Transcript budget9-14-06 - Citizens Research Council of Michigan

Michigan’s Budget Crisis and the
Outlook for School Funding
Lenawee ISD
September 14, 2006
Adrian
Tom Clay, Director of State Affairs
Citizens Research Council of Michigan
www.crcmich.org
Citizens Research Council
of Michigan
• 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
The Central Message
• The State of Michigan has a structural
deficit affecting:
• Public K-12 Education
• General Fund financed programs
• Its causes have both spending and
revenue components
• We will not grow out of it
• Only structural policy changes will fix the
problem
The Michigan Budget
FY2006 Appropriations
• Total State Budget - $41.2B
• State’s Two Major Funds:
General Fund - $9.0B
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
Six Years of
Budget Problems
• Worst Budget Problems since World
War II
• Declining General Fund Revenues
• Slow Growth in School Aid Fund
Revenues
• Structural and Cyclical Deficits at play
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
Budget Deficit Pressures
• Both funds outspending “Regular
Revenues”
• Operating deficits for 6 straight years
• Significant one-time resources used
• $6.8 Billion
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
FY05
FY06
Summary of One-Time Resources
FY2001-FY2006
(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
$1,363
984
212
561
455
Temporary Federal Fiscal Assistance
Bond for pay-as-you-go capital projects
324
655
211
Revenue Sharing accounting change
Refinance Bonds
181
250
Employee Wage concessions
186
Other
1,443
$6,825
Causes of Michigan’s Budget
Problems
•
•
•
•
Weak Economy
Tax Cuts
Stock Market Decline
Michigan’s deteriorating share of auto
and light truck market
• Structural imbalance between
revenues and spending
How Weak is the Economy?
Michigan’s Recent Statistics:
•49th in Personal Income Growth
•47th in Unemployment Rate
•49th in Employment Growth (Decline for
Michigan)
•49th in Index of Economic Momentum
(Population, Personal Income,
Employment)
Economy in Early 1980s Much Worse
Millions of Units
Big 3 Losing Market Share
20
17.0 17.4 17.2 16.8 16.6 16.9 16.9
18
15.1 14.8 15.1 15.2 15.6
16
13.9
12.9
14
12
10
8
6
4
2
0
2004
2001
1998
1995
1992
U.S. Light Vehicle Sales
Source: Automotive News.
Big 3 Share
75%
70%
65%
60%
55%
50%
45%
40%
Michigan Manufacturing Employment
Monthly Employment (1,000s)
Lost 1 in 4 Manufacturing Jobs
1,000
Jul 1999
908,200
900
800
700
Jan 1992
775,900
March 2006
664,500
600
500
1990 1992 1994 1996 1998 2000 2002 2004 2006
Source: U.S. Department of Labor, Bureau of Labor Statistics.
Perspective On Revenues
• General Fund revenues in FY03,
FY04, & FY05 below FY1995
• Inflation-Adjusted General Fund
Revenues below 1972 level
• General Fund revenue problems
adversely affecting School Aid
allocations
General Fund Revenues
$10,000
$9,500
$9,000
$8,500
$8,000
$7,500
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
$7,000
General Fund Budget
FY2007
• 86% of General Fund spending in 4
areas:
-Higher Education ($1.9B)
-Community Health-Mental Health,
Public Health, Medicaid ($2.9B)
-Corrections ($1.8B)
-Human Services-Family Services,
Juvenile Justice, Public Assistance
($1.2B)
-All Other General Fund Programs
($1.3B)
Looking Back: Reshaping the
General Fund Budget
Reductions
• Higher Education- $275M in 4 Years (13%)
• Human Services- $172M in 5 years (14%)
• School Aid- $323M in 5 years (84%)
• Revenue Sharing- $447M in 5 years (29%)
• State Employees- 7,400 in 4 years (12%)—
smallest workforce since 1974
Reshaping the General Fund
Budget
Increases
• Department of Community Health-$263M
in 5 years (10%)
• Medicaid
• Community Mental Health
• Corrections-$175M in 5 years (11%)
States With More Than 500 Prisoners
Per 100,000 Residents
Percentages of General Fund
Spending FY2001-FY2007
FY2001
FY2007
Community Health
27.3
31.9
Corrections
16.3
20.2
Human Services
12.7
13.0
Higher Education
21.3
20.8
Other
22.4
14.2
100.0
100.0
Totals
• Community Health and Corrections now
claim 52.1 percent of General Fund spending
• Increased from 43.6 Percent in FY2001
Beyond FY2007:
The General Fund Structural
Problem Continues
• Expenditure Causes
• Medicaid
• Corrections
• Revenue Causes
• Antiquated revenue structure
• Revenue sources unresponsive to
economic growth
Medicaid
• Projected spending pressures 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%
- 3 to 4 times as fast as revenues
Corrections
• Crime rates falling but prison population
pressures continue to increase
• Populations projected to increase 1,000/
year until 2010 (if current policies
continue)
• Annual cost increases about $80M
• Annual increases about 6%
—Twice as fast as revenues will grow
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
State Taxes as a Percent of
Michigan Personal Income
Percent
8.0
7.5
7.0
6.5
6.0
1995
1997
1999
2001
2003
Fiscal Year
2005
2007
General Fund Budget Scenario
• Medicaid & Corrections projections
growing faster than revenues
• Other areas of general fund spending
assumed to increase at 3%/year
• Revenues grow about 3%/year
• Major revenue sources with no growth
—Retard overall growth
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 FY2007
General Fund Structural Deficit Projections
$16,000
$14,000
Spending
Pressures
$10,000
$8,000
Revenues
$6,000
$4,000
$2,000
$0
FY
20
FY 07
20
FY 08
20
FY 09
20
FY 10
20
FY 11
20
FY 12
20
FY 13
20
14
Millions
$12,000
Fiscal Year
Current Issues
• Business Taxes
• Health Care cost pressures throughout
the budget
-Health Insurance—school and state
• Employees
-Health Care for retirees
-Medicaid
• Low Taxes vs. Quality of Life
Single Business Tax Eliminated
(Effective December 31, 2007)
• Law change initiated by petition
• Primary Advocate: L. Brooks Patterson—
Oakland County Executive
• Legislature enacted the law
• Impervious to gubernatorial veto
• SBT is gone and with it $1.9 billion of
General Fund revenue (22%)
The Remaining Business
•
•
•
•
•
•
What will replace the revenues?
New taxes on business?
New taxes on individuals?
Full or partial replacement
Revenue neutrality implies winners and losers
Nearly 30% of businesses pay no SBT
(41,000)—45% below $1000 in liability
• Potential for plenty of losers
What Role Will Spending
Cuts Play?
• 86% of General Fund spending in 4
areas:
-Higher Education ($1.9B)
-Community Health-Mental Health, Public
Health, Medicaid ($2.9B)
-Corrections ($1.8B)
-Human Services-Family Services,
Juvenile Justice, Public Assistance
($1.2B)
-All Other General Fund Programs
($1.3B)
Taxes Not Only Concern of Business
•
•
•
•
•
•
•
Others Include
Skilled Workforce
Energy Costs
Legacy Costs—Pensions and Retiree Health
Care
Health Insurance for Working Employees
Workers’ Compensation
Infrastructure
Quality Public Services
FY2007 Economic Forecast
National Indicators:
Real GDP Growth
2.8%
Consumer Prices
2.5%
Unemployment Rate
4.8%
Light Vehicle Sales Change
Oil Prices (per barrel)
-0.6%
$63.00
Michigan Indicators:
Employment Change
-0.2%
Unemployment Rate
7.0%
Consumer Prices (Detroit)
2.3%
Personal Income Growth
4.2%
School Aid
• Outlook for 2007
• Structural Deficit beyond 2007
School Aid Fund
• Revenues earmarked exclusively for public
schools
• FY2007 forecast $13.0 billion
• Slow growth in revenues since FY2003
• Main Sources of Revenue:
• Sale and Use Taxes- $5.6 Billion (43%)
• Income Tax- $2.1 Billion (16%)
• State Education Property Tax- $2.1 Billion
(16%)
• Other Revenues Include Lottery, Cigarette,
Federal
School Aid Fund Revenues
$12,000
$11,000
$10,000
$9,000
$8,000
1
7
9
9
8 99 00 01 02 03 04 05 06 07
9
19 19 20 20 20 20 20 20 20 20
General Fund Revenues
$10,000
$9,500
$9,000
$8,500
$8,000
$7,500
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
$7,000
State-Local School Finance
Relationship
• Amounts of total revenue for each district
determined by the State pursuant to State law
and appropriations
• School Aid revenues and total local operating
property taxes determine the amount the State
can “Afford”
• Local school operating property taxes subtracted
from the total to determine State payments to
district
• School Districts cannot levy operating taxes
• Districts pay retirement contributions as a flat
percentage of payrolls
FY2007 School Aid
• State Revenue Increase- $353 Million
(3.2%)
• Federal Funds Up- $20M
• General Fund Grant Cut $28M
• One time revenues from FY2006 not
available- $48M
• FY2006 Surplus used- $93M
• Total Spending increase $393M (3.1%)
School Aid Spending Increases
• Foundation Allowance increase
($210/student)- $168M
• Special Education- $73M
• Equity Payment- $20M
• Engineering Michigan’s Future- $20M
• Great Start- $10M
• School Lunch Program- $16M (Federal)
• ISDs ($2.4M) and Adult Education ($3M)$5.4M
Spending Shifts to School Aid Budget
$63.4 Million (16% of Total Increase)
•
•
•
•
•
Cash Flow borrowing costs- $22.8M
MEAP Tests costs- $19.5M
School Breakfasts- $9.6M
Hearing and Vision Screening- $5.2M
DHS Juvenile Facilities Education expenses-$3M
• Other- $3.3M
General Fund Spending Pressures
Spill Over to School Aid
• General Fund support down $357 million
since FY2000
• FY2007 reduces grant to “Irreducible
Minimum”
• Shifts of spending to School Aid Fund in
FY2007 Appropriations- $63 Million
• Total Effect- $420 million ($250 per
pupil)
• Will Higher Education be next?
FY2007 Spending Pressures
• Retirement—Increases 16.34% to 17.74% —
about $80 per pupil on average
• Employee Health Insurance averages about
$1200 per student likely will rise by more
than $50 per student
• Pay and Step Raises cost nearly $60 per
student on average—4% = $240 per student
• Other—Fuel, Utilities, Supplies—$50 per
student
• Total could exceed $400 per student
• Not enough growth in total School Aid
resources ($230) to cover all cost pressures
Proposal 2006-05:
Educational Funding Guarantee Law
“The K-16 Proposal”
• Proposed initiated law
• Not subject to veto by governor
• Requires vote of people or 3/4 of each
house to amend
• Amends State School Aid Act (PA 94 of
1979) – appropriations and policy
Summary of Proposal
•
•
•
Funding guarantees for Universities,
Community Colleges, and K-12
Reduces per pupil funding gap from
$1,300 to $1,000 by FY12
Caps employer contribution at 80% of
Total Contribution percentage or
14.87% of Payroll, whichever is less,
with the State picking up the difference
Education Funding Guarantees
FY2007
• Base funding increase – “catch up” provision
$180 million to $322 Million
• Retroactive Retirement Cap--$385 million
• Immediate $565+ Hole in the General Fund
Budget
• Cover with Budget Cuts?
Other General Fund Programs
Revenue Sharing
• Budget Base $7.7 billion
• $565 million = 10% for 9 months
Annual Spending Guarantee
FY2007 and After
•
•
•
•
•
Increase by rate of inflation
No More—No Less
In Good and Bad Economies
Loophole??—”.....appropriated under this act”
Cuts in non-education programs would occur
in recession
• Revenue growth in good times probably
enough to prevent crowding out noneducation programs
Retirement Funding
Guarantee
• FY07 rate is 17.74% of payroll
• Employer share: 14.19% of payroll
• State share: 3.55% of payroll
• FY08 rate (projected) would result in
employer share capped at 14.87%
• FY07 state costs: $385 million
• FY13 state costs: $1 billion
• State responsible for entire annual marginal
cost associated with rate change
Beyond Fiscal Year 2007
A Structural Deficit in School Aid Fund?
Deficits Defined
• Cyclical—Caused by Economic Downturn
-Revenues Worsen
-Some Spending Pressures Increase
-Deficit Erased When Economy
Recovers
• Structural—Caused by costs increases to
maintain current policies outpacing
revenue growth, Even in Good Economic
Times
School Aid Structural Deficit
Spending Pressures Outpace Revenue Growth
• Retirement Contributions
• Employee Health Insurance
• General Pay Raises
• Other—Fuel, Utilities, Supplies
• Revenues Growing Slowly
School Aid Outlook Beyond
FY2007
• Moderate Revenue growth ($280 Per Pupil)
• Revenue growth rate below general
economy
• Annual State revenue increases about 3%
• Not enough growth to match spending
pressures
School Retirement Funding
• School Districts pay contributions for
employees
• Rate for FY2007 17.74% of Payrolls
• Contribution rate composed of two parts
-Regular Pension Benefit
-Health Care Benefits
• Both parts will continue to increase in the
future
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
19
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
Financial Significance
• School District contributions exceeded
$1.35 billion in FY2005
• Costs will likely average $1000 per
student in FY2007
• Incremental increases exceed $90 per
pupil after FY2008
• Rising contribution rates will continue to
claim significant share of future revenue
increases
Employee Health Insurance
• Double-digit premium increases recently
• FY2007 increases moderated
• Schools spend over $1200 per pupil on
Health Insurance Premiums
• Annual increases could exceed $100 per
pupil
School Aid Numbers
—FY2008 and Beyond
• Revenues grow about $280 per pupil per year
• Spending Pressures and “Requirements”
-Retirement- $90+
-Health Insurance- $100+
-Salaries and Wages (4%)- $240+
-Fuel, Utilities, Etc.- $50+
• Structural Deficit about $200 per pupil (over 2%)
Structural Deficits Require
Structural Changes
• Expenditures
-Retirement Costs—Retiree Health Care
-Health Insurance
-Change Programs
• Revenues
-Broaden Base of Sales and Use Taxes
-Eliminate Some Tax Expenditures
Who Can Change the Structure?
• Influence of School Boards or Local
Voters very limited
• State controls most financial policies
• Retirement Contributions and Benefits
• Tax Rates and Taxable Items
• Total Revenue received by districts
• Areas of Local Control or Influence
• Employee Compensation
• Instructional and Other Programs
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
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
Retirement Changes Being
Considered in Lansing
• Earn retiree Health Benefits based on
years of service
• Defined Contribution program for pension
benefits
• Both changes would likely only affect
new employees
• Financial effects would be negligible at
first
Citizens Research Council
of Michigan
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