Transcript Michigan’s Fiscal Future

Michigan’s Budget
Problem
Prospects for the Future
July 2002
Citizens Research Council of Michigan
1
Background
State’s Economy Has Declined
State Revenue Performance Still Weak (April
Down 10%, May Down 3%, June Flat)
Spending Reductions Small So Far — Onetime
Revenues Used to Fill Gaps
Future Revenue Growth is Constrained —
Income Tax Cuts Will Absorb Significant
Increment of Growth
2
Effects 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
3
Economy
National Slowdown — Relatively Mild
(Probably No Recession)
National Economy Growing Again
State Recession — Mild by Michigan
Standards
Current Michigan Indicators Mixed
4
Revenue 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
5
May Revenue Consensus
Latest Bad News
Revenue Forecasts Lowered Again
General Fund Down $672 Million Over
Two Years
School Aid Fund Reduced $142 Million
FY2002 Balancing Actions Use One-time
Resources
6
FY2003 Balancing Actions
Legislature Had Great Difficulty
Choosing Course
Permanent Revenues Became Final
Piece of the Solution
Spending Cuts Minimal
7
Postponing 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
$853 Million — School Aid Fund
8
($ in Millions)
General Fund & School Aid Fund
Operating Gaps
$600
$400
$200
$0
($200)
($400)
($600)
($800)
($1,000)
($1,200)
General Fund
School Aid
Fund
FY00
FY01
FY02
FY03
FY04
9
Economic 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
10
FY2003 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
11
Original Budget Proposal:
Permanent Spending Cuts $308 Million —
Only $145 Million Cut State Programs
One-time Resources — $660 Million
Rainy Day Fund — $207 Million
Tobacco Settlement Revenue-$100 Million
Special Medicaid Revenue — $247 Million
Employment Trust Fund — $80 Million
12
Time to Cut Spending?
Legislature Presented Choices—More
Revenue or Cut Spending
Sacred Cattle Identified
Legislature Chose to Enhance Revenues
13
Revenue 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
14
General Fund Arithmetic
FY02
Projected Appropriations
$9,307
One-time Spending Adjustments
83
Adjusted Spending
9,390
FY03
$9,235
247
9,482
Revenues
Cigarette and SBT Revenues
One-time Revenues
8,406
41
498
8,402
209
413
Structural Gap
($892)
($771)
15
FY2003 School Aid
Net Revenue Growth $400 Million ($501
Million with Cigarette Tax Increase)
FY2002 Carryover Gap $841 Million
Increase in Foundation Allowance to
$6,700
How is it Financed?
16
More 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 Million
Small Surplus at End of FY2003
School Aid Spared Any Cuts in Latest
Budget Adjustments
17
The School Aid Arithmetic
FY 02 Spending Base
$6,700 Basic Allowance
Other Adjustments
Total Spending
Revenues
Cigarette Tax Increase
Tax Date Shift
Fund Balance
Rainy Day Fund
Other
Total Resources
Structural Gap
FY02
$11,458
(39)
11,420
10,134
12
695
350
433
$11,624
($841)
FY03
$11,458
337
(114)
11,681
10,534
103
494
192
465
$11,788
($579)
18
Looking 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
19
FY2004 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 Unlikely
Budget Difficulties in Local School Districts will
Exceed Those Reported in Recent Months
Spending Can Grow After FY2004
20
General Fund Longer Term
Projections Scenario
Revenues and Spending Out to FY2009
Steady Revenue Growth Assumed (4.5%)
Income Tax Cuts in State Law Occur on
Schedule
“Normal” Spending Increases for Inflation
One-time Revenues Factored Out
Large Increases in Medicaid Factored In
21
Medicaid Problems Looming
FY 2002 and FY2003 Short $100 to $150 Million
in State Funds
Temporary Revenues Used to Avoid Cuts
Replacement Revenues Needed
Federal Limits on Medicaid Special Financing
Adds $375 Million to State Funding
Requirements over Three Years
Medicaid Reimbursement Rates to Service
Providers Under Pressure
22
General 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
23
The Overall General Fund
Result
Gap of $1 Billion For FY2004
Gap Widens as Federal Medicaid
Funding Declines
Reaches $1.2 Billion in FY2006
Gap Starts to Decline Slowly After
FY2006
24
Time to Decide
Solve the Policy Contradiction
Spending Policy Has Been Validated By
Use of One-time Resources
Shortfall in Permanent Revenue Lays
Future of Programs Open to Question
Which Direction Will the State Choose?
Does Recent Action Indicate the Future
Course?
25
Approaches to Balancing
Budget in FY2004 and Beyond
Cut Spending
Raise More Revenue
Combination of Both Approaches
Must Find $1 Billion in Total Revenues or
Spending Reductions
Over 10% of Spending Base
26
Cutting 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)
27
The Remaining 20 Percent
Other Areas Include:
State Police
Judiciary
Environmental Quality
Natural Resources
Attorney General
Revenue Sharing at Risk — An Indirect
Way to Increase GF-GP Revenues
28
Balancing 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
29
Higher 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
30
Medicaid--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
31
Other Community Health
Programs
Community Mental Health (Nearly $1
Billion)
Mental Health Institutions
Substance Abuse Prevention & Treatment
Women, Infant, and Children Food and
Nutrition Programs
Programs for the Aging
32
Corrections
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
33
Family 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 Programs
Foster Care, Adoption, Domestic Violence
Programs
Day Care for Working Public Assistance
Recipients
34
Local Government at Risk
State Revenue Sharing—Statutory
Payments Already Cut by 13 Percent
Cuts are Likely to be Permanent
More Reductions Could Occur
$868 Million Remains of Statutory
Allocations
35
Local 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)
36
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)
37
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
38
Delaying/Suspending Income
Tax Cuts
If Cuts For January 2003 and Beyond are
Delayed — Cumulative Effects — For Each
Fiscal Year
FY2003
$144 Million
FY2004
$352 Million
FY2005
$421 Million
FY2006
$440 Million
FY2007
$460 Million
Not Enough to Close Gap
39
Who Will Solve the Problem?
New Governor
New Legislature — Majority of Legislators
May be New
Most Leadership and Experience With
Budget Problem of Current Magnitude Will
Be Gone
40
Most Difficult Budget Situation
in 40 Years?
What Makes it Different?
Not Economy—Recession Mild by Michigan
Standards
Expenditure Commitments and Tax Cuts Made
When Economy at Peak of Business Cycle
Over $1 Billion in General Fund Tax Cuts Already
Over-reliance on Temporary Revenue Sources
General Fund Revenue Growth Was Committed
to Future Tax Cuts
41
Citizens Research Council
of Michigan
www.crcmich.org
42
The Overall General Fund
Result
Gap of $1 Billion For FY2004
Gap Widens as Federal Medicaid
Funding Declines
Reaches $ 1.2 Billion in FY2006
Gap Starts to Decline Slowly After
FY2006
43