Michigan Economic and State Budget Update and Outlook

1. Michigan Economic and State Budget Update and Outlook Presented to School Community Health Alliance November 13, 2009 Ann Arbor

2. 2 Citizens Research Council Founded in 1916 Statewide Non-partisan Private not-for-profit Promotes sound policy for state and local governments through factual research � accurate, independent and objective Relies on charitable contributions of Michigan foundations, businesses, and individuals www.crcmich.org

3. 3 What is the State of the Economy? U.S. recession probably ended over the summer, but employment growth still several months off Michigan employment growth will trail U.S., but we could see growth towards the end of next year Recovery is tenuous and we could easily slip back into recession It could have been worse, we did not enter a depression, and Ford, GM, and Chrysler are still here

4. 4 Recession Over?

5. 5 Employment Declines Were MassiveBut Are Abating

6. 6 Michigan Employment DeclinesAre Also Abating

7. Michigan Has Now Lost 1 in 6 Jobs(with 35% of loss in last 12 months)

8. Consensus Forecast � Michigan Loses 1 Million Jobs

9. 3 in 4 Auto Jobs Lost by 2010

10. 10 Michigan Personal Income Falling Relative to U.S.

11. 11 The Budget Story Has Not Changed . . The State of Michigan has dual structural deficits affecting: -Public K-12 education -General Fund financed programs Its causes have both spending and revenue components We will not grow out of it Significant spending cuts and/or tax increases will be required

12. 12 But There is a New Chapter National recession � severe Consumption Business spending Homebuilding Michigan unprepared to deal with current recession on its own Exhausted reserves Tax increases of 2007 Must correct for two problems simultaneously Structural deficits Cyclical deficits Each problem requires specific set of tools

13. 13 Michigan�s Budget ProblemsFY2001 to FY2007 7 years of spending cuts Major tax cuts since late 1990s Anemic revenue growth $8 billion in one-time resources used including reserves Cash position improved with 2007 tax increases, but still very tenuous Weakened connection between revenue structure and the economy Spending pressures growing faster than revenues � structural not cyclical

14. 14 Michigan�s Discretionary BudgetGF-GP at 1965 Level

15. 15 First Two-Year DeclineSAF provides Two-Thirds of K-12 Revenue

16. 16 Persistent DeficitsMichigan�s Structural Deficit Problem

17. 17 May Revenue RevisionsSeverity of Recession Apparent

18. 18 Achieving Budget BalanceFY2009 GF-GP Solutions One-quarter (~$300 M): spending reductions Employee layoffs and furloughs Medicaid reimbursement rate reduction/eliminate optional services Cut revenue sharing to locals Some areas protected per ARRA Three-quarters (~$900 M): federal recovery funding (ARRA) $300M completely discretionary Remainder from Medicaid match rate increase - states have a significant amount of flexibility

19. 19 FY2009 Budgets �Balanced�Heavy Reliance on Non-Recurring Actions

20. 20 Where Things Stand TodayFY2010 Budget Update State operated under a temporary, one-month budget for October Met balanced budget requirement Enacted only after start of fiscal year Did not include funding for schools Full-year budget enacted by Oct. 31 deadline � avoiding �shutdown� Largely a �legislative� product, with little input from the Governor

21. 21 What the Deficit Looked Like?$1.8B Hole Identified

22. 22 FY2010 GF-GP Budget SolutionsSpending Cuts and Stimulus Rule the Day

23. 23 Spending Cuts Widespread Medicaid provider rates Assistance to local governments Scholarships to university students State employee concessions/layoffs Average of -8.4% cut (GF-GP) across all state departments Some larger than others Some protected from cuts per ARRA

24. 24 What the Deficit Looked Like?$1B Hole Identified

25. 25 FY2010 SAF Budget SolutionsMix of Cuts, Stimulus, and Revenue

26. 26 Governor�s ActionsPrompted by Concern About Revenue Veto � Sec. 20j (hold harmless) $52M - $119 per pupil to $324 per pupil Proposed proration $127 per pupil reduction Clock is ticking on legislative response Some districts face cut of $616 per pupil (8%)

27. 27 Is That the Last Word?Adjustments to FY2010 Budget No. Concerns over revenue performance since May. January revenue conference � revisit. Revenue performance will depend on timing of national and Michigan recovery. Further adjustments may be in works.

28. 28 Very Early Look AheadFunding �Cliff� Appears in FY2011 A number of issues to resolve: FY2010 cuts carried into FY2011? State revenue growth in FY2011? What will legislature do on tax policy front? Federal stimulus funding nearly exhausted, replacement revenue? GF-GP - $413M (reduction from $1.2B) SAF - $307M (reduction from $450M) Remember: 2010 is an election year

29. 29 FY2011: One ScenarioGeneral Fund Budget Faces $800M Hole

30. 30 School Aid Structural DeficitSpending Pressures Outpace Revenue Growth Retirement Contributions�rapid growth Employee Health Insurance�rapid growth General Pay Raises Other�Fuel, Utilities, Supplies Revenues Growing Slowly

31. 31 Retirement Funding School districts make contributions for employees � advance funded School districts also pay for retiree health care � cash funded Rate for FY2009 is 16.54% of payrolls Contribution rate composed of two parts -Regular pension benefit (9.73%) -Health care benefits (6.81%) Both parts will continue to increase in the future Pension because of market in 2008 Health because of increase in retirees and cost of health care

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33. 33 How does this translate at the classroom level? Ave. per pupil revenue growth of 4.4% or $570 Spending pressures and �requirements� of 6.1%: Salaries - $350 Retirement - $110 Group insurances (health) - $250 Other (fuel, utilities, etc.) - $130 Structural deficit of $270 per pupil

34. 34 School Aid Revenues & Spending Pressures Spending pressures grow 4.7% per year Revenues (state and local) grow 3% per year Shortfall of 1.7 percentage points each and every year without spending and revenue policy changes By FY17, revenues will cover only 86% of spending

35. 35 School Aid Structural Deficit ProjectionsFY2009 � FY2017

36. 36 Declining Enrollments

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38. 38 Policy Options Achieving Long-Term Structural Balance Increase revenue growth Reduce rate of spending pressure growth Bend the two curves so they meet

39. 39 Revenues Change system so revenues grow in line with economy and personal income Consider taxing services broadly Modify personal income tax by changing rate and exemptions�or�implement graduated income tax (Constitutional amendment required) Reduce reliance on �sin� taxes Consider taxing pensions and other retirement income (area of greatest income growth in future)

40. 40 Tax Scenario Expanding Sales and Use Taxes Exempt business-to-business Reducing rate to 3.6% (neutral) Adds about 0.8% to growth rate Graduated Income Tax Revenue-neutral starting point Nearly doubles growth rate Combined effects Adds 0.8% to School Aid Fund growth Adds 1.5% to General Fund growth Still work to do � spending solutions

41. 41 Spending Scenario Health care � employees and retiree Holding health care cost increases to 5% per year Reduces General Fund annual spending pressure growth by 1.6% Reduces School Aid annual spending pressure growth by 1.1%

42. 42 Questions? CRC Publications available at www.crcmich.org Providing Independent, Nonpartisan Public Policy Research Since 1916