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Michigan’s Budget Crisis and the Outlook for School Funding

Michigan’s Budget Crisis and the Outlook for School Funding. Lenawee ISD September 14, 2006 Adrian Tom Clay, Director of State Affairs Citizens Research Council of Michigan www.crcmich.org. Citizens Research Council of Michigan. Founded in 1916 Statewide Non-partisan

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Michigan’s Budget Crisis and the Outlook for School Funding

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  1. Michigan’s Budget Crisis and the Outlook for School Funding Lenawee ISD September 14, 2006 Adrian Tom Clay, Director of State Affairs Citizens Research Council of Michigan www.crcmich.org

  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. 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

  4. The Michigan BudgetFY2006 Appropriations • 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

  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

  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

  7. Budget Deficit Pressures • Both funds outspending “Regular Revenues” • Operating deficits for 6 straight years • Significant one-time resources used • $6.8 Billion

  8. General Fund & School Aid Operating Deficits

  9. Summary of One-Time ResourcesFY2001-FY2006(in Millions)

  10. 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

  11. How Weak is the Economy? Michigan’s Recent Statistics: • 49th in Personal Income Growth • 47th in Unemployment Rate • 49th in Employment Growth (Decline for Michigan) • 49th in Index of Economic Momentum (Population, Personal Income, Employment) Economy in Early 1980s Much Worse

  12. Big 3 Losing Market Share Source: Automotive News.

  13. Lost 1 in 4 Manufacturing Jobs Michigan Manufacturing Employment Jul 1999 908,200 March 2006 664,500 Jan 1992 775,900 Source: U.S. Department of Labor, Bureau of Labor Statistics.

  14. Perspective On Revenues • General Fund revenues in FY03, FY04, & FY05 below FY1995 • Inflation-Adjusted General Fund Revenues below 1972 level • General Fund revenue problems adversely affecting School Aid allocations

  15. General Fund Revenues

  16. General Fund BudgetFY2007 • 86% of General Fund spending in 4 areas: • Higher Education ($1.9B) • Community Health—Mental Health, Public Health, Medicaid ($2.9B) • Corrections ($1.8B) • Human Services—Family Services, Juvenile Justice, Public Assistance ($1.2B) • All Other General Fund Programs—$1.3B

  17. 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

  18. 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%)

  19. States With More Than 500 Prisoners Per 100,000 Residents

  20. Percentages of General Fund SpendingFY2001-FY2007

  21. Community Health and Corrections now claim 52.1 percent of General Fund spending • Increased from 43.6 Percent in FY2001

  22. Beyond FY2007: The General Fund Structural Problem Continues • Expenditure Causes • Medicaid • Corrections • Revenue Causes • Antiquated revenue structure • Revenue sources unresponsive to economic growth

  23. Medicaid • Projected spending pressures exceed General Fund revenue growth • Significant State revenue sources will not grow—e.g. Tobacco Revenues • General Fund requirements grow at 150% of Total Spending growth • Near-term General Fund increases at 12% - 3 to 4 times as fast as revenues

  24. Corrections • Crime rates falling but prison population pressures continue to increase • Populations projected to increase 1,000/ year until 2010 (if current policies continue) • Annual cost increases about $80M • Annual increases about 6%—Twice as fast as revenues will grow

  25. Structural Revenue Issues • Revenue system reflects economy of the 50s, 60s, and 70s • Revenues grow more slowly than economy • Consumption taxes goods-oriented • Relatively few services are taxed • Services are over half of private sector economic activity

  26. General Fund Budget Scenario • Medicaid & Corrections projections growing faster than revenues • Other areas of general fund spending assumed to increase at 3%/year • Revenues grow about 3%/year • Major revenue sources with no growth —Retard overall growth

  27. 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

  28. Current Issues • Business Taxes • Health Care cost pressures throughout the budget -Health Insurance—school and state • Employees -Health Care for retirees -Medicaid • Low Taxes vs. Quality of Life

  29. Single Business Tax Eliminated(Effective December 31, 2007) • Law change initiated by petition • Primary Advocate: L. Brooks Patterson—Oakland County Executive • Legislature enacted the law • Impervious to gubernatorial veto • SBT is gone and with it $1.9 billion of General Fund revenue (22%)

  30. The Remaining Business • What will replace the revenues? • New taxes on business? • New taxes on individuals? • Full or partial replacement • Revenue neutrality implies winners and losers • Nearly 30% of businesses pay no SBT (41,000)—45% below $1000 in liability • Potential for plenty of losers

  31. What Role Will Spending Cuts Play? • 86% of General Fund spending in 4 areas: • Higher Education ($1.9B) • Community Health—Mental Health, Public Health, Medicaid ($2.9B) • Corrections ($1.8B) • Human Services—Family Services, Juvenile Justice, Public Assistance ($1.2B) • All Other General Fund Programs—$1.3B • Will School Aid be affected?

  32. Taxes Not Only Concern of Business Others Include • Skilled Workforce • Energy Costs • Legacy Costs—Pensions and Retiree Health Care • Health Insurance for Working Employees • Workers’ Compensation • Infrastructure • Quality Public Services

  33. FY2007 Economic Forecast

  34. School Aid • Outlook for 2007 • Structural Deficit beyond 2007

  35. School Aid Fund • Revenues earmarked exclusively for public schools • FY2007 forecast $13.0 billion • Slow growth in revenues since FY2003 • Main Sources of Revenue: • Sale and Use Taxes- $5.6 Billion (43%) • Income Tax- $2.1 Billion (16%) • State Education Property Tax- $2.1 Billion (16%) • Other Revenues Include Lottery, Cigarette, Federal

  36. School Aid Fund Revenues

  37. General Fund Revenues

  38. State-Local School Finance Relationship • Amounts of total revenue for each district determined by the State pursuant to State law and appropriations • School Aid revenues and total local operating property taxes determine the amount the State can “Afford” • Local school operating property taxes subtracted from the total to determine State payments to district • School Districts cannot levy operating taxes • Districts pay retirement contributions as a flat percentage of payrolls

  39. FY2007 School Aid • State Revenue Increase- $353 Million (3.2%) • Federal Funds Up- $20M • General Fund Grant Cut $28M • One time revenues from FY2006 not available- $48M • FY2006 Surplus used- $93M • Total Spending increase $393M (3.1%)

  40. School Aid Spending Increases • Foundation Allowance increase ($210/student)- $168M • Special Education- $73M • Equity Payment- $20M • Engineering Michigan’s Future- $20M • Great Start- $10M • School Lunch Program- $16M (Federal) • ISDs ($2.4M) and Adult Education ($3M)-$5.4M

  41. Spending Shifts to School Aid Budget $63.4 Million (16% of Total Increase) • Cash Flow borrowing costs- $22.8M • MEAP Tests costs- $19.5M • School Breakfasts- $9.6M • Hearing and Vision Screening- $5.2M • DHS Juvenile Facilities Education expenses--$3M • Other- $3.3M

  42. General Fund Spending Pressures Spill Over to School Aid • General Fund support down $357 million since FY2000 • FY2007 reduces grant to “Irreducible Minimum” • Shifts of spending to School Aid Fund in FY2007 Appropriations- $63 Million • Total Effect- $420 million ($250 per pupil) • Will Higher Education be next?

  43. FY2007 Spending Pressures • Retirement—Increases 16.34% to 17.74% —about $80 per pupil on average • Employee Health Insurance averages about $1200 per student likely will rise by more than $50 per student • Pay and Step Raises cost nearly $60 per student on average—4% = $240 per student • Other—Fuel, Utilities, Supplies—$50 per student • Total could exceed $400 per student • Not enough growth in total School Aid resources ($230) to cover all cost pressures

  44. Proposal 2006-05:Educational Funding Guarantee Law “The K-16 Proposal” • Proposed initiated law • Not subject to veto by governor • Requires vote of people or 3/4 of each house to amend • Amends State School Aid Act (PA 94 of 1979) – appropriations and policy

  45. Summary of Proposal • Funding guarantees for Universities, Community Colleges, and K-12 • Reduces per pupil funding gap from $1,300 to $1,000 by FY12 • Caps employer contribution at 80% of Total Contribution percentage or 14.87% of Payroll, whichever is less, with the State picking up the difference

  46. Education Funding GuaranteesFY2007 • Base funding increase – “catch up” provision $180 million to $322 Million • Retroactive Retirement Cap--$385 million • Immediate $565+ Hole in the General Fund Budget • Cover with Budget Cuts? Other General Fund Programs Revenue Sharing • Budget Base $7.7 billion • $565 million = 10% for 9 months

  47. Annual Spending Guarantee FY2007 and After • Increase by rate of inflation • No More—No Less • In Good and Bad Economies • Loophole??—”.....appropriated under this act” • Cuts in non-education programs would occur in recession • Revenue growth in good times probably enough to prevent crowding out non-education programs

  48. Retirement Funding Guarantee • FY07 rate is 17.74% of payroll • Employer share: 14.19% of payroll • State share: 3.55% of payroll • FY08 rate (projected) would result in employer share capped at 14.87% • FY07 state costs: $385 million • FY13 state costs: $1 billion • State responsible for entire annual marginal cost associated with rate change

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