Post on 29-Dec-2015
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Michigan’s Budget Problem
Michigan’s Budget Problem
Prospects for the Future
July 2002
Citizens Research Council of Michigan
Prospects for the Future
July 2002
Citizens Research Council of Michigan
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BackgroundBackground
State’s Economy Has DeclinedState Revenue Performance Still Weak
(April Down 10%, May Down 3%, June Flat)Spending Reductions Small So Far —
Onetime Revenues Used to Fill GapsFuture Revenue Growth is Constrained —
Income Tax Cuts Will Absorb Significant Increment of Growth
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Effects of 1998 Tax CutsEffects of 1998 Tax 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
Recent Actions Contradict That Premise
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EconomyEconomy
National Slowdown — Relatively Mild (Probably No Recession)
National Economy Growing AgainState Recession — Mild by
Michigan StandardsCurrent Michigan Indicators
Mixed
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Revenue ProblemsRevenue Problems
Revenue Declines Started Late in 2000 and Have Continued to Date
Several Budget Adjustments Affecting 3 Years
Heavy Reliance on One-time Actions — Over $3 Billion in Three Years
Structural Deficits Have Evolved in the State’s Two Major Funds
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May Revenue ConsensusMay Revenue Consensus
Latest Bad NewsRevenue Forecasts Lowered AgainGeneral Fund Down $672 Million Over
Two YearsSchool Aid Fund Reduced $142 MillionFY2002 Balancing Actions Use One-
time Resources
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FY2003 Balancing ActionsFY2003 Balancing Actions
Legislature Had Great Difficulty Choosing Course
Permanent Revenues Became Final Piece of the Solution
Spending Cuts Minimal
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Postponing A Long-term SolutionPostponing A Long-term Solution
Gaps Between Ongoing Revenues & Spending
Spending for FY2002 Not Cut Significantly
FY 2002 Structural Gaps Moving Into FY2003
$933 Million — GF-GP$853 Million — School Aid Fund
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($1,200)
($1,000)
($800)
($600)
($400)
($200)
$0
$200
$400
$600
($ in
Mill
ion
s)
FY00 FY01 FY02 FY03 FY04
School Aid Fund
General Fund
General Fund & School Aid FundOperating GapsGeneral Fund & School Aid FundOperating Gaps
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Economic Outlook AssumptionsEconomic Outlook Assumptions
Moderate Economic Recovery — Has Already Started Nationally
Moderate Economic Growth in Michigan Assumed to Begin in Summer
Economy Back on Track by End of Year
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FY2003 General Fund Revenue Outlook---May ConsensusFY2003 General Fund Revenue Outlook---May Consensus
Net Year-to Year Revenue Reduction — $2 Million
Spending Needs Exceeded Revenues by $1,288 Million
Revenues $1.4 Billion Lower (15%) Than FY2000
$270 Million Lower than FY1996
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Original Budget Proposal: Original Budget Proposal:
Permanent Spending Cuts $308 Million — Only $145 Million Cut State Programs
One-time Resources — $660 MillionRainy Day Fund — $207 MillionTobacco Settlement Revenue-$100 MillionSpecial Medicaid Revenue — $247 MillionEmployment Trust Fund — $80 Million
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Time to Cut Spending?Time to Cut Spending?
Legislature Presented Choices—More Revenue or Cut Spending
Sacred Cattle Identified
Legislature Chose to Enhance Revenues
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Revenue Enhancements Are ApprovedRevenue Enhancements Are Approved
Cigarette Tax—50 cent Increase 20 cents for School Aid 30 cents for Other Programs
General Fund Receives 22 cents
Total Revenue Increase $292 Million in FY2003
SBT Cuts Suspended — $69 Million in FY2003
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General Fund ArithmeticGeneral Fund Arithmetic
FY02 FY03Projected Appropriations $9,307 $9,235One-time Spending Adjustments 83 247Adjusted Spending 9,390 9,482 Revenues 8,406 8,402Cigarette and SBT Revenues 41 209One-time Revenues 498 413 Structural Gap ($892) ($771)
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FY2003 School Aid FY2003 School Aid
Net Revenue Growth $400 Million ($501 Million with Cigarette Tax Increase)
FY2002 Carryover Gap $841 MillionIncrease in Foundation Allowance to
$6,700
How is it Financed?
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More One-time RevenuesMore One-time Revenues
Rainy Day Fund--$350 Million (In FY2002)Advance the Due Date for State
Education (Property) Tax and Cut the Rate From 6 to 5 Mills for 2003 Only — $494 Million
Total One-time Actions — $844 MillionSmall Surplus at End of FY2003School Aid Spared Any Cuts in Latest
Budget Adjustments
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The School Aid ArithmeticThe School Aid Arithmetic
FY02 FY03FY 02 Spending Base $11,458 $11,458$6,700 Basic Allowance 337Other Adjustments (39) (114)Total Spending 11,420 11,681Revenues 10,134 10,534Cigarette Tax Increase 12 103Tax Date Shift 494Fund Balance 695 192 Rainy Day Fund 350 Other 433 465 Total Resources $11,624 $11,788 Structural Gap ($841) ($579)
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Looking Beyond FY2003Looking Beyond FY2003
Both Major State Funds Have Very Large Operating Deficits
Budget Must be Balanced (Michigan Constitution)
Expenditures Must Eventually Be Balanced with Base Revenues
State is Nearly Out of One-time Actions
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FY2004 School Aid OutlookFY2004 School Aid Outlook
Fund Balance Will Carry Over To FY2004 ($107M)
Revenue Growth Will Likely Be In Range of $475 Million to $600 Million
Probably Enough Growth to Close Gap ($579M)Significant Year-to-Year Spending Increases in
FY2004 UnlikelyBudget Difficulties in Local School Districts will
Exceed Those Reported in Recent MonthsSpending Can Grow After FY2004
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General Fund Longer Term Projections ScenarioGeneral Fund Longer Term Projections Scenario
Revenues and Spending Out to FY2009Steady Revenue Growth Assumed (4.5%)Income Tax Cuts in State Law Occur on
Schedule“Normal” Spending Increases for InflationOne-time Revenues Factored Out Large Increases in Medicaid Factored In
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Medicaid Problems LoomingMedicaid Problems Looming
FY 2002 and FY2003 Short $100 to $150 Million in State Funds
Temporary Revenues Used to Avoid CutsReplacement Revenues NeededFederal Limits on Medicaid Special
Financing Adds $375 Million to State Funding Requirements over Three Years
Medicaid Reimbursement Rates to Service Providers Under Pressure
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General Fund OutlookGeneral Fund Outlook
Revenue Growth Not Enough to Catch Up With Current Spending
Increases in FY2004 and FY2005 Constrained By Income Tax Cuts and Federal Tax Reform
Under Current Law, Revenues Will Not Grow To FY2002 Spending Level Until FY2006
Budget Problem in FY2004 Exceeds $1 Billion Even After Cigarette Tax Hike and SBT Cut Pause
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The Overall General Fund ResultThe Overall General Fund Result
Gap of $1 Billion For FY2004Gap Widens as Federal Medicaid
Funding DeclinesReaches $1.2 Billion in FY2006Gap Starts to Decline Slowly
After FY2006
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Time to DecideTime to Decide
Solve the Policy Contradiction Spending Policy Has Been Validated By
Use of One-time ResourcesShortfall in Permanent Revenue Lays
Future of Programs Open to QuestionWhich Direction Will the State Choose?Does Recent Action Indicate the Future
Course?
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Approaches to Balancing Budget in FY2004 and BeyondApproaches to Balancing Budget in FY2004 and Beyond
Cut Spending Raise More RevenueCombination of Both ApproachesMust Find $1 Billion in Total
Revenues or Spending ReductionsOver 10% of Spending Base
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Cutting SpendingCutting Spending
80% of General Fund in Four Areas:Higher Education ($2.1B)Community Health — Mental Health,
Public Health, Medicaid ($2.7B)Corrections ($1.6B)FIA — Family Services, Juvenile
Justice, Public Assistance ($1.2B)
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The Remaining 20 PercentThe Remaining 20 Percent
Other Areas Include:State PoliceJudiciaryEnvironmental QualityNatural ResourcesAttorney General
Revenue Sharing at Risk — An Indirect Way to Increase GF-GP Revenues
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Balancing by Cutting SpendingBalancing by Cutting Spending
Across-the-board Reductions Not An Option
Fundamental Changes in Priorities Would Be Needed — Such As: Who Pays For Higher Education? Optional Medicaid Services Prison Sentencing and Prison
Populations
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Higher EducationHigher Education
State Pays Half of University Operating Costs (One third of Community Colleges)
Across-the-board Share Of Reductions Implies Over 20% University Tuition Increases
Higher Education Could be a Tempting Place to Cut—Larger Reductions Might be Made
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Medicaid--State’s Options Are Limited--Federal RequirementsMedicaid--State’s Options Are Limited--Federal Requirements
Two Largest Optional Services: Pharmaceuticals Nursing Home Care
Comprise About 40% of Medical Services Spending
Reducing Either Program Would Have Serious Consequences
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Other Community Health ProgramsOther Community Health Programs
Community Mental Health (Nearly $1 Billion)
Mental Health InstitutionsSubstance Abuse Prevention &
TreatmentWomen, Infant, and Children Food
and Nutrition ProgramsPrograms for the Aging
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CorrectionsCorrections
Most of Budget Spent Housing Prisoners
Use of Less-costly Options Would Require Reductions in Length of Sentence and/or Length of Stay in Prison
Current Policies Imply Larger Prison Populations in Next Several Years
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Family Independence AgencyFamily Independence Agency
Maximum Grant for Family of Three ($459 per month) is 37% of Poverty Level
Food Stamps Raise Support to 60% of Poverty Level
Caseloads Now One-third of 1994 Level Juvenile Justice ProgramsFoster Care, Adoption, Domestic Violence
ProgramsDay Care for Working Public Assistance
Recipients
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Local Government at RiskLocal Government at Risk
State Revenue Sharing—Statutory Payments Already Cut by 13 Percent
Cuts are Likely to be PermanentMore Reductions Could Occur$868 Million Remains of Statutory
Allocations
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Local GovernmentLocal Government
Community Mental Health — Nearly $1 billion in State funds
Transportation—Funds Already Diverted to help General Fund—Revenues not Responsive to Economic Growth
Libraries ($20M)Local Health Departments ($41M),
Other Health Grants ($27M)
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Other Programs At Risk Other Programs At Risk
Programs for the Aging ($26M)Payments in Lieu of Taxes ($18M)Local Corrections Programs ($82M)Secondary Road Patrol Grants
($13M)Arts Grants ($22M)
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Is Increasing Revenue an Option?Is Increasing Revenue an Option?
Cigarette Tax and Pausing SBT Tax Cut Provide Resources That Will Build in Future — The First “Permanent” Revenue Increase Used to Balance Budget
Redirect Tobacco Settlement Revenues — Might Redirect $150 Million Annually — Ballot Proposal Could Render Moot
Delay or Suspend Individual Income Tax Cuts
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Delaying/Suspending Income Tax CutsDelaying/Suspending Income Tax Cuts
If Cuts For January 2003 and Beyond are Delayed — Cumulative Effects — For Each Fiscal Year
FY2003 $144 MillionFY2004 $352MillionFY2005 $421 MillionFY2006 $440 MillionFY2007 $460 Million
Not Enough to Close Gap
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Who Will Solve the Problem?Who Will Solve the Problem?
New GovernorNew Legislature — Majority of
Legislators May be NewMost Leadership and Experience
With Budget Problem of Current Magnitude Will Be Gone
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Most Difficult Budget Situation in 40 Years?Most Difficult Budget Situation in 40 Years?
What Makes it Different?Not Economy—Recession Mild by Michigan
StandardsExpenditure Commitments and Tax Cuts Made
When Economy at Peak of Business CycleOver $1 Billion in General Fund Tax Cuts
Already Over-reliance on Temporary Revenue Sources General Fund Revenue Growth Was Committed
to Future Tax Cuts
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Citizens Research Council of Michigan
Citizens Research Council of Michigan
www.crcmich.org
www.crcmich.org