Transcript budget051904 - Citizens Research Council of Michigan

Michigan’s Chronic Budget Problem:
Its Magnitude, Causes and Implications
May 19, 2004
Tom Clay
Director of State Affairs
Citizens Research Council of Michigan
www.crcmich.org
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Citizens Research Council of Michigan
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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
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Five Years of Budget Problems
• Declining General Fund Revenues
• Slow Growth - School Aid Fund
Revenues
• Situation Cyclical or Structural?
• Prospects for Improvement?
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The National Situation
• Worst State Budget Crisis Since World
War II
• Revenue Structures Mismatched With
Spending Responsibilities
• Spending Demands Outpacing Revenue
Increases
• Medicaid a Nationwide Problem
• Corrections Growing Rapidly in Michigan
and Some Other States
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The Michigan Budget
• Total State Budget - $39.1 Billion
• State’s Two Major Funds:
General Fund - $8.7 Billion
School Aid Fund - $12.5 Billion
• Other State Funds Restricted for Other
Purposes, e.g. Transportation, Federal
Revenues
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General Fund Budget
83% of General Fund Spending in 4 Areas:
• Higher Education ($1.8 B)
• Community Health — Mental Health,
Public Health, Medicaid ($2.5 B)
• Corrections ($1.7 B)
• FIA — Family Services, Juvenile Justice,
Public Assistance ($1.1 B)
All Other General Fund Programs - $1.5 B
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School Aid
• State Provides About 80% of Total State &
Local Revenues to Local Districts & Charter
Schools
• Almost All of the Revenue Base Earmarked
Specifically for Schools
• Sales Tax is Principal Revenue Source
(41%)
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External Causes of the
Budget Problem
• Weak Economy
• Stock Market Decline
• Michigan’s Deteriorating Share of
Auto and Light Truck Market
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How Weak is the Economy?
Michigan’s Recent Statistics:
-46th in Personal Income Growth
-48th in Unemployment Rate
-49th in Employment Growth (Decline for
Michigan)
-49th in Index of Economic Momentum
(Population, Personal Income, Employment)
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Michigan Job Losses
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285,000 Jobs Lost in Three Years
Manufacturing Employment Down 174,000
19% Fewer Manufacturing Jobs
61% of Job Losses in Manufacturing
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The Stock Market
• Michigan Income Tax Receipts From NonSalary Income Dropped Over $500 Million
in Three Years (Nearly 40 Percent)
• Affected General Fund and School Aid
• Hangover Will Remain For Several Years
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Total U.S. Vehicle Sales & Big 3 Share 1992-2003
Sales Level
20,000,000
72%
70%
68%
66%
64%
62%
60%
58%
56%
54%
52%
15,000,000
10,000,000
5,000,000
0
20 03
20 02
20 01
20 00
19 99
19 98
19 97
19 96
19 95
19 94
19 93
19 92
Total U.S. Sales Light Vehicles
Big 3 Share of Total Sales
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Internal Causes of the Problem
• Spending Growth Outpacing Revenue
Increases
-Medicaid –Double Digit Growth
-Corrections
-Some Programs Are Being Crowded Out
of Budget
• Tax Cuts Eroding the Revenue Base
• Failure to Implement Permanent Budgetbalancing Changes
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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 w/1/3 Less Revenue
• Roughly 13 Percentage Points of 34
Percentage Points Gone ($1.3 B)
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Summary of One-time Resources
(in Millions)
Rainy Day Fund
FY2000 School Aid Fund Surplus
FY2000 General Fund Surplus
$1,363
984
212
Medicaid Benefits Trust Fund
Advance State Education Tax Collection Date
Tobacco Settlement/Merit Award Revenues
Temporary Federal Fiscal Assistance
561
455
317
655
Bond for Pay-as-you-go Capital Projects
Revenue Sharing Accounting Change
Refinance Bonds
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181
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Employee Wage Concessions
11015
General Fund & School Aid
Operating Deficits
School Aid
Fund
$600
$400
($ in Millions)
$200
$0
($200)
General
Fund
($400)
($600)
($800)
($1,000)
($1,200)
FY00
FY01
FY02
FY03
FY04
FY05
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Perspective On Revenues
• Actual General Fund Revenues in FY03,
FY04, & FY05 Below FY1995
• 10 Years of Higher Costs & Increased
Needs Go Unfunded
• Some Programs Crowding Out Others
• School Aid Revenues Up $3.5 B Over
Same Period (45%)
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FY2004 Review—General Fund
• Budgets Cut $1.7 Billion
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– General Fund - $1,335 Million
– School Aid - $361 Million
Onetime Resources & Savings - $807 M
Fees & Other Revenues - $453 M
Other Changes - $155 M
Tax Increases Off the Table
More Cuts Coming
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FY2004 School Aid Review
• School Aid Down Year to Year—
$128 Million
• First Decline Since Proposal A
• Retirement Percentage Held at
12.99%--Reserves Used to Postpone
Increase
• Can More Cuts Be Avoided?
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Summary of Other Budget Cuts
• Higher Education Cut 14% in 2 Years $297 M
• Revenue Sharing Cut 15% in 3 Years $293 M
• State Workforce Down 8,500 in 3 Years
(14%) - Smallest Workforce Since 1974
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Revenue Sharing Payments
Fiscal Years ’93 through ‘04
$1,600.0
$1,400.0
Statutory/
Constitutional
$1,200.0
$1,000.0
Actual/
Proposed
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'0
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'9
9
'9
7
'9
5
$800.0
'9
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In Millions
$1,800.0
Fiscal Year
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Medicaid
• Spending Up 40 Percent in 4 Years Nearly Double Digit Increases
• Caseload Up 27% During Same Period
• Program Now Covers 1.35 Million
Michigan Citizens
• Pressures on Rates Paid Providers Could Add Significantly to Growth in
Future
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Corrections
• Largest State-Operated Program
• Most State Revenue Goes to Other
Organizations - Universities, Schools,
Hospitals, Local Government, etc.
• 50,000 Prisoners
• Over 30 % of State Workers
• Share of Budget Has Increased 4
Percentage Points Since FY2000
• Spending Up $253 Million (17%)
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States With More Than 500
Prisoners Per 100,000 Residents
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25.0
20.0
15.0
10.0
5.0
0.0
FY
05
FY
03
FY
95
Corrections
Higher Education
School Aid
FY
93
FY
80
Percent of Total
Shares of the General Fund Budget
Fiscal Year
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State Government
Employment Trends
70,000
50,000
Corrections
40,000
All Other
Departments
30,000
20,000
10,000
Fiscal Year
2003
2002
2000
1995
1990
1985
0
1980
Employment
60,000
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State Employee Compensation
• Increases in Employee Compensation Costs Not
Funded In FY2004 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
• Concessions Prevented Loss of 3,000 Jobs in
Place
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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
• Spending Problems—Particularly Medicaid
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Revenue Forecasts for FY2005
May Consensus Agreement
• New Forecast Approved Yesterday-May 18
• Recovery and Steady Growth Projected
for Economy
• Economic Forecast Produces About 4%
Revenue Growth
• Little Change From January Forecast
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Updated FY2005 General Fund
Budget Challenge
• Projected Deficit of Nearly $1.3 Billion
• Projected Revenues $200 Million Below FY2004
Appropriations
• Additional Requirements---$916 Million
– Medicaid---$447 Million
– Additional Medicaid Requirements--$100+Million
– Employee Compensation-Existing Contract and
Expiring Concessions---$246 Million
– Corrections---$44 Million
– Family Independence Agency---$25 Million
– Higher Education Tuition Restraint---$52 Million
– Other---$102 Million
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FY2005 Proposed
Revenue Changes
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Increase Cigarette Tax $.75 - $295M
Decouple From Federal Estate Tax-$94M
Increase Liquor Markup - $32M
Merit Scholarship Accounting Change $64M (One-time)
• Increased Revenue Enforcement - $30M
• Most of Revenue Earmarked for Medicaid
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FY2005 Proposed
General Fund Spending Changes
• Eliminate Revenue Sharing for Counties-$183 M
- Create One-time Fund For Counties By
Collecting All Property Taxes In Summer
• Close Women’s Prison - $23 M
• Proposed Employee Savings & Concessions $148 M
• Eliminate Private College Scholarships - $65 M
• Limit Payments in Lieu of Taxes - $10 M
• Reduce GF Grant to School Aid - $196 M
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Closing The General Fund Gap
Original Proposal
• Revenues - $451 M
• Spending Reductions - $705 M
• One-time Resources - $104 M
• Total - $1.260 B
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The FY2005 School Aid Proposal
• Foundation Allowance Minimum at $6,700
• General Fund Grant Reduced by $196 M to
$132M---Lowest in More Than 25 Years
• Membership Count Change “Saves” $43M
• Project Great Start Partly Funded By Decreasing
ISD Operations Support
• Total Spending Lower Than FY2003, $104M
Above FY2004
• Retirement Rate up 1.88 Percentage Points to
14.87 Percent
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FY2005 School Aid Will Cause
Significant Financial Pressures
• Retirement Percentages Will Consume
More Than The Small Increase
• Large Increases in Health Insurance Costs
to Fund
• No Room for Other Higher Costs Without
Cutting Staff or Using Fund Balances (a
slippery slope)
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Outlook For FY2005
General Fund Proposal
• Additional Adjustments Needed to Deal With
Medicaid Spending Requirements
• Many Elements of Governor’s Proposal At Risk
• Resistance to Tax Increases
• Some Spending Changes Appear to be
Unacceptable to Legislature
-Private College Scholarships
-County Revenue Sharing
• Completion of Budget By July Will Be Difficult
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The Ongoing General Fund
Structural Problem - The Budget
Beyond FY2005
• Pressures On Health Care & Corrections
Spending to Outpace Future Revenue Growth
• Only Fundamental Structural Changes Will
Solve the Problem
• Revenues - Antiquated Tax Structure
• Medicaid Responsibilities - Federal/State
• Corrections Policies
• Eliminate Some Programs
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The School Aid Outlook
Beyond FY2005
• FY2005 Proposal Balances Spending &
Ongoing Revenues
• Continued Economic Growth Translates to
Budget Growth in FY2006
• Continued Revenue Growth Could Permit:
• About 4% Spending Growth in FY2006 &
Beyond
• Foundation Allowance Increases
• Retirement and Health Insurance Will Continue
to Claim Larger Shares of Revenues
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Revenue Structure Issues
• Level of Revenues
-Sufficient to Finance Desired
Programs -Now or in the Future?
• Source of Revenues
-Equitable?
-Representative of Economy?
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Level of Revenues
• Jury Still Out
• Elected Officials Have Not Yet Devised
Permanent Solution
• Actions So Far Suggest Level Insufficient
• Economic Growth Will Not Solve Problem
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Source of Revenues
• Tax System
• Narrow Base for Sales and Use Taxes
• Single Business Tax Scheduled for Repeal
in 2010
• Revenues Increase More Slowly than
Michigan Economy
• Overhaul of Tax System May be Desirable
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Percent
State Taxes as a Percent of
Michigan Personal Income
Year
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Broadening the Sales and
Use Taxes Base
• Most Services not Taxed
• Services Constitute More Than 1/2 Private
Economic Activity
• If Starting Point is Revenue-neutral,
Significant Rate Reduction Could Occur
• Revenues Would Grow Faster Than Current
Sales & Use Taxes
• Some Services Might be Excluded - e.g.
Health Care, Educational Services
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Reform Business Taxes
• Is it Realistic to Eliminate SBT Without
Replacement?
• Is it Time to For Many to Replace One?
• SBT Replaced 7 Taxes in 1970s
• Is Business Paying the Wrong Share of Taxes?
• Should Taxes Focus on Wealth? Profits?
• SBT Produces About 25 Percent of General
Fund Revenue
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A Medium-Range General Fund
Budget Scenario
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Assumed Revenue Growth - 4%
Community Health Growth - 9%
Corrections Growth - 7%
Remaining Programs Grow 3%
Projections Begin w/FY2005 Proposed
Budget
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General Fund Projections to FY2010
$12.0
Billions
$11.0
$10.0
Revenues
$9.0
Spending
Pressures
$8.0
$7.0
$6.0
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Y
F
06
Y
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07
Y
F
08
Y
F
09
Y
F
10
Y
F
Fiscal Year
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Citizens Research Council
of Michigan
www.crcmich.org
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