1. Presidents Council State Universities of Michigan Board of Directors March 23, 2006 Lansing Presidents Council State Universities of Michigan Board of Directors March 23, 2006 Lansing Michigan’s Budget Crisis and the Prospects for the Future Tom Clay, Director of State Affairs Citizens Research Council of Michigan www.crcmich.org Tom Clay, Director of State Affairs Citizens Research Council of Michigan www.crcmich.org

2. Citizens Research Council of Michigan 2 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 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. Citizens Research Council of Michigan 3 The Central Message The State of Michigan has a Structural Deficit Affecting: -Public K-12 Education -General Fund Financed Programs Its Causes Have Both Spending and Revenue Components We Will Not Grow Out of It Only Structural Policy Changes Will Fix The Problem The State of Michigan has a Structural Deficit Affecting: -Public K-12 Education -General Fund Financed Programs Its Causes Have Both Spending and Revenue Components We Will Not Grow Out of It Only Structural Policy Changes Will Fix The Problem

4. Citizens Research Council of Michigan 4 Total State Budget - $41.2B State’s Two Major Funds: General Fund - $9.0B School Aid Fund - $12.8B Other State Funds Restricted for Other Purposes, e.g. Transportation, Federal Revenues Over 80% of All Revenues Spent Outside State Government Total State Budget - $41.2B State’s Two Major Funds: General Fund - $9.0B School Aid Fund - $12.8B Other State Funds Restricted for Other Purposes, e.g. Transportation, Federal Revenues Over 80% of All Revenues Spent Outside State Government The Michigan Budget FY2006 Appropriations

5. Citizens Research Council of Michigan 5 Six Years of Budget Problems Worst Budget Problems Since World War II Declining General Fund Revenues Slow Growth in School Aid Fund Revenues Structural and Cyclical Deficits at Play Worst Budget Problems Since World War II Declining General Fund Revenues Slow Growth in School Aid Fund Revenues Structural and Cyclical Deficits at Play

6. Citizens Research Council of Michigan 6 Deficits Defined Cyclical — Caused by Economic Downturn - Revenues Worsen - Some Spending Pressures Increase - Deficit Erased When Economy Recovers Structural — Caused by Cost Increases to Maintain Current Policies Outpacing Revenue Growth, Even in Good Economic Times Cyclical — Caused by Economic Downturn - Revenues Worsen - Some Spending Pressures Increase - Deficit Erased When Economy Recovers Structural — Caused by Cost Increases to Maintain Current Policies Outpacing Revenue Growth, Even in Good Economic Times

7. Citizens Research Council of Michigan 7 Components of the Structural Deficit Revenues Self-inflicted Changes in Revenue Structure -Tax Rate Cuts -Federal Changes in Tax Law—Failure to Amend State Law -Increased Use of Slow or No-growth Revenue Sources (e.g. Tobacco Taxes) Weakening Connections of Economy With Revenues -Sales Tax -Income Tax Self-inflicted Changes in Revenue Structure -Tax Rate Cuts -Federal Changes in Tax Law—Failure to Amend State Law -Increased Use of Slow or No-growth Revenue Sources (e.g. Tobacco Taxes) Weakening Connections of Economy With Revenues -Sales Tax -Income Tax

8. Citizens Research Council of Michigan 8 Components of the Structural Deficit Expenditures Health Care is Everywhere in the Budget and Growing Faster Than Revenues Largest Component in State Budget -Medicaid -Health Insurance for School & State Employees -Health Insurance for School & State Retirees -Prisoners Health Care is Everywhere in the Budget and Growing Faster Than Revenues Largest Component in State Budget -Medicaid -Health Insurance for School & State Employees -Health Insurance for School & State Retirees -Prisoners

9. Citizens Research Council of Michigan 9 Components of the Structural Deficit Expenditures Corrections Largest State-operated Program Employees Nearly 1/3 of All State Workers Michigan’s Costs Significantly Above Our Great Lakes Neighbors Incarceration Rate More Than 40% Higher Growth in Spending Outpacing Revenues Corrections Largest State-operated Program Employees Nearly 1/3 of All State Workers Michigan’s Costs Significantly Above Our Great Lakes Neighbors Incarceration Rate More Than 40% Higher Growth in Spending Outpacing Revenues

10. Citizens Research Council of Michigan 10 Budget Deficit Pressures Both Funds Outspending “Regular Revenues” Operating Deficits for Six Straight Years Significant One-time Resources Used-- $6.6 Billion Both Funds Outspending “Regular Revenues” Operating Deficits for Six Straight Years Significant One-time Resources Used-- $6.6 Billion

11. Citizens Research Council of Michigan 11 General Fund & School Aid Operating Deficits

12. Citizens Research Council of Michigan 12 Summary of One-Time Resources FY2001-FY2005 (in Millions) Rainy Day Fund $1,363 FY2000 School Aid Fund Surplus 984 FY2000 General Fund Surplus 212 Medicaid Benefits Trust Fund 561 Advance State Education Tax Collection Date455 Tobacco Settlement/Merit Award Revenues324 Temporary Federal Fiscal Assistance655 Bond for Pay-as-you-go Capital Projects211 Revenue Sharing Accounting Change181 Refinance Bonds250 Employee Wage Concessions186 Other1,203 $6,585

13. Citizens Research Council of Michigan 13 Causes of Michigan’s Budget Problems Weak Economy Tax Cuts Stock Market Decline Michigan’s Deteriorating Share of Auto and Light Truck Market Structural Imbalance Between Revenues and Spending Weak Economy Tax Cuts Stock Market Decline Michigan’s Deteriorating Share of Auto and Light Truck Market Structural Imbalance Between Revenues and Spending

14. Citizens Research Council of Michigan 14 How Weak is the Economy? Michigan’s Recent Statistics: 50 th in Personal Income Growth 46 th in Unemployment Rate 48 th in Employment Growth (Decline for Michigan) 49 th in Index of Economic Momentum (Population, Personal Income, Employment) Michigan’s Recent Statistics: 50 th in Personal Income Growth 46 th in Unemployment Rate 48 th in Employment Growth (Decline for Michigan) 49 th in Index of Economic Momentum (Population, Personal Income, Employment)

15. Citizens Research Council of Michigan 15 Big 3 Losing Market Share Source: Automotive News, 2005 Sales are Agency Averages. 2005

16. Citizens Research Council of Michigan 16 Michigan Manufacturing Employment Source: U.S. Department of Labor, Bureau of Labor Statistics. November 2005 671,000 Lost 1 in 4 Manufacturing Jobs Jan 1992 775,900 Jul 1999 908,200

17. Citizens Research Council of Michigan 17 Perspective On Revenues General Fund Revenues in FY03, FY04, & FY05 Below FY1995 Inflation-Adjusted General Fund Revenues Below 1972 Level General Fund Revenues in FY03, FY04, & FY05 Below FY1995 Inflation-Adjusted General Fund Revenues Below 1972 Level

18. Citizens Research Council of Michigan 18 General Fund Revenues

19. Citizens Research Council of Michigan 19 General Fund Budget FY2006 85% of General Fund Spending in 4 Areas: 1.Higher Education ($1.9B) 2.Community Health—Mental Health, Public Health, Medicaid ($2.9B) 3.Corrections ($1.8B) 4.Human Services—Family Services, Juvenile Justice, Public Assistance ($1.1B) All Other General Fund Programs — $1.3B 85% of General Fund Spending in 4 Areas: 1.Higher Education ($1.9B) 2.Community Health—Mental Health, Public Health, Medicaid ($2.9B) 3.Corrections ($1.8B) 4.Human Services—Family Services, Juvenile Justice, Public Assistance ($1.1B) All Other General Fund Programs — $1.3B

20. Citizens Research Council of Michigan 20 Looking Back: Reshaping the General Fund Budget Reductions Higher Education-$275M in 4 Years (13%) Human Services-$172M in 5 years (14%) School Aid-$323M in 5 years (84%) Revenue Sharing-$447M in 5 years (29%) State Employees-7,400 in 4 years (12%) –Smallest Workforce Since 1974 Reductions Higher Education-$275M in 4 Years (13%) Human Services-$172M in 5 years (14%) School Aid-$323M in 5 years (84%) Revenue Sharing-$447M in 5 years (29%) State Employees-7,400 in 4 years (12%) –Smallest Workforce Since 1974

21. Citizens Research Council of Michigan 21 Reshaping the General Fund Budget Increases Department of Community Health-$263M in 5 years (10%) –Medicaid –Community Mental Health Corrections-$175M in 5 years (11%) Increases Department of Community Health-$263M in 5 years (10%) –Medicaid –Community Mental Health Corrections-$175M in 5 years (11%)

22. Citizens Research Council of Michigan 22 Percentages of General Fund Spending FY2001-FY2006 FY2001FY2006 Community Health27.332.9 Corrections16.319.8 Human Services12.712.0 Higher Education21.320.7 Other22.414.5 Totals100.0

23. Citizens Research Council of Michigan 23 Percentages of General Fund Spending FY2001-FY2006 Community Health and Corrections Now Claim 52.7 Percent of General Fund Spending Increased from 43.6 Percent in FY2001 Community Health and Corrections Now Claim 52.7 Percent of General Fund Spending Increased from 43.6 Percent in FY2001

24. Citizens Research Council of Michigan 24 State Revenue Sharing Revenue Sharing Allocations From State Sales Tax Constitutional—6 tenths of a penny— Distributed on Per Capita Basis Statutory—85 hundredths of a penny— Complicated Formula Distribution Statutory Payments Were Cut Beginning in FY2002 Money Stays in General Fund Revenue Sharing Allocations From State Sales Tax Constitutional—6 tenths of a penny— Distributed on Per Capita Basis Statutory—85 hundredths of a penny— Complicated Formula Distribution Statutory Payments Were Cut Beginning in FY2002 Money Stays in General Fund

25. Citizens Research Council of Michigan 25 Statutory Revenue Sharing The Other General Fund Revenue Cuts in Statutory Revenue Sharing Add Revenues to General Fund FY2007 Budget Uses $600 Million to Supplement General Fund Revenues 1000 Cities, Villages, Townships Will Receive no Statutory Payments Over Half of Remaining Statutory Payments ($405M) Go to Detroit ($215M) Total Revenue Sharing Payments Down $442M Since FY2001 Cuts in Statutory Revenue Sharing Add Revenues to General Fund FY2007 Budget Uses $600 Million to Supplement General Fund Revenues 1000 Cities, Villages, Townships Will Receive no Statutory Payments Over Half of Remaining Statutory Payments ($405M) Go to Detroit ($215M) Total Revenue Sharing Payments Down $442M Since FY2001

26. Citizens Research Council of Michigan 26 Beyond FY2007: The General Fund Structural Problem Continues Expenditure Causes – Medicaid – Corrections Revenue Causes – Antiquated Revenue Structure – Revenue Sources Unresponsive to Economic Growth Expenditure Causes – Medicaid – Corrections Revenue Causes – Antiquated Revenue Structure – Revenue Sources Unresponsive to Economic Growth

27. Citizens Research Council of Michigan 27 State Taxes as a Percent of Michigan Personal Income

28. Citizens Research Council of Michigan 28 The Headlee Revenue Limit FY1995—State Revenues at the Limit (9.49% of Personal Income) FY2007—State Revenues 18% Below the Limit (7.75% of Personal Income) Gap Equals $5.8 Billion FY1995—State Revenues at the Limit (9.49% of Personal Income) FY2007—State Revenues 18% Below the Limit (7.75% of Personal Income) Gap Equals $5.8 Billion

29. Citizens Research Council of Michigan 29 General Fund Budget Scenario Medicaid & Corrections Projections Growing Faster Than Revenues Other Areas of General Fund Spending Assumed to Increase at 3% per year Revenues Grow about 3% per year Major Revenue Sources w/No Growth —Retard Overall Growth Medicaid & Corrections Projections Growing Faster Than Revenues Other Areas of General Fund Spending Assumed to Increase at 3% per year Revenues Grow about 3% per year Major Revenue Sources w/No Growth —Retard Overall Growth

30. Citizens Research Council of Michigan 30 Combining Revenues and Spending Pressures State Will Have Balanced Budgets — Constitutionally Required Incremental Problem Each Year Will Exceed $300M (Over 3% of Spending Base) After FY2007 State Will Have Balanced Budgets — Constitutionally Required Incremental Problem Each Year Will Exceed $300M (Over 3% of Spending Base) After FY2007

31. Citizens Research Council of Michigan 31 General Fund Structural Deficit Projections

32. Citizens Research Council of Michigan 32 Balancing Budget by Cutting Spending Gap Will Grow to $1.5 Billion by 2011 Exceeds the Projected Size of “All Other” “All Other” Includes: Courts State Police Capital Outlay Legislature Governor’s Office Attorney General Treasury & 11 Other State Departments Gap Will Grow to $1.5 Billion by 2011 Exceeds the Projected Size of “All Other” “All Other” Includes: Courts State Police Capital Outlay Legislature Governor’s Office Attorney General Treasury & 11 Other State Departments

33. Citizens Research Council of Michigan 33 School Aid Structural Deficit Spending Pressures Outpace Revenue Growth Retirement Contributions Employee Health Insurance General Pay Raises Other—Fuel, Utilities, Supplies Revenues Growing Slowly Annual Structural Deficit Over 3% Retirement Contributions Employee Health Insurance General Pay Raises Other—Fuel, Utilities, Supplies Revenues Growing Slowly Annual Structural Deficit Over 3%

34. Citizens Research Council of Michigan 34 Examples of Structural Changes Spending Reduce Prison Populations Reduce Number of Higher Education Institutions Eliminate Selected Health Benefits/Eligibility Eliminate Remaining Aid to Local Government Revenues Sales Tax on Services Modify Personal Income Tax—Increase Exemption and Raise Rate Spending Reduce Prison Populations Reduce Number of Higher Education Institutions Eliminate Selected Health Benefits/Eligibility Eliminate Remaining Aid to Local Government Revenues Sales Tax on Services Modify Personal Income Tax—Increase Exemption and Raise Rate

35. Citizens Research Council of Michigan 35 Citizens Research Council of Michigan CRC Publications Available at www.crcmich.org Providing Independent, Nonpartisan Public Policy Research Since 1916 CRC Publications Available at www.crcmich.org Providing Independent, Nonpartisan Public Policy Research Since 1916