1. State Budget Overview FY04 and Beyond
October 2003
Citizens Research Council of Michigan

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. 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. 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
Some Programs Being Crowded Out of Budgets

5. The Michigan Budget Total State Budget---$38.5 Billion
State’s Two Major Funds are Affected
General Fund---$8.9 Billion
School Aid Fund---$12.6 Billion
Other State Funds Are Restricted for Other Purposes and Generally Cannot be Used For General and School Aid Fund Problem

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

7. How Weak is the Economy? Michigan’s Recent Statistics:
-30th in Personal Income Growth
-44th in Unemployment Rate
-49th in Employment Growth (Decline for Michigan)
-41st in Index of Economic Momentum (Population, Personal Income, Employment)

8. 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)
Hangover Will Remain For Several Years

9. 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)

10. 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
Temporary Federal Fiscal Assistance
655
Revenue Sharing Accounting Change
196
Other
685
$5,501

11. General Fund & School Aid Fund Operating Gaps

12. FY2003 Review
Two Executive Orders Cut General Fund Spending---$618 Million
School Aid Cut $127 Million
School Aid Supplemental--General Fund Grant
Revenues $303 Million Short of May Consensus
Effects Mostly Spillover to FY2004

13. FY2003– Other Considerations
Federal Fiscal Relief Package Gave Boost
$655 Million Over Two Years (FY03 and FY04)
Medicaid Money Spent
Current State Budget Planned to Carry Federal $169 Million Over to FY04
Nearly Wiped Out By Latest Revenue Revisions

14. Perspective On Revenues
General Fund Revenues in FY03 and FY04 Below FY1995
Seven Years of Higher Costs and Increased Needs Go Unfunded
Some Programs Crowding Out Others
School Aid Revenues Up $3 Billion Over Same Period

15. Four Years of Revenue Changes
The General Fund
Percent
FY00
FY04
Change
Baseline Revenues
$9,853
$8,075
($1,777)
(18.0)
Expenditures
9,405
9,012
(393)
(4.2)
Operating Gap
$448
($937)
($1,385)
The School Aid Fund
$10,479
$11,059
$580
5.5
10,070
11,469
1,399
13.9
$410
($409)
($819)

16. The FY2004 Initial Challenge
General Fund Short $1.7 Billion
School Aid Fund Short $365 Million
Tax Increases Off the Table
May Revenue Revisions Added to the Challenge ($139 Million)
Now Another $583 Million Must be Covered

17. 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--

18. The Proposed Budget 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—A.K.A. Tax Policy Changes/Revenue Enhancements

19. General Fund Gap Closing Solutions Proposed & Enacted ($ in millions)
Executive
Legislative
Budget
Response
Spending Reductions
$937
$904
Fee Increases & Other
182
226
Tax Policy Changes
109 15
Corrections Policy Changes
122
Eliminate School Aid Subsidy
198
Revenue Sharing Accounting Change
196
Continue Past Revenue Sharing Cuts
152
146
Federal Revenues
305
Totals
$1,700
$1,913

20. School Aid Gap Solutions Proposed & Enacted ($ in millions)
Executive
Legislative
Budget
Response
Spending Reductions
$195
$187
Tax Policy Changes 20 4
New Lottery Games 50
School Bond Loan Refinance
100
128
Additional General Fund Grant 33
Other Revenue 37
Totals
$365
$439

21. Categorical Program Reductions
Career Preparation $21M
Partnership for Adult Learning M
Math & Science Centers M
Gifted & Talented M
Michigan Virtual High School M
Adult Education Cut 74% M
ISD Operations Cut 3.5% M
Other Reductions M
Total Categorical Cuts $142M

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

23. Higher Education Appropriations Cut 6.7 Percent-- $102M
(except CMU, GVSU, Oakland, SVSU)
Private College Degree
Reimbursement Eliminated M
Total $109M
FY2003 Cuts Continued—Two-Year Cuts Equal 10%
Merit Scholarships Survive

24. Corrections Largest State-Operated Program
Over 30 Percent of State Workforce
$150 Million Increase in Bed Space and Health Costs Largely Avoided
$32 Million Increase Appropriated
Conditional Reintegration Program Eliminates need for 750 Beds
Increased Use of Community-based Sanctions

25. State Government Employment Trends

26. Local Revenue Sharing Previous Cuts Maintained $146M
Total Payments Reduced 3 Percent From FY2003 Levels M Total $245M
All Reductions Taken From Statutory Portion (27%)
Statutory Percentage Equals 21.3% Of Sales Tax At 4 Percent Rate
Allocation is Equivalent of 15.5%
Statutory Revenue Sharing Eliminated For Some Units

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

28. State Employee Compensation
Increases in Employee Compensation Costs Not Funded In Appropriations
Pay Raise Negotiated in 2001
Other Increases—Group Insurance & Retirement Contribution Rate
General Fund Costs---$140 Million
3,000 Jobs at Stake

29. Areas of Risk Economic and Revenue Outlook Employee Concessions
FIA & Medicaid Caseloads

30. More Bad News October Consensus 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 $125 Million

31. Implications of Revenue Revisions
FY03 General Fund Surplus Nearly Wiped Out
FY03 School Aid Fund Deficit Requires Attention
FY04 General Fund Gap Equals $583
FY04 School Aid Deficit Equals $342 Including the FY03 Carryover
School Aid Problem Equates to About $200 Per Pupil

32. Other FY04 General Fund Problems
Medicaid Faces $125 Million Problem
Failure to Achieve Employee Concessions Would Require Additional Funding in Health and Safety Programs

33. Potential Actions General Fund -Executive Order Spending Cuts
-Revenue Enhancements
School Aid
-Pro-rata Reductions—Equal $ Per Pupil

34. General Fund Overall Gap of $583 Million to Close
Remember the 80 Percent
Revenue Enhancements?
-Delay Last 0.1 Percent Reduction
-Sin Taxes
-Tax Loopholes
-Increased Enforcement
-Racetrack Slots

35. 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--

36. School Aid--$342 Million Problem
Revenue Enhancements
-General Fund Grant?
-Sin Taxes
Spending Reductions—Foundation Allowance or Categoricals
Only $630 Million of Categoricals Remain
-“At Risk” Pupil Support $314M
-ISD Operations M
-School Readiness M
-Laptop Computers (New Program) M
-Other Programs M

37. Aftermath of Budget Adjustments
General Fund Will Have Absorbed $2.5 Billion in Budget Adjustments In FY04
School Aid Budget Adjustments Total $781 Million In FY04
School Aid Spending Down on Year-to Year Basis For First Time Since Proposal A (about $300 Million)

38. What About the Future? Prospects for the Economy
-Sources of Growth—Probably not Autos
-Will Michigan Lag Behind Other States?
Pressures on Spending Will Continue
Will FY05 Be Better?

39. FY05 General Fund Scenario
Projected FY04 Appropriations
$9,012
FY04 Baseline Revenues
$7,785
4% Growth
311
Other Ongoing FY04 Adjustments
(14)
Adjust for Income 1/1/04 Tax Cut
(43)
Elimination of Estate Tax
(55)
Past Revenue Sharing Cuts
213
Bad Driver & Driver License Fees
156
Total Revenues
8,354
Gap
($658)

40. The FY05 Outlook—General Fund Expenditures
Contracted FY05 Employee Pay Raise
($80)
Medicaid--Federal Temporary Fiscal Relief Elimination
(168)
Medicaid--Federal Funding Match Increase 60
Medicaid--Special Financing Revenue Loss
(135)
Corrections Population Increase
(60)
Medicaid Cost Increases
(80)
Higher Education Inflation
(58)
Total
($521)

41. General Fund—The Overall Picture
Revenue Scenario—4% Growth
From October Consensus $658M
Expenditure Demands/Problems M
$1,179M

42. General Fund Structural Problem
Is It Eliminated? No!
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
-Program Responsibilities---Federal/State

43. School Aid Outlook Cuts in FY04 Likely
Will Revenue Growth be Sufficient to Regain FY04 Appropriations?

44. FY05 Outlook—School Aid October Consensus Revenues the Starting Point
Revenue Must Grow By $440 Million to Reach FY2004 Appropriations
4 Percent Growth Produces About $420 Million
No Room For Spending Growth
Increased Employers Retirement Contribution Percentage Likely
(10+ Percent Increase in the Contribution Rate)

45. FY05 Outlook—School Aid Local Perspective
Increased Retirement Contribution Percentage Could Claim Entire Potential Increase In State Funding
Pressures on Health Insurance Premiums Will Continue
Another Year of Austerity

46. Citizens Research Council of Michigan