1. 1 State Budget Overview Michigan’s Ongoing Budget Crisis January 2004 Tom Clay, Senior Research Associate Citizens Research Council of Michigan www.crcmich.org January 2004 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 Worst State Budget Crisis Since World War II Revenue Structures 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 285,000 Jobs Lost in Three Years Manufacturing Employment Down 174,000 19% Fewer Manufacturing Jobs 61% of Job Losses in Manufacturing

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, FY2004, and FY2005 Below FY1995 Ten Years of Higher Costs and Increased Needs Go Unfunded Some Programs Crowding Out Others School Aid Revenues Up $3.7 Billion Over Same Period (49%)

14. 14 Four Years of Revenue and Expenditure Changes The General FundPercent FY00FY04Change Ongoing Revenues$9,853$8,075($1,869)(19.0) Expenditures9,4058,820(592)(6.3) Operating Gap$448($830)($1,278) The School Aid FundPercent FY00FY04Change Ongoing Revenues$10,479$11,080$6015.7 Expenditures10,07011,2741,20412.0 Operating Gap$410($194)($603)

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 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

23. 23 Implications of Revenue Revisions Entire Reduction Fell on FY04 FY04 General Fund Gap $489 Million FY04 School Aid Gap $269 Million School Aid Problem Equated to About $170 Per Pupil

24. 24 Balancing FY2004 Again Income Tax Cut Delayed General Fund -Executive Order Spending Cuts ($285 Million) -Revenue Enhancements ($72 Million) -One-time Adjustments ($132 Million) School Aid -Share Income Tax Cut Delay ($46 Million) -Laptops and Lapsed Appropriations ($43 Million) -Pro-rata Reductions ($131 Million)---$74 per pupil -Other Revenue Adjustments ($49 Million)

25. 25 Aftermath of Budget Adjustments General Fund Has Experienced $2.4 Billion in Budget Adjustments In FY2004 School Aid Budget Adjustments Total About $700 Million In FY2004 School Aid Spending Down on Year-to Year Basis For First Time Since Proposal A (about $80 Million)

26. 26 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 (December 03) 86M $213M FY03 Cuts Maintained 84M Two-Year Cuts Equal 14% $297M

27. 27 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%)

28. 28 State Government Employment Trends

29. 29 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

30. 30 Revenue Sharing Payments Fiscal Years ’93 through ‘04

31. 31 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 in Place

32. 32 New Revenue Forecasts January Consensus Agreement FY04 Revenues Unchanged from October Consensus FY05 Economic Forecast Produces 4% Percent Revenue Growth Most of Growth Need to Replace FY04 One-time Revenues

33. 33 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 Revenue Collections Not Yet Showing Improvement

34. 34

35. 35 FY2005 Outlook General Fund Revenues ($ in millions) FY2004 Estimated Revenue$7,858 Base Economic Growth324(4%) Continue Prior Revenue Sharing Reductions290 Enhanced Tax Enforcement71 Bad Driver Fees and Driver License Fees156 Merit Scholarship Accounting Change63 Cigarette Tax from Rainy Day Fund154 Income Tax Rate Reductions(227) Estate Tax Reduction (Federal Law Change)(45) Other Adjustments(87) Net Available Revenues$8,557 Projected FY2004 Appropriations8,813 Revenue Gap($256)

36. 36 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--HMO Actuarial Soundness(100) Medicaid--Special Financing Revenue Loss(135) Medicaid Cost Increases(80) Corrections Population Increases(60) Total($673)

37. 37 Fiscal Year 2005 General Fund—The Overall Picture Revenue Gap $256M Expenditure Demands/Problems 673M $929M

38. 38 How Will Balance Be Achieved? Past Actions Suggest: No Tax Increases Health Care and Services for Poor Protected Changes in Corrections Policy to Reduce Prison Populations Elimination of Some Small State Programs and Grants Very Large Cuts for Higher Education and Revenue Sharing for Local Government

39. 39 The Ongoing General Fund Structural Problem Pressures On Health Care and Corrections Spending Likely to Outpace Revenue Growth in Future Only Fundamental Structural Changes Will Solve the Problem -Revenue Structure—Antiquated Tax Structure -Medicaid Responsibilities---Federal/State -Corrections Policies

40. 40 FY2005 Outlook School Aid ($ in millions) FY2004 Revenues$10,584 Base Economic Growth423(4%) Enhanced Tax Enforcement28 Other Adjustments(8) FY2004 General Fund Grant W/O Tax Cut Pause282 Federal Revenue1,317 Net Available Revenues$12,626 FY2004 Appropriations After Reductions12,391 Potential Spending Change$235 Difference From Original FY04 Appropriations40

41. 41 FY2005 School Aid Outlook Revenues Approximately Equal to Original FY2004 Appropriations Before Cuts Increased Retirement Contribution Percentage Almost Certain Health Insurance Costs Will Continue to Spiral Another Year of Austerity and Retrenchment

42. 42 Citizens Research Council of Michigan www.crcmich.org