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Transcript of 1 Michigan Economic and Budget Outlook Robert Kleine State Treasurer Bloomfield Hills School...
1
Michigan Economic and Budget Outlook
Robert KleineState Treasurer
Bloomfield Hills School DistrictApril 19, 2011
2
Summary
U.S economy doing better than expected 10-year recession in Michigan is over Michigan has revenue problem not spending problem State revenues running well above projections Required spending cuts could do more damage than tax
increases Business tax cuts not likely to create many new jobs Schools districts expected to cut costs and deliver better
results Local govts. facing fiscal crisis- rev. sharing cuts will push
many over edge
4
Six Quarters in a Row of GDP Growth Observed
-1.3%
2.7%
-1.1%
1.4%
3.5%
2.1%2.0%
0.1%
1.6%
3.2%
6.9%
3.6%2.9%2.9%3.0%
3.5%4.1%
1.7%
3.1%2.1%
5.4%
1.4%0.1%
3.0%
0.9%
3.2%2.3%
2.9%
-0.7%
0.6%
-4.0%
-6.8%
-4.9%
-0.7%
1.6%
5.0%
3.7%
1.7%2.6%
3.2%2.8%3.0%3.5%3.6%
2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1
Figures are annualized percent change from preceding quarter in 2005 chained dollars. Source: Bureau of Economic Analysis. Forecast quarters in red are the September 2010 Global Insight forecast.
3.0%Growth
Real GDP Growth
5
ISM Indices Show Expansion
30
35
40
45
50
55
60
65
Source: Institute for Supply Management.
ISMManufacturing Index
May 2011= 53.5
ISMNon-Manufacturing Index
june 2011 = 53.3
6
U.S. Has Gained Nearly 1.5 Million Jobs Since February 2010
12784
13
-83-72
-185-233
-178-231
-267
-434-509
-802
-619
-820
-726-796
-660
-386
-502
-300-231-236-221
-55-130
-39-35
192277
458
-192
-49-59-29
17193
15268
235194
232
54
Nov 07 Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 11-May
Source: U.S. Bureau of Labor Statistics, U.S. Department of Labor; 4/1/2011
U.S. Retail Sales, % change, year-ago month, 2007-2010
-12.0%-10.0%-8.0%-6.0%-4.0%-2.0%0.0%2.0%4.0%6.0%8.0%
10.0%
7
8
$0
$500
$1,000
$1,500
$2,000
1980Q1 1985Q1 1990Q1 1995Q1 2000Q1 2005Q1 2010Q1
(Bil
lion
s of
Dol
lars
)
Source: Bureau of Economic Analysis
Corporate Profits Up Sharply in 2009 and 2010
2010 Q4: $1678.3
Key Economic Concerns
Rising oil prices Slow recovery of housing market Deep cuts in government spending Continued high unemployment Slow growth in incomes of middle class
9
Higher Income Groups Capture Most Income Gains
10
Average After-Tax Income by Income Group1979-2007 (in 2007 dollars)
Percent DollarChange Change
Income Category 1979 2007 1979-2007 1979-2007
Lowest fifth $15,300 $17,700 16% $2,400Second fifth $31,000 $38,000 23% $7,000Middle fifth $44,100 $55,300 25% $11,200Fourth fifth $57,700 $77,700 35% $20,000Top fifth $101,700 $198,300 95% $96,600
Top 1 Percent $346,600 $1,319,700 281% $973,100
Income Inequality
Louis Brandeis: "We can either have democracy in this country or we can have great wealth concentrated in the hands of a few, but we can't have both."
13
Michigan’s 10-year recession Comes to an End
Michigan Wage and Salary Employment Year-Over-Year Change(In Thousands)
Note: Bureau of Labor Statistics. 2009-2011 estimates are from the May 2010 Consensus Forecast.
Avg.
Cons. Forecast
14
Michigan’s Recent Job Gains Have Been Strong
Source: RSQE, Michigan Forecast April 2010, and Bureau of Labor Statistics.
Dec 2008 - Mar 2010- Sept 2010-June 2009 Mar 2011 Mar 2011
Wage and Salary Employment -216.7 89.0 97.1 Manufacturing -104.9 38.4 29.1 Private nonmanufacturing -114.1 66.3 77.0 Government 2.3 -15.7 -9.0
Michigan Unemployment Rate, Monthly, 2008-2011
10.4%
0.0%2.0%4.0%6.0%8.0%10.0%12.0%14.0%16.0%
2008 2009 2010 2011
Unemployment Rate
15
18
Michigan Vehicle Employment
Transportation Equipment Employment Increases(Thousands)
Source: Bureau of Labor Statistics.
19
Michigan Payroll Employment and Vehicle Production
-60.0%
-40.0%
-20.0%
0.0%
20.0%
40.0%
60.0%
80.0%
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Ve
hic
le P
rod
uc
tio
n
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
Em
plo
ym
en
t G
row
th
6 Month Vehicle Prod 6 Month Payroll
Source: Bureau of Labor Statistics & Michigan Department of Treasury
6 Month Moving Average – Year over Year Percent Change
21
Michigan Cut Taxes Significantly from 1995 to 2005
FY Tax Cuts in Millions
Source: Michigan Department of Treasury; does not include Proposal A property tax cut
IIT Rate Increase & MBT Surcharge
22
Michigan Taxes Decline as a Percent of Personal Income
Michigan State Tax Revenue as a Percent of Personal Income
Note: FY 2010 tax estimate based on May 2010 Consensus.FY 2010 personal income based on ORTA and consensus estimates May 2010.
23
FY ‘10 GF-GP Revenue at FY ‘88 LevelDown 32% Since 2000
2010$6.7B
1988$6.7B
Billions of Dollars
Note: GF-GP figures are presented on a Consensus basis. 2010 estimated.
2000$9.8B
24
FY ’10 Inflation AdjustedGF-GP Lowest Since 1965
2010$6.7B
1965$6.5B
1999$14.3B
Note: GF-GP figures are presented on a Consensus basis and adjusted for inflation to 2010 dollars usingthe state and local government price deflator. FY 2010 is the May 2010 Consensus estimate.
Billions of 2010$
25
School Aid RevenuesFY 2010 Total Earmarked Resources: $10.7 Billion
Almost half of the School Aid revenues come from the Sales and Use Tax.
Source: May 2010 Consensus
26
SAF Revenues Growin FY 2011 and FY 2012
SAF RevenuesYear-Over-Year Pct. Change
Source: May 2010 Consensus Conference.
28
FY ’11 Inflation Adjusted SAF Lowest Since Proposal A Adopted
2011$10.8B
1995$11.6B
Note: SAF figures are presented on a Consensus basis and adjusted for inflation to 2011 dollars usingthe state and local government price deflator. FY 2010 & FY 2011 are the May 2010 Consensus estimates.
Billions of 2011$
Consensus Est.
30
Total State SpendingFY 2011 Total Spending: $47.1 Billion
Source: OBDGG, CM, 3/10/10
Over 75% of total budget devoted to health, human services and education spending.
FY 2012 GF/GP Budget Recommendation(Millions of $)
GF/GP Revenue $8,197
Current Services Spending $9,608
Projected Funding Gap -$1,411
Proposals to Close Funding Gap
Tax Reform & Revenue Adjust. $849
Spending Reductions $659
Structural Reforms $324
Investments -$260
Total $1,571
Proj. Year-end Balance $16031
32
(dollars in millions)
FY 2010 FY 2011 FY 2012Beginning Balance $238.2 $272.6 $523.8Ongoing Revenue * $10,749.9 $10,979.1 $11,193.7ARRA $450.0 $184.3 $0.0Fed Aid & Other $1,641.1 $2,042.0 $1,688.4Total Revenue $13,079.2 $13,478.0 $13,405.9
Expenditures ** $12,915.9 $12,954.2 $12,995.6
Balance $163.3 $523.8 $410.3
School Aid Fund Budget Outlook
* Ongoing Revenue equals consensus estimate for FY10 & FY11.** Expenditures in FY12 are increased from FY11 by inflation.Source: Michigan Department of Treasury.
Proposed Budget Reductions, FY 2012 (Millions)
Program Amount
Higher Education- 15% reduction $222.4
Community Health, Corrections, Human Services
$209.6
Statutory Revenue Sharing $292.1
County Revenue Sharing $51.8
Employee Compensation $180.0
Other $226.9
School Aid $781.0
33
34
Michigan Expenditure GrowthLowest Among States
GF Expenditures Total Exp. Less Federal Aid% Growth Growth % Growth Growth
2001 to 2009 Rank 2001 to 2009 Rank
Illinois 10% 47 14% 49
Indiana 40% 19 34% 42
Michigan -13% 50 0% 50
Ohio 29% 35 29% 45
Wisconsin 15% 43 25% 46
Missouri 9% 48 47% 48
U.S. Avg. 30% 47%
Source: Office of Revenue and Tax Analysis, Michigan Dept. of Treasury, 07/27/10, based on NASBO State Expenditure Surveys 2001 and 2009.
35
Michigan State Government GF/GP Appropriations
Dollars in Millions
Source: State Budget Office.
% ChgSpending Categories: FY 2001 FY 2010 % Chg After Inflation
Universities & CC $2,101 $1,551 -26.2% -65.5%School Aid 386 30 -92.2% -131.5%Corrections 1,620 1,920 18.5% -20.8%Community Health 2,674 2,303 -13.9% -53.2%Human Services 1,216 897 -26.3% -65.6%State Police 321 268 -16.6% -55.9%Other 1,427 942 -34.0% -73.3%
Total $9,745 $7,911 -18.8% -58.2%
Revenue Sharing $1,600 $992 -38.0% -77.3%
36
Michigan State Government Total Appropriations
Dollars in Millions
Source: State Budget Office.
% ChgSpending Categories: FY 2001 FY 2010 % Chg After Inflation
Universities & CC $2,236 $1,912 -14.5% -53.8%School Aid 10,892 12,707 16.7% -22.7%Corrections 1,700 1,996 17.5% -21.9%Community Health 8,572 13,414 56.5% 17.1%Human Services 3,720 6,104 64.1% 24.8%Transportation 3,026 3,227 6.6% -32.7%Revenue Sharing 1,601 992 -38.0% -77.4%Other 5,252 4,813 -8.4% -47.7%
Total $36,998 $45,164 22.1% -17.3%
Federal Aid 9,566 18,816 96.7% 57.4%
37
Michigan State Government 10,700 Fewer Employees than 2000
Number Non-CorrectionsFiscal State State CorrectionsYear Governor Employees Employees Employees
1973 Milliken 52,673 50,316 2,357 1978 Milliken 64,456 59,990 4,466 1989 Blanchard 64,560 52,038 12,522 2000 Engler 61,493 43,841 17,652 2010 Granholm 50,615 35,672 14,943 2011 Snyder 47,607 33,141 14,466
% Change 1978-2011 -26% -45% 235%% Change 2000-2011 -23% -24% -18%
Source: Michigan Department of Treasury
38
Government Not LargeCompared to Other States
Source: Bureau of the Census, 2008 State and Local Government Employment Survey
State and LocalGovt. Employees
Per 10,000State of Population Rank
Indiana 554 27Ohio 538 32Minnesota 536 34Illinois 504 42Wisconsin 504 42Michigan 475 48
U.S. Average 549
Strengths of Proposal
Treats tax expenditures as spending- finally Improves horizontal equity $200 million for OPEB funding Addresses structural budget deficit Simplifies business tax
Weaknesses of Proposal
Increases income inequality Shifts burden from business (particularly well off
professionals) to seniors and low income families
Employee concessions excessive- requires 8.5% pay cut plus 20% payment for health care
Increased taxes on individuals will offset benefits of lower business taxes
Revenue sharing cuts will be devastating
Weaknesses of proposal (cont.)
Corporate income tax is unstable and easy to manipulate
Education cuts will hurt economic future
Priorities
Retain all or most of EITC Reduce revenue sharing cuts Reduce tax burden on low-income seniors Reduce tax cuts for non-corporate
businesses Reduce education cuts
Proposed Changes
Extend 6% corporate income tax to business income with a possible exemption of $250,000-raises $550-$700 million
Retain a 0.1% gross receipts tax on all business- raises $250 million
Impose a tax on selected services such as sports tickets and service contracts
Provide a $20,000 pension exemption for individual returns and $40,000 for joint returns, or at minimum phase out exemption
Proposed Changes (cont.)
Leave the income tax at 4.35%- saves average taxpayer less than $1 a week- raises $165 million
Retain or possibly reduce EITC to 10 or 15% for two years
Use revenue in excess of estimates to restore revenue sharing cuts or cut in EITC- revenues likely to be at least $200 million higher in both FY 2011 and FY 2012
Add one tax credit for all charitable contributions- $150/$300
46
Michigan Business Tax
• A Business Income Tax at 4.95%• A Modified Gross Receipts Tax at 0.8%• Surcharge added at 21.99% capped at $6 million per
taxpayer.• Provides over 30 tax credits.• Increases reliance on profits, so revenue will be more
volatile than SBT.• Revenue: $2.3 billion in FY09 and an estimated $1.9 billion
in FY10 & $2.2 billion in FY11.• Businesses with gross receipts of < $350,000 do not have
to file a return and businesses with < $20 million in gross receipts only pay a tax of 1.8% of profit.
48
Corporate Income Tax Pros & Cons
PROS
• Only corporations making a profit would pay.
• Widely used, therefore multistate companies would have lower compliance costs.
• Longer legal history provides more certainty
CONS
• Revenue stream is extremely volatile (federal corporate income tax revenue declined 55% in FY 2009).
• Many businesses (noncorporations) avoid the tax.
• No direct relationship between profitability and dependence on government services.
Business Tax Cuts Will Not Create Many New Jobs
Business tax cuts offset by tax increases on individuals and families and spending cuts
Most of tax relief goes to non-mobile retail and service businesses
Business taxes are only 5% of state GDP and tax cut amounts to only 0.5% of GDP
49
Business Tax Cuts by Sector
Services- $575 million Prof.& Tech services- $181 million Manufacturing- $279 million Retail Trade- $153 million Wholesale trade- $139 million Real Estate- $110 Million Construction- $90 million Finance & Ins.- $75 million Other- $112 million
50
Business Tax Options
6% Corporate income tax $778 million
3.5% Business income tax $780 million
2.5% BI tax plus 0.1% gross rec. tax $830 million
6% Business income tax $1,.4 billion
4% BI tax plus 0.1% gross receipts tax $1.2 billion
6% BI tax with $250,000 exemption $1.25 billion
Potential Revenue Sources
Sales tax on services- up to $0.8 billion Change business tax proposal- up to $0.6
billion Keep income tax rate at 4.35%- $160 million Increased revenue growth- $0.4-0.5 billion
53
Major Taxes: Revenue Growth Improving
Note: FY 2008 large increase in MBT due to surcharge and because the MBT is also replacing some local property taxes and large increase in income tax withholding payments due to the tax rate increase.
Source: ORTA, Michigan Dept. of Treasury; FY 2011 & FY 2012, January 2011 consensus estimates.
FY 2011 FY 2012 Last ThreeFY 2008 FY 2009 FY 2010 Est. Est. Months
Sales Tax 3.4% -10.3% 1.3% 2.9% 1.5% 7.0%
Use Tax -0.2% -6.8% 5.2% 3.7% 4.3% 3.7%
Withholding 10.4% -6.0% -1.7% 3.1% 1.5% 8.1%
SBT/MBT 35.8% -6.2% -17.6% 10.4% 17.7% 11.7%
RETT -28.5% -32.3% 1.4% 10.2% 10.2% 3.9%
SET -0.1% -1.9% -7.2% -3.2% -3.2% 5.2%
Revenue Sharing Cuts for Selected Cities
Detroit- $176 million Lansing- $6.3 million Grand Rapids- $6.1 million Pontiac- $6 million Saginaw- $4.8 million Highland Park- $2 million Hamtramack- $1.7 million Ecorse- $0.84 million
Michigan Property Values Continue to Decline
Year Total SEV Growth Total TV Growth
2005 5.9% 5.6%
2006 5.0% 5.8%
2007 3.8% 5.2%
2008 -1.3% 1.4%
2009 -5.4% -0.8%
2010 -9.2% -6.6%
2011 est. NA -4.0%
2012 est. NA -1.3%
55
56
Public School Teachers Average Annual Salaries, 2008-09
Source: National Education Association
Avg. Public SchoolTeachers Pay
2008-09 Rank
California $66,986 1New York $65,234 2Connecticut $63,976 3Illinois $62,787 5Michigan $57,327 10Ohio $54,925 15Minnesota $51,938 19Wisconsin $50,424 20Indiana $49,198 2410 Most Populous States $56,03410 Least Populous States $50,544
US Average $53,910
10-Year Increase in Teachers Salaries
Rank State % Increase
1 Mississippi 46.5%
2 Louisiana 45.4%
3 Arkansas 44.8%
4 North Carolina 44.4%
5 Illinois 43.4%
19 Ohio 33.0%
23 Minnesota 31.3%
38 Indiana 25.4%
43 Wisconsin 21.5%
49 Michigan 16.9%
50 Alaska 7.9%57
58
Retirement Contribution Rates as a Percentage of Payroll
FY09 FY10 FY11 FY12State Emp. Retirement SystemDefined Benefit Pension 18.84% 21.36% 23.98% 37.15%Defined Benefit Health Care 11.80% 11.90% 13.40% 14.00%Total Defined Benefit Costs 30.64% 33.26% 37.38% 51.15%
Defined Contribution Pension 5.91% 5.91% 6.00% 6.00%Defined Contribution Health Care 11.80% 11.90% 13.40% 14.00%Total Defined Contribution Costs 17.71% 17.81% 19.40% 20.00%
Public School Employees Retirement SystemDefined Benefit Pension 9.73% 10.13% 12.16% 15.96%Defined Benefit Health Care 6.81% 6.81% 8.50% 8.50%Total Defined Benefit Costs 16.54% 16.94% 20.66% 24.46%
60 60
What Does Michigan Need to Do?
Consolidate government services at both the state and local level.
Reform the state’s tax structure so that it will grow with the State’s economy and not discourage economic growth.
Slow the growth of government healthcare and tax expenditures.
Maintain or increase the investment in education.
Reform local pensions
61
Gasoline Tax Revenue Declines Over Time
Source: Michigan Department of Treasury.
FY 2011 - $826.0 million
FY 2002 - $938.9 million
Forecast
62
Too Many Units of Government
Local Governments– 83 Counties– 275 Cities– 258 Villages– 1,240 Townships
K-12 Schools– 551 Local School Districts– 230 Charter Schools– 57 Intermediate School Districts
Colleges and Universities– 15 Public Universities– 29 Community Colleges
63
Ingham County School Districts
Source: Michigan Department of Education
Students
School District Fall 2009
East Lansing 3,445
Lansing 14,148
Dansville 904
Haslett 2,722
Holt 5,902
Leslie 1,380
Mason 3,030
Okemos 4,016
Stockbridge 1,668
Waverly 2,992
Webberville 668
Williamston 1,906
Total 42,782
64
Maryland School DistrictsAre Large
Source: Maryland County Public Schools, various websites
Note: Montgomery County Public Schools is 16th largest in the US
School District Students
Montgomery County Public Schools 141,777
Prince George's County Public Schools 129,723
Anne Arundel County Public Schools 74,200
Howard County Public Schools 49,748
Total Tax Revenue as % of GDP, selected OECD Countries, 2009
Rank Country % of GDP
1 Denmark 48.2%
2 Sweden 46.4%
3 Italy 43.5%
4 Belgium 43.2%
5 Finland 43.1%
20 Canada 31.1%
31 United States 24.0%
32 Chile 18.2%
33 Mexico 17.5%
66
Federal Spending Increases During Recessions
Years Expenditure Increase
1971-1973 16.7%
1974-1976 38.0%
1980-1982 26.2%
1990-1992 10.2%
2000-2002 12.4%
2008-2010 15.9%
67
68Source: Congressional Budget Office
Spending Cuts Needed to Balance Federal Budget (with & without Bush Tax Cuts)
billions of dollars
Spending Cuts Needed When: FY 2015 FY 2020
Tax Cuts Are Not Extended ($650) ($817)
Tax Cuts Are Extended: Revenue Loss ($453) ($753) Spending Cuts Needed ($1,103) ($1,570)
70
Federal Deficit as a Percent of GDP Spikes in 2010
Source: Congressional Budget Office, March 2010. Deficit based on President Obama’s proposed budget. Deficit totals are the total budget deficit.
71Source: Congressional Budget Office
Federal Budget: FY 2010 and FY 2020 Projection
billions of dollars
Spending Item: FY 2010 FY 2020
MandatorySocial Security $701 $1,191Medicare $519 $929Medicaid $273 $542Other Health $18 $149Income Security $435 $293Federal Retirement $140 $192Veterans Programs $58 $83Other Mandatory Programs ($38) $68Offsetting Receipts ($179) ($306)
DiscretionaryDefense $692 $880Other NonDefense $666 $742Interest on Debt $202 $778Total $3,487 $5,541
72
History of Recessions
# of Business Cycles
Average
Duration
Average Expansion
1854-1919 16 22 months 27 months
1919-1945 6 18 months 35 months
1945-2001 10 10 months 57 months
Addendum: Duration Peak Unemployment
GDP Decline
Great Depression 43 months 35.3% (1933) -26.7%
Great Recession 19 months (?) 10.1% (?) -3.7%