1. Michigan Economic and Budget Outlook IMA Conference Michigan State University East Lansing, MI October 25, 2010 Mark P. Haas Chief Deputy Treasurer

2. 2 Tax Administration / Tax and Debt Management Financial Management / Banking Services Local Government Services Financing Higher Education Investing All State Funds Casino Gambling / Lottery Housing Development for Low/Moderate Income Treasury Responsibilities

3. 3 Treasury Customers 82 175 843 1,858 549,160 720,000 Over 6,000,000 Colleges and Universities Hospitals Public Schools Local Government Units Public Retirees Higher Ed Students Michigan Taxpayers

4. 4 Treasury’s Commitment ● Maintain the State’s financial integrity. ● Fair and consistent administration of tax laws. ● Provide efficient and effective professional services. ● Provide access to financial resources for higher education, K-12, local government, and hospitals.

5. 5 2011 Treasury Budget Pass Through Funds Revenue Sharing $1,032.1 Grants$ 128.4 Debt Service $ 134.9 Payments in Lieu of Taxes $ 13.0 $1,308.4 $1,308.4 Operations Funding Revenue Generation $139.8 Student Financial $ 36.9 Investments $ 17.1 Local Government $ 15.8 State Banking $ 8.6 Revenue Forecasting $ 1.7 Bond Finance $ 1.3 $221.3 $221.3 ($s in millions) All Funds $1,975.4 General Fund (GF) $201.4 Authorities, Funds & Commissions Lottery $ 26.2 Gaming $ 25.3 MSHDA $ 223.7 MSF $ 168.7 LBFTA $ 1.9 $445.8 $445.8

6. 6 Overview ● U.S. and Michigan Economic Outlook ● State and Local Budget Situation ● Federal Fiscal Situation ● What Michigan Needs to Do

7. 7 How Bad was the Recession?

8. 8 2008-2009 Recession Longest Since Great Depression Number of Months from Peak to Trough U.S. Recessions Source: NBER

9. 9 2008-2009 Recession GDP Decline Steepest on Record Percent Change, Economy Peak to Trough Source: Bureau of Economic Analysis, U.S. Department of Commerce. Data not avail for 1937-38 and 1945 recessions.

10. 10 One for the Record Books Source: April 2008 Global Insight Forecasts and 2009 actuals compiled from various sources by Michigan Department of Treasury.

11. 11 Is the Economy Looking Better?

12. 12 Leading Indicators Show National Recovery Struggling 09/10/10 -9.2% Weekly Leading Index, Smoothed Annual Growth Rate Source: Economic Cycle Research Institute.

13. 13 GDP Growth Observed Four Quarters in a Row Figures are annualized percent change from preceding quarter in 2005 chained dollars. Source: Bureau of Economic Analysis. Forecast quarters in red are the September 2010 Global Insight forecast. 3.0% Growth Real GDP Growth 2010Q2

14. 14 U.S. Has Gained Over 600,000 Jobs Since December 2009 Source: U.S. Bureau of Labor Statistics, U.S. Department of Labor

15. 15 Stock Market Moving Sideways S&P 500 Closing Level Source: freelunch.com, reuters.com 1565 10/09/07 1125 09/16/10 677 03/09/09

16. 16 Federal Outlays and Receipts Source: US Treasury; Encima Global. (last obs. June 2010) Outlays are far outpacing receipts.

17. 17 Federal Government Debt as % of GDP Source: OMB; CBO; Encima Global Government (last obs. 2009, forecast 2010 to 2019) Latest CBO Estimate 90% 2020

18. 18 Federal Spending Increases Outpaces Income Growth Source: Heritage Foundation, 2009 Federal Revenue and Spending Book of Charts, WSJ.

19. 19 ● Growing deficits will require: ●Higher federal taxes ●Federal budget cuts ●More federal borrowing ● Tax hikes and budget cuts will slow economy. ● Federal borrowing will squeeze out private borrowing. ● Deficits could adversely affect currency, exchange rates, and inflation. Implications of Federal Deficits

20. 20 What about Michigan ?

21. 21 Michigan Employment Never Recovered in Past Expansion Source: U.S. Bureau of Labor Statistics and Michigan Department of Treasury. Note: Peak is calculated from Michigan’s June 2000 Peak. Michigan U.S. Ohio Indiana

22. 22 Michigan Loses Nearly 850,000 Jobs Michigan Wage and Salary Employment Year-Over-Year Change (In Thousands) Note: Bureau of Labor Statistics. 2009-2011 estimates are Treasury Forecast. Avg. Treasury Forecast

23. 23 Michigan Personal Income Falling Relative to U.S. Source: Department of Treasury calculations from U.S. Bureau of Economic Analysis data. *Alaska & Hawaii data not available. Michigan per Capita Income as a Percent of U.S. Per Capita Income 87% 93% 122% Michigan’s Rank 12151837 1970198020002009 1912 1933* 1945*

24. 24 Industry Restructuring 25-Year Cycle 1960 1980 2000 New England Textile Industry Pittsburgh Steel Industry Michigan Auto Industry

25. 25 How does the State Budget Look?

26. 26 Total State Spending FY 2011 Total Spending: $47.1 Billion Source: OBDGG, CM, 3/10/10 Over 75% of total budget devoted to health, human services and education spending.

27. 27 Michigan GF-GP Revenues Turning Corner GF-GP Revenues Year-Over-Year Percent Change Source: May 2010 Consensus Conference.

28. 28 General Fund Budget Outlook 1) Ongoing Revenue equals consensus estimate for FY10 and FY11. 2) Expenditure increase in FY12 due to loss of restricted ARRA funds and increase in cost to maintain services. Source: State Budget Office, FY10 & FY11; Michigan Department of Treasury, FY12.

29. 29 Michigan School Aid Fund Revenues to Stabilize SAF Revenues Year-Over-Year Pct. Change Source: May 2010 Consensus Conference. Cons. Forecast

30. 30 School Aid Fund Budget Outlook * Ongoing Revenue equals consensus estimate for FY10 & FY11. ** Expenditures in FY12 are increased from FY11 by inflation. Source: Michigan Department of Treasury.

31. 31 Major Components of FY 2011 Budget Agreement ● Tax Amnesty: GF $68.1 million, SAF $26.1 million. ● Unclaimed Property: GF $168.0 million. ● Liquor Reforms: GF $9.1 million. ● State Pension Reforms: GF $60 million. ● Debt Refinancing: GF $77.3 million, SAF $40.0 million. ● Reduce spending about $270 million from the Governor’s adjusted original recommendation.

32. 32 How do Local Budgets Look?

33. 33 State To Local Revenue Sharing Cut 33% Last Eight Years (Millions) Source: Office of Revenue and Tax Analysis, Michigan Department of Treasury.

34. 34 Most Local Own Source Revenue From Property Taxes FY 2008 Own Source Revenue Plus State and Federal - $25.3 Billion

35. 35 Home Prices Fell Sharply Beginning to Turn Around Source: Case Shiller 10-Metro Area Home Price Index. June 10 0.8% U.S. 10 City Detroit Area U.S. Prices Fall After Sharp Run Up June 10 5.0%

36. 36 Michigan Home Building Fell Precipitously New Private Housing Units Authorized in Michigan Note: 2010 YTD through July Source: U.S. Department of Commerce.

37. 37 Overall Michigan Taxable Property Value Growth Slowing Yearly Percent Change Source: State Tax Commission and May 2010 Consensus Conference.

38. 38 What does Michigan Need to do?

39. 39 Michigan State Government Already Has Fewer Employees Source: Michigan Department of Treasury.

40. 40 Government Smaller Compared to Other States Source: U.S. Bureau of the Census, 2008 State and Local Government Employment Survey.

41. 41 State Government Average Annual Salaries – 2008 Source: Bureau of the Census

42. 42 What Does Michigan Need to Do? Consolidate government services at both the state and local level. Reform the state’s tax structure so that it will grow with the State’s economy and not discourage economic growth. Slow the growth of government healthcare and tax expenditures. Maintain or increase the investment in education. Reform local government pensions.

43. 43 Too Many Units of Government Local Governments 83 Counties 275 Cities 258 Villages 1,240 Townships K-12 Schools 551 Local School Districts 230 Charter Schools 57 Intermediate School Districts Colleges and Universities 15 Public Universities 29 Community Colleges

44. 44 Ingham County School Districts Source: Michigan Department of Education.

45. 45 Local Colleges and Universities Source: Stateuniversity.com

46. 46 Maryland School Districts Are Large Source: Maryland County Public Schools, various websites Note: Montgomery County Public Schools is 16 th largest in the US

47. 47 Michigan’s Tax System Needs to be Restructured

48. 48 General Fund Revenue by State Michigan Only State with a Decline Source: Michigan Department of Treasury Percent Change Between 2000 and 2009

49. 49 Inflation Adjusted GF-GP Revenue Down 50.4% Since 2000 Note: FY 2010 and 2011 are May 2010 Consensus Estimates Source: Office of Revenue and Tax Analysis, Michigan Department of Treasury. Current Dollars Inflation Adjusted

50. 50 Inflation Adjusted SAF Revenue Down 25% Since 2000 Current Dollars Inflation Adjusted Note: FY 2010 & 2011 are May 2010 Consensus Estimates Source: Office of Revenue and Tax Analysis, Michigan Department of Treasury.

51. 51 Real State GDP Declines 3.3% since 2000 Source: House Fiscal Agency Inflation Adjusted

52. 52 Michigan GF-GP & SAF Taxes Falls as a Percent of Personal Income If revenues were still 6.8% of personal income, FY 2011 revenue would be $6.3 billion larger. Note: FY 2010 and FY 2011 estimates based on Jan 2010 Consensus.

53. 53 Source: U.S. Bureau of Economic Analysis. Goods - 32.3% Personal Consumption Expenditures by Percentage Services - 67.7% Tax Structure Needs to Keep Pace With Changing Economy

54. 54 Tax Breaks / Tax Expenditures Larger Than Tax Collections Source: House Fiscal Agency. Tax Breaks Tax Collections

55. 55 Recent Tax Changes Reduce Future Revenue Generous film production credits enacted to encourage production in Michigan. Battery Credits enacted to encourage production of batteries for hybrid cars in Michigan. Earned Income Tax Credit provides $325 million in 2010 and $338 million in 2011.

56. 56 Significant Tax Cuts Will Cut Future Revenues

57. 57 Why Do We Have A Revenue Problem Michigan economy declining for 10 years. Tax System does not keep up with economy. Phased-in tax cuts eroding revenue.

58. 58 Most Revenue Losses Due to Tax Cuts Source: Michigan Department of Treasury

59. 59 Key Characteristics of a Good Tax System ● Stable – Stable level revenue: ●Broad based taxes. ●Balanced group of taxes (don’t rely on just one major tax). ● Fair – Similar taxpayers pay similar taxes. ● Efficient – Simple to administer and comply with, and should not distort economic decisions.

60. 60 Corporate Income Tax Pros & Cons PROS ●Only corporations making a profit would pay. ●Widely used, therefore multistate companies would have lower compliance costs. ●Longer legal history provides more certainty CONS ●Revenue stream is extremely volatile (federal corporate income tax revenue declined 55% in FY 2009). ●Many businesses (noncorporations) avoid the tax. ●No direct relationship between profitability and dependence on government services.

61. 61 Local Governments Have a Pension Problem ● Pension liabilities exceed assets and costs are growing faster than assets. ● Local pensions are very generous—average multiplier 2.7%. ● Local pensions are subject to abuse, which raises future costs. ● Reform needed.

62. 62 Balanced Approach: Hybrid Retirement Model Social Security Defined Benefit Defined Contribution 1/3

63. 63 Retirement Model Characteristics ● Equal contributions from employer and employee into all three plans. ● Benefits based on lifetime earnings – will greatly reduce abuses. ● Raise retirement age as people live longer. ● Investment risk shared – one-third each. ● May require changes to P.A. 312.

64. 64 Consolidation / Shared Services ● Do for business reasons, not political. ● Important to look at all costs, as transition costs can be larger than savings.

65. 65 Conclusion ● Recession worst in decades, but it appears U.S. economic recovery is beginning to take hold. ● Michigan has been in a recession since 2001 due to auto sector restructuring and U.S. recession. ● Michigan recovery will require U.S. recovery, stability in the auto sector, and time. ● Funding for schools, state and local government depend on economy growing and tax restructuring. ● Government changes needed to reflect new economic reality.

66. 66 Questions www.Michigan.gov/Treasury