Transcript Michigan’s Fiscal Future

Michigan’s Budget Crisis:
Its Causes & Prospects
for Resolution
Michigan Association of School Administrators
Region 2
April 22, 2005
Tom Clay, Director of State Affairs
Citizens Research Council of Michigan
www.crcmich.org
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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The Michigan Budget
FY2006 Proposal
• Total State Budget - $41.2B
• State’s Two Major Funds:
General Fund - $8.9B
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
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Five Years of Budget Problems
• Declining General Fund
Revenues
• Slow Growth in School Aid Fund
Revenues
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Dual Deficits at Play
• Structural and Cyclical
• General and School Aid Funds
Affected
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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
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General Fund & School Aid
Operating Deficits
$600
School Aid Fund
$400
General Fund
($ in Millions)
$200
$0
($200)
($400)
($600)
($800)
($1,000)
($1,200)
FY00
FY01
FY02
FY03
FY04
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FY05
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Summary of One-Time Resources
(in Millions)
Rainy Day Fund
FY2000 School Aid Fund Surplus
FY2000 General Fund Surplus
Medicaid Benefits Trust Fund
Advance State Education Tax Collection Date
Tobacco Settlement/Merit Award Revenues
Temporary Federal Fiscal Assistance
Bond for Pay-as-you-go Capital Projects
Revenue Sharing Accounting Change
Refinance Bonds
Employee Wage Concessions
Other
Citizens Research Council of Michigan
$1,363
984
212
561
455
317
655
211
181
209
186
1,200
$6,534
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General and School Aid Funds
Face Structural Deficits
• General Fund Somewhat More
Severe
• Schools Face Retirement & Health
Insurance Costs Outpacing Revenue
Increases
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General Fund Budget
83% of General Fund Spending in 4 Areas:
1. Higher Education ($1.8B)
2. Community Health — Mental Health,
Public Health, Medicaid ($2.5B)
3. Corrections ($1.7B)
4. Human Services— Family Services,
Juvenile Justice, Public Assistance
($1.1B)
All Other General Fund Programs - $1.5B
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External Causes of
Michigan’s Budget Problems
• 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:
-49th in Personal Income Growth
-48th in Unemployment Rate
-50th in Employment Growth (Decline for
Michigan-Only State in the U.S.)
-50th in Index of Economic Momentum
(Population, Personal Income, Employment)
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Total U.S. Vehicle Sales & Big 3 Share 1992-2004
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 04
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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Perspective On Revenues
• General Fund Revenues in FY03,
FY04, & FY05 Below FY1995
• Inflation-Adjusted General Fund
Revenues Below 1972 Level
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General Fund Spending
• Total Spending Down $1.2B in 4
Years (12%)
• Additional Spending in Some Areas
— Medicaid and Corrections —
Obscures Magnitude of Cuts in
Others
• Cuts Exceed $3 Billion
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Significant Cuts
• Higher Education Cut 14% in 2 Years $297M
• Revenue Sharing Cut 26% in 4 Years $399M
• State Workforce Down 8,500 in 3
Years (14%) - Smallest Workforce
Since 1974
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Medicaid
• Spending Up 40% in 4 Years — Nearly
Double Digit Increases
• Caseload Up 27%
• Covers 1.4 Million Michigan Citizens
• Pressures on Rates Paid Providers —
Could Add Significantly to Growth in
Future
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Corrections
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Largest State-Operated Program
50,000 Prisoners
Over 30% of State Workers
Over Half of Workers Paid From
General Fund Revenues
• Higher Incarceration Rate Than Our
Neighbors
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States With More Than 500
Prisoners Per 100,000 Residents
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The Economic and Revenue
Outlook for FY2006
• Moderate Economic Recovery
• Small Employment Gains
• Improved Income Growth
• General & School Aid Fund
Revenue Growth — 3.5 to 4%
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FY2006 General Fund Proposed Budget
• FY2006 Revenues Less Than FY2005
Appropriations
• Medicaid Pressures Exceed $500 Million
• Total Funding Gap---$772.6 Million
• Programs Reductions---$389.6 Million
• Reduced School Aid Support---$145.0
Million
• Revenues and Other Adjustments--$241.7 Million
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Risks and Uncertainties
• Tax Expenditures Recommended For
Reduction or Elimination---$63 Million
• Medicaid Provider Taxes---$75 Million
• Higher Education Funding Reductions--$25 Million
• Elimination of Tuition Grant Program---$62
Million
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FY2006 School Aid Proposal
• $175 Per Pupil Increase
• $50 Increase for High School Students
• Increases for At-Risk Students,
Intermediate School Districts, and Special
Education
• Funding Increases Will Be Absorbed by
Higher Retirement and Health Insurance
Costs
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FY2006 School Aid Proposal
Risks and Uncertainties
• Tax Expenditures Recommended For Reduction
or Elimination---$48 Million
Interstate Communications---$7M
Interstate Trucks and Trailers---$11M
Films---$9M
Vending Machines and Mobile Facilities---$18M
Misc---$3M
• School Bond Loan Fund Proposal---$45 Million
• Beginning Surplus---$24 Million
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Beyond FY2006
The Structural Problem Continues
• Expenditure Causes
– Medicaid
– Corrections
• Revenue Causes
– Antiquated Revenue Structure
– Revenue Sources Unresponsive
to Economic Growth
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Medicaid
• Projected Spending Pressures of Medicaid
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%
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Corrections
• Crime Rates Falling but Prison
Populations Continue to Increase
• Populations Projected to Increase 1,800/
Year until 2010 (if Current Policies
Continue)
• Annual Increase in Costs About $100M
• Annual Increases About 7% — Twice the
Rate General Fund Revenue Increase
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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
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State Taxes as a Percent of
Michigan Personal Income
8.5
Percent
8.0
7.5
7.0
6.5
6.0
1995
1997
1999
2001
2003
2005
Year
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A Medium-Range General Fund
Budget Scenario
• Medicaid & Corrections Projections
Incorporated
• Other Areas of General Fund Spending
Assumed to Increase at 3%/Yr
• Revenues Grow about 3%/Yr
• Major Revenue Sources w/No Growth —
Retard Overall Growth
• SBT Eliminated at End of Calendar 2009
— 23% of General Fund Revenue
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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 FY2006
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General Fund
Structural Deficit
$14,000
$12,000
General Fund Spending Pressures
In Millions
$10,000
General Fund Revenues
$8,000
$6,000
$4,000
$2,000
$0
FY05
FY06
FY07
FY08
FY09
FY10
FY11
Fiscal Year
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Implications
• Balancing Budget W/Spending Cuts
Will Require Structural Changes Likely
Affecting Medicaid & Corrections
• Significant Changes in State Financial
Support for Local Government & Higher
Education Would Likely Continue
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Revenue Changes
• Replace the “Lost” SBT Before 2010
Governor’s Proposal “RevenueNeutral”
• Broaden the Base of the Sales &
Uses Taxes to Include More
Services
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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
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Issues With Services Taxation
• Would Socially Valuable Services
Such as Medical Care and Education
be Exempt?
• Business to Business Services —
Pyramiding Could Create Multiple
Taxation Problem
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School Aid Outlook Beyond FY2006
• Moderate Revenue Growth ($200 to $250
Per Pupil)
• Revenue Growth Rate Below General
Economy
• Annual Revenue Increases in 3 to 3.5
Percent Range
• Not Enough Growth to Match Spending
Pressures
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Significant Demands On Revenues
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Retirement Contributions
Employee Health Insurance
General Pay Raises
Fuel and Utilities
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Public School Employees
Retirement System
• CRC Report Issued in September, 2004
• Covers Pension and Health Benefit
Contributions
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School Retirement Funding
• School Districts Pay Contributions for
Employees
• FY2005 Percentage of Payroll 14.87%
• Proposed Rate for FY2006 16.34%
• Contribution Rate Composed of Two Parts
-Regular Pension Benefit
-Health Care Benefits
• Both Parts Will Continue to Increase
Dramatically in the Future
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Pension Funding Component
• Stock Market Crash in 2001 and 2002
• Lost 22 Percent of Market Value In Two Years
• Gap Between Assumptions and Actual Returns
Was Nearly 40 Percent
• Contribution Rate Subsidized By Reserves in
FY04, FY05 and FY06
• Rate Jumps From 7% in FY04 to 12% in FY08
• Investments Beat the Assumptions in FY2004
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Retiree Health Benefits Component
• Funded on a Pay-As-You-Go Basis
• Now Costs 6.55% of Payroll
• Unfunded Liability Has Increased By a
Factor of Ten Times Since 1985
• Pre-funding and Amortizing Liability Would
Jump the Rate to 15% of Payroll
• Under Current Funding Practice
Contribution Rate Will Climb to Over 20%
by End of Next Decade
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Combining Health and Pension
Contribution Rates
• Rate Jumps From 12.99% in FY04, 14.87% in
FY05, 16.34% in FY06 to 20% in FY08
• Incremental Requirement For FY06 Through
FY08 Averages More Than $200 Million Per
Year ($125 Per Student)
• FY2006 Rate Subsidized With $50 of Reserves
• Per Pupil Increase In FY2006---$80
• Total Three-year Increase About $600 Million
• Three Years of 4% School Aid Revenue Growth
Produces About $500 Million Per Year
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MPSERS Contribution Rates
Fiscal Years Ending 1991 Through 2020
30.00
25.00
Pension
Health Benefit
Total Contribution
20.00
15.00
10.00
5.00
0.00
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91
19
94
19
97
20
00
20
03
20
06
20
09
20
12
20
15
20
18
Percentage of Payroll
35.00
Fiscal Year Ending
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Employee Health Insurance
• Double-digit Premium Increases Recently
• Schools Spend About $1000 Per Pupil on
Group Insurance Premiums---Mostly
Health Insurance
• Annual Increases Around $100 Per Pupil
Likely For Next Several Years
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Employee Salaries and Wages
• Largest Component of School Budgets
• General Raises and Step Increases Add to
Payroll Costs
• Each Percentage Point of Increase in Payrolls
Costs About $50 Per Pupil
• Total Payroll Increase of 3% Would Cost About
$150 Per Pupil
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A Structural Deficit in School Aid Fund?
Cost Increases to Maintain Current
Policies Outpacing Revenue Growth,
Even in Good Economic Times
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The Numbers—School Aid
• Revenues Grow About $200 to $250 Per
Pupil Per Year
• Spending Pressures and “Requirements”
-Retirement and Health Insurance--$200+
-Salaries and Wages (3%)--$150+
• Structural Deficit Exceeds $100 Per Pupil
Each Year
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Structural Deficits Require
Structural Changes
• Expenditures
-Retirement Costs—Retiree Health Care
-Health Insurance
-Changes in Programs
• Revenues
-Broaden Base of Sales and Use Taxes
-Review Tax Expenditures
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Importance of Restoring
Fiscal Balance
• Fiscal Problems Crowd Out
Consideration of Other Important Issues
• Michigan’s Budget Situation Affects Credit
Rating
– Recent Downgrades
– Reflects on Schools & Local
Government Units
– Increases Borrowing Costs
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Citizens Research
Council of Michigan
CRC Publications Available at
www.crcmich.org
Providing Independent, Nonpartisan Public Policy Research Since 1916
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