, Senior Research Associate Citizens Research Council of Michigan www.crcmich.org

2. 2 Citizens Research Council of Michigan Founded in 1916 Statewide Non-partisan Private Not-for-profit Promotes sound policy for state and local governments through factual research Relies on charitable contributions of Michigan businesses, foundations, and individuals

3. 3 Four Years of Budget Problems Declining General Fund Revenues Slow Growth in School Aid Fund Revenues When Will It End? Michigan Is Not Alone

4. 4 The National Situation States face Worst Budget Crisis Since World War II Revenue Structures Are Mismatched With Spending Responsibilities Spending Growth Outpacing Revenue Increases Medicaid a Nationwide Budget Problem for the States Corrections Growing Rapidly in Michigan and Some Other States Some Programs Are Being Crowded Out of Budgets

5. 5 The Michigan Budget Total State Budget---$38.5 Billion State’s Two Major Funds are Affected General Fund---$8.8 Billion School Aid Fund---$12.4 Billion Other State Funds Are Restricted for Other Purposes and Generally Cannot be Used For General and School Aid Fund Problem

6. 6 Causes For The Crisis Weak Economy Stock Market Decline—Capital Gains Dropped Significantly Tax Cuts Eroding the Revenue Base Failure to Implement Permanent Budget Balancing Actions Michigan’s Revenue and Spending Structure

7. 7 How Weak is the Economy? Michigan’s Recent Statistics: -9 th in Personal Income Growth -46 th in Unemployment Rate -46 th in Employment Growth (Decline for Michigan) -32 nd in Index of Economic Momentum (Population, Personal Income, Employment) These are improvements from last report

8. 8 Michigan Job Losses 260,000 Jobs Lost in Three Years Manufacturing Employment Down 170,000 19% Fewer Manufacturing Jobs

9. 9 The Stock Market All States with Income Taxes Were Clobbered Michigan Income Tax Receipts From Non- Salary Income Dropped Over $500 Million in Three Years (Nearly 40 Percent) Affected General Fund and School Aid Hangover Will Remain For Several Years

10. 10 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 Roughly 13 Percentage Points of 34 Percentage Points Gone ($1.3 Billion)

11. 11 Summary of One-time Resources (in Millions) Rainy Day Fund$1,363 FY2000 School Aid Fund Surplus984 FY2000 General Fund Surplus212 Medicaid Benefits Trust Fund561 Advance State Education Tax Collection Date455 Tobacco Settlement/Merit Award Revenues317 Temporary Federal Fiscal Assistance655 Bond for Pay-as-you-go Capital Projects211 Revenue Sharing Accounting Change181 Refinance Bonds209 Employee Wage Concessions110 Other759 $6,017

12. 12 General Fund & School Aid Fund Operating Gaps

13. 13 Perspective On Revenues General Fund Revenues in FY2003 and FY2004 Below FY1995 Nine Years of Higher Costs and Increased Needs Go Unfunded Some Programs Crowding Out Others School Aid Revenues Up $3 Billion Over Same Period

14. 14 Four Years of Revenue and Expenditure Changes The General FundPercent FY00FY04Change Ongoing Revenues$9,853$8,075($1,777)(18.0) Expenditures9,4058,820(585)(6.2) Operating Gap$448($745)($1,193) The School Aid FundPercent FY00FY04Change Ongoing Revenues$10,479$11,059$5805.5 Expenditures10,07011,2451,17611.7 Operating Gap$410($186)($596)

15. 15 The FY2004 Budget Challenge General Fund Short $1.9 Billion School Aid Fund Short $439 Million Tax Increases Off the Table

16. 16 Cutting General Fund Spending 80% of General Fund in Four Areas Higher Education ($1.9B) Community Health — Mental Health, Public Health, Medicaid ($2.6B) Corrections ($1.6B) FIA — Family Services, Juvenile Justice, Public Assistance ($1.1B) --All Other General Fund Programs--$1.6 Billion--

17. 17 Reshaping The Structure Executive and Legislative Positions Similar Across-the-board Cuts Avoided Health Care and Assistance for Poor Protected Higher Education Support Dropped Significantly Corrections Policy Changes Generate Savings Revenue Sharing Cuts Continue Fee Increases Shifted Costs to Users of Services and Freed General Fund Revenues

18. 18 General Fund Gap Closing Solutions Proposed & Enacted ($ in millions) ExecutiveLegislative BudgetResponse Spending Reductions$937$904 Fee Increases & Other182226 Tax Policy Changes10915 Corrections Policy Changes122 Eliminate School Aid Subsidy198 Revenue Sharing Accounting Change196 Continue Past Revenue Sharing Cuts152146 Federal Revenues305 Totals$1,700$1,913

19. 19 School Aid Gap Solutions Proposed & Enacted ($ in millions) Executive Legislative Budget Response Spending Reductions$195$187 Tax Policy Changes204 New Lottery Games50 School Bond Loan Refinance100128 Additional General Fund Grant33 Other Revenue37 Totals$365$439

20. 20 FY2004 School Aid Categorical Program Reductions Career Preparation $21M Partnership for Adult Learning 19M Math & Science Centers 8M Gifted & Talented 5M Michigan Virtual High School 11M Adult Education Cut 74 Percent 58M ISD Operations Cut 3.5 Percent 3M Other Reductions 17M Total Categorical Cuts $142M

21. 21 School Aid Increases School Lunch Payments $3.2M Renaissance Zone Reimbursement 15.1M Wireless Technology 22.0M Total $40.3M Other Budget Assistance—Retirement Contributions Made By Districts Temporarily Held at 12.99% of Payroll

22. 22 Higher Education Appropriations Cut 6.7 Percent-- $102M (except CMU, GVSU, Oakland, SVSU) Community Colleges Cut 6 percent 18M Private College Degree Reimbursement Eliminated 7M Total $127M Executive Order Reductions 86M $213M FY03 Cuts Maintained 84M Two-Year Cuts Equal 14% $297M

23. 23 Corrections Largest State-Operated Program Over 30 Percent of State Workforce $150 Million Increase in Bed Space and Health Costs Largely Avoided Share of Budget Has Increased 2.5 Percentage Points Since FY2000 Spending Up $124 Million (8%)

24. 24 State Government Employment Trends

25. 25 Local Revenue Sharing Previous Cuts Maintained $132M Total Payments Reduced 3 Percent From FY2003 Levels 89M Executive Order Reductions (5%) 72M Total $293M All Reductions Taken From Statutory Portion (26%) Statutory Percentage Equals 21.3% Of Sales Tax At 4 Percent Rate Allocation is Equivalent of 16% Statutory Revenue Sharing Eliminated For More Than 250 Units

26. 26 Revenue Sharing Payments Fiscal Years ’93 through ‘04

27. 27 State Employee Compensation Increases in Employee Compensation Costs Not Funded In Appropriations Pay Raises Negotiated in 2001—Three Year Contract—2%(‘03), 3%(’04), 4%(’05) Other Increases—Group Insurance & Retirement Contribution Rate General Fund Costs---$140 Million 3,000 Jobs Were at Stake Concessions Essentially in Place

28. 28 More Bad News-October Consensus Revenue Revisions Revenues Reduced for FY03 and FY04 General Fund Reduced $199 Million and $373 Million School Aid Reduced $104 Million and $222 Million Total Two-Year Reduction $898 Million Medicaid Problem About $100 Million

29. 29 Implications of Revenue Revisions FY03 General Fund Surplus Nearly Wiped Out FY03 School Aid Fund Ends With Deficit FY04 General Fund Gap Equals $570 Million FY04 School Aid Deficit Equals $350 Million Including the FY03 Deficit School Aid Problem Equates to About $200 Per Pupil

30. 30 Balancing FY2004 Again Delay Income Tax Cut? General Fund -Executive Order Spending Cuts -Revenue Enhancements -Accounting and Other One-time Adjustments School Aid -Share Income Tax Cut Delay ($46 Million) -Laptops -Pro-rata Reductions--$100 per pupil -Minor Revenue Adjustments ($47 Million)

31. 31 General Fund Deficit Reduction Plan (in millions) Reduce Projected Deficit$86.4 Income Tax Cut Pause31.1 Revenue Adjustments72.1 Other Spending Adjustments11.6 Appropriation Reductions200.9 Work Project Reductions31.0 Revenue Sharing Reductions72.0 Federal/Restricted Fund Shifts69.9 Total$575.0

32. 32 School Aid Deficit Reduction Plan (in millions) Reduce Projected Deficit$59.7 Income Tax Cut Pause45.6 Other Revenues47.1 Laptop Computers22.0 Other Changes(2.7) Pro-rata Reductions177.9 Total$349.6

33. 33 Aftermath of Budget Adjustments General Fund Has Experienced $2.5 Billion in Budget Adjustments In FY2004 School Aid Budget Adjustments Total Nearly $800 Million In FY2004 School Aid Spending Down on Year-to Year Basis For First Time Since Proposal A (about $140 Million)

34. 34 Areas of Continuing Risk Economic and Revenue Outlook -Traditional Michigan Recovery not Likely -Auto and Light Truck Sales Already Strong -Incentives, Rebates and Low Interest Loans Borrowed Sales From Future -Big Three Losing Sales Share FIA & Medicaid Caseloads Higher Than Projected

35. 35

36. 36 What About the Future? Prospects for the Economy -Sources of Growth—Probably not Automobile Industry -Will Michigan Lag Behind Other States? Pressures on Spending Will Continue Will FY2005 Be Better?

37. 37 FY2005 General Fund Scenario (millions) FY2004 Baseline Revenues$7,785 4% Growth311 Continue Prior Revenue Sharing Reductions291 Tax Policy and Other FY2004 Changes(14) Bad Driver Fees and Driver License Fees156 Merit Scholarship Accounting Change63 Income Tax Rate Reduction (final quarter)(43) Federal Estate Tax Elimination(73) Net Available Revenues$8,476 Projected FY2004 Appropriations8,820 Revenue Gap($344)

38. 38 The FY2005 Outlook—General Fund Expenditures (in millions) Contracted FY05 Employee Pay Raise($80) Restore FY04 Employee Concessions(110) Medicaid--Federal Temporary Fiscal Relief Elimination(168) Medicaid--Federal Funding Match Increase60 Medicaid--Special Financing Revenue Loss(135) Corrections Population Increase(60) Medicaid Cost Increases(80) Total($573)

39. 39 Fiscal Year 2005 General Fund—The Overall Picture Revenue Scenario Gap 344M Expenditure Demands/Problems 573M $917M

40. 40 General Fund Structural Problem Pressures For Spending (Cost) Increases (e.g. Health Care, Corrections) are Likely to Outpace Revenue Growth in Future Only Fundamental Structural Changes Will Solve the Problem -Revenue Structure—Antiquated Tax Structure -Program Responsibilities---Federal/State

41. 41 School Aid Outlook One-time Revenues of $214 Million Will Not Be Available Will Revenue Growth in FY2005 in be Enough to Regain FY2004 Appropriations?

42. 42 FY2005 Outlook—School Aid October Consensus Revenues the Starting Point Revenue Must Grow By $414 Million to Reach Original FY2004 Appropriations (before cuts) 4 Percent Growth Produces About $421 Million No Room For Spending Growth Increased Employers Retirement Contribution Percentage Likely (10+ Percent Increase in the Contribution Rate)

43. 43 FY2005 School Aid Scenario (in millions) FY2004 Baseline Revenues$10,527 4% Growth421 Adjustment for One-time State Education Tax Revenues(29) Other Adjustments11 Tax Policy Changes and New Lottery Games--FY0464 FY2004 General Fund Grant282 Federal Revenue1,317 Net Available Revenues$12,594 FY2004 Appropriations After Executive Order12,504 Potential Spending Change$90 Difference From Original FY04 Appropriations$7

44. 44 FY2005 Outlook—School Aid Local District Perspective Increased Retirement Contribution Percentage Almost Certain Pressures on Health Insurance Premiums Will Continue Another Year of Austerity and Retrenchment

45. 45 Citizens Research Council of Michigan www.crcmich.org