Transcript budget12-14

Michigan’s Fiscal Future:
Long-term Analysis of Michigan’s
Economy and State Budget
Prepared in cooperation with
W.E. Upjohn Institute for Employment Research
December 14, 2007
Tom Clay
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
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Michigan’s Budgetary Morass
• Seven years of spending cuts
• FY2007 General Fund revenues lower
than in FY1996
• School Aid fund annual growth since
2000: 1.4%
• Nearly $8 billion in one-time resources
used
• Reserves exhausted
• Weakened connection between revenue
structure and the economy
• Spending pressures growing faster than
revenues
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The Central Message Is:
• 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
• Significant spending cuts and/or
tax increases will be required
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Deficits Defined
Cyclical — Caused by Economic Downturn
- Revenues worsen
- Some spending pressures increase
- Deficit erased when economy
recovers
Structural — Costs to maintain current
policies increase faster than revenue
growth, Even in Good Economic Times
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How Weak is the Economy?
Michigan’s Recent Statistics:
•50th in Personal Income Growth
•50th in Unemployment Rate
•50th in Employment Growth (One of only
three states with a decline)
•50th in Index of Economic Momentum
(Population, Personal Income,
Employment)
Economy in Early 1980s Much Worse
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Michigan Manufacturing Employment
Monthly Employment (1,000s)
Lost Nearly a Third of Manufacturing Jobs
1,000
Jul 1999
908,200
900
800
August 2007
621,900
700
600
500
1990 1992 1994 1996
Source: Bureau of Labor Statistics.
1998 2000
2002 2004 2006
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Millions of Units
Big 3 Losing Market Share
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17.017.417.216.816.6 16.916.916.5
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15.114.8 15.115.215.6
16
13.9
12.9
14
12
10
8
6
4
2
0
1992
1995
1998
2001
2004
U.S. Light Vehicle Sales
Source: Automotive News.
75%
70%
65%
60%
55%
50%
45%
40%
Big 3 Share
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The Michigan Budget:
How the Public’s Money is Spent
• Total state budget — $42.8B
• State’s two major funds:
General Fund — $9.9B
School Aid Fund — $13.0B
• Other state funds restricted for other
purposes, e.g. transportation,
federal revenues
• Over 80% of all revenues spent
locally—schools, hospitals,
universities, roads
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Revenues
• Self-inflicted changes in revenue
structure
-Tax rate cuts
-Federal changes in tax law
-Increased use of slow or nogrowth revenue sources (e.g.
tobacco taxes)
• Weakening connection of economy
with revenues
-Sales Tax
-Income Tax
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State Taxes as a Percent of
Michigan Personal Income
8.0%
7.5%
7.0%
6.5%
6.0%
5.5%
1995
1997
1999
2001
2003
Fiscal Year
2005
2007
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School Aid Fund
$8,325
GF-GP
$8,178
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96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
$12,000
$11,500
$11,000
$10,500
$10,000
$9,500
$9,000
$8,500
$8,000
$7,500
$7,000
$6,500
Source: Michigan Department of Treasury
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Use of One-time Resources
Nearing $8 Billion in 7 Years
•Reserves exhausted
•Minimal gains so far in
solving structural deficit
•State vulnerable to next
national recession
•Cash situation precarious
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General Fund Budget
FY2008
• 86% of General Fund spending in 4
areas:
-Higher Education ($1.9B)—20%
-Community Health-Mental Health, Public
Health, Medicaid ($3.1B)—32%
-Corrections ($2.0B)—21%
-Human Services-family services,
juvenile justice, cash assistance
($1.3B)—13%
-All other General Fund programs
($1.4B)—14%
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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—9,500 in 6 years (15%)
—smallest workforce since 1974
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Michigan’s Fiscal Future:
Long-term Analysis of
Michigan’s Economy and State
Budget
Prepared in cooperation with
W.E. Upjohn Institute for
Employment Research
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The Future
• Projections seldom made beyond the
current budget year
• Failure to estimate the future
consequences of current actions leads to
unpleasant surprises
• Knowing where we are headed helps
justify actions to change the future
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Scope of the Analysis
• Ten-year scenarios of the Michigan
economy with varying assumptions about:
-Auto industry
-Office furniture
-Chemicals
-Hi-tech
• WE Upjohn staff used Regional Economic
Models, Inc. (REMI) to prepared economic
projections
• Economic projections translated to revenue
projections and projections of spending
pressures
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The Economy
Mid-range Projections-Assumptions
• Continuous moderately growing U.S. economy
(GDP 2.7% annual real growth)
• Decline in domestic name-plate market share
slows
• Employment in office furniture stable
• Employment in chemicals declines
• R&D employment expands
Overall a moderately improving economy
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Summary of Results
Major Indicators for Michigan
Annual rates of change
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•
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•
•
•
•
Total Employment (-.07%)
Labor Force (-.25%)
Real Gross State Product (+1.2%)
Labor productivity (+1.6%)
Personal Income (+4.2%)
Payrolls (+3.8%)
Population (-.04%)
These statistics better than last 6 years
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Job Gains and Losses
38,000 Overall Decline
Job Losses
• Goods producing—228,000
• Retail and wholesale trade—62,000
• Government—19,000
•
•
•
•
Job Gains
Health care—134,000
Business services—52,000
Social assistance—33,000
Recreation and amusement—27,000
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Population in 2017
Major Changes in Demographic
Composition Ahead
• Total Population—Down 41,000 (0.4%)
•
•
•
•
School Age (5-17)—Down 257,000 (14%)
Higher Education (18-24)—Down 84,000 (9%)
Labor Force (16-64)—Down 262,000 (4%)
Seniors (65+)—Up 413,000 (31%)
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Michigan's Changing Population
2007 to 2017
-3.9%
7,000
Thousands
6,000
5,000
4,000
2007
3,000
2,000
+31.5%
-14.3%
2017
-8.5%
1,000
0
5-17
18-24
16-64
65+
Age Groups
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Implications for State Government Finance
Revenues
• Revenues from the current revenue
system will grow slowly—even more
slowly than the economy
• Revenue declining as share of personal
income
• Official FY2008 forecasts used as the
beginning point
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Revenues
• Analysis concentrates on General Fund and
School Aid Fund revenues
• Local government revenue sharing also
included
• Transportation revenues included
• Each revenue source is projected separately
based on the economic projections
• Revenues are aggregated into total revenues
available from current tax structure
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Michigan Business Tax
Fully Reflected in Analysis
• Two new taxes replace SBT: Income and
Modified Gross Receipts
• Significant personal property tax (PPT)
relief (18-mill PPT exemption and PPT
credit)
• Numerous new credits (compensation,
investment, R&D, etc.)
• Schools held harmless from PPT loss and
from declines in overall MBT revenue
• Net fiscal effect: revenue neutral ($2.3B
to GF and SAF in FY09)
• Revenue trigger for three years (limits
growth)
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The FY2008 Budget Deal
• $1.36 billion in new revenues
-Income Tax $745 Million
-Services Tax $614 Million
• $440 million in spending cuts General
Fund and School Aid Fund budgets
Fundamental structural deficit problems
remain
• Spending pressure and revenue growth
paths essentially unaltered
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Services Tax Repealed December 1
• Replaced by MBT Surcharge
• Income Tax increase phases down
beginning FY2012 and eliminated
by FY2015
• MBT Surcharge Sunsets in FY2017
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Major Revenue Sources-Six Taxes
• Personal Income Tax-divided between General
and School Aid Funds
• Sales Tax-principally allocated to School Aid
and Revenue Sharing
• Use Tax-Divided between General and School
Aid Funds
• Michigan Business Tax-General and School Aid
Funds
• Tobacco Taxes-Divided between General and
School Aid Funds and Medicaid program
• State Education Property Tax-School Aid Fund
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Six Taxes
• Account for 85% of General and School
Aid Funds revenues
• Aggregate growth rate about 3%
• Higher growth rate will be needed to
keep up with spending pressures
increases
• Remaining sources trend growth less
than 2%
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FY2007 Sources of General and
School Aid Fund Revenues
Other,
$3,378.0
Income,
$6,335.6
Property,
$2,069.2
Tobacco,
$681.9
Business,
$2,026.3
Use,
$1,394.5
Sales,
$5,417.2
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FY2017 Sources of General and
School Aid Fund Revenues
Other,
$3,799
Property,
$3,127
Tobacco,
$533
Business,
$3,264
Use,
$1,955
Income,
$7,859
Sales,
$7,202
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Growth Rates—General and
School Aid Revenues
(FY2008-FY2017)
• Income—3%
• Business—3%
• Sales—3%
• Use—3.5%
• Tobacco—Minus 2.5%
• State Education (Property)—4.5%
• Other Sources—1.8%
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Reasons for Sluggish Revenue Growth
• Increasing Senior Citizen Population—
Retirement income not taxed and spend less
on goods
• Consumption taxes goods oriented—
economic growth is in service sector
• Slow or no growth revenues drag down
overall growth (e.g. tobacco, gambling,
alcohol)
• Flat rate income tax
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Spending Pressures
Analysis covers nine major areas
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•
•
•
•
•
•
•
•
School Aid
Higher education
Medical care
Corrections
Human services
Mental health
Revenue sharing with local governments
Employee compensation and benefits
Transportation
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School Aid Structural Deficit
Spending Pressures Outpace Revenue Growth
• Retirement Contributions—rapid growth
• Employee Health Insurance—rapid growth
• General Pay Raises
• Other—Fuel, Utilities, Supplies
• Revenues Growing Slowly
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School Aid Revenues &
Spending Pressures
• Spending pressures grow 5% per year
• Revenues grow 3% per year
• Shortfall of 2% each and every year
without spending and revenue policy
changes
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Higher Education
• Enrollments at all-time high
• Increased participation needed to make
Michigan competitive
• State support has lagged behind costs placing
pressure on tuition
• Increased state support required to produce
more college graduates
• Revenues will not grow fast enough to
maintain state share of costs without cuts
elsewhere
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Medical Care
Health care everywhere in budget
Growing faster than revenues
Largest component in state budget
-Medicaid
-Health insurance for school and state
employees
-Health insurance for school and state
retirees
-Prisoners
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Medicaid
• Medical care for 1 in 7 Michigan citizens
• Future spending growth pressures 8% to 9%
annually
• Some state revenues dedicated to Medicaid do
not grow—Tobacco Settlement revenues,
Cigarette Tax
• General Fund requirements grow faster than
total Medicaid spending
• General Fund spending pressures outpace
revenue growth by 3 to 4 times
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Corrections
•
•
•
•
•
•
•
Largest state-operated program
30% of state employees
More than 50,000 prisoners
58 prisons and camps
$30,000 per prisoner cost per year
$1.9 billion budget
Incarceration rate 40% higher than
Great Lakes neighbors-the result: $500
million higher costs
• Spending pressures increasing twice as
fast as revenues in an improving
economy
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Corrections
Background
• Since 2000: population growth 1.3%/yr
• 2 years of declines (’03 and ’04)
• Recent increases in ’05 and ‘06
• Workforce more than tripled since 1980,
today 1 in 3 work for corrections
Spending Trends
• Growth since 1980: 9.2%/yr
• Per capita spending: ‘80 — $18
Today — $177
• 1 in 5 General Fund dollars ($1.8 B)
• Fueled by Michigan’s disproportionate
incarceration rate – 40% higher than
neighbors
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States With More Than 500
Prisoners Per 100,000 Residents
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Corrections
Spending Pressures
• Population growth ’07 to ’11: 2.2%/yr
or about 1,200 prisoners/yr
• $37M additional per year
• Health care for prisoners
($5,400/prisoner per year)
• Aging prisoner population
• Wage and salary increases for employees
• New construction?
• Overall: corrections spending pressures
will be more than double (7%) General
Fund revenue growth of 2.8% during
forecast
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Human Services
• About 13% of General Fund ($1.3 B)
• General shift from cash assistance to
services as a result of welfare reform
• Primarily caseload driven – continue to
rise in future
• No adjustment to cash grant since 1993
• Recipients becoming “poorer”
• Some increase expected in forecast
• Future: spending pressures rise faster
(4%) than revenue growth (2.8%)
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Mental Health
Background
• Little discretion in program, Art. VIII, Sec. 8
• Shift from state-to locally-delivered services
• Result: little relief to state budget
• Medicaid assuming larger role
• Managed care provided some relief
• Over $2 billion spent annually
Spending Trends
• Since FY90: below total state spending 4.2% compared to 5.1%
• Since FY00: slowed to 3%, but equals total
• Greater than GF spending (-0.6%)
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Mental Health
Spending Pressures
• General health care increases,
specifically prescription drug costs
• Aging population – more users
• Medicaid as an entitlement
• Overall: growth of at least 4% annually
compared to General Fund revenue
growth of 2.8% during forecast
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Employee Benefits
• Benefits significant portion of public
budgets
• State: from 34% to 57% of base
payroll between FY98 and FY06
• Major driver is health care for current
and retired employees
• State employees: over $9,000/yr
• School employees: over $8,000/yr
• Failure to “pre-fund” retiree health
stresses budgets
• School retiree health more than
doubles from FY07 to FY17, from
6.6% to 14% of payroll
• Future growth of 7% annually
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Transportation
• Over $2.0 billion in state revenue raised
annually, about 50/50 between fuel taxes and
vehicle registrations
Problem
• Fuel tax revenues, flat in nominal terms, but
negative 4.2% annually in real terms
• Registration revenues rising, but not enough
Why
• Fixed per-gallon tax (19 cents, last raised in
1997)
• Decreased consumption due to fuel efficiency,
alternative fuels, and cost of fuel
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Transportation
Spending Pressures
• System deterioration, unable to sustain
condition goals (90% “good”)
• Significant “backlog” needs (primarily
expansion of highway system)
• Overall: Spending pressures of 5% annually
(compared to 3% revenue growth)
• “gap” of $3 billion over 10 years
• excludes “backlog” ($5.4 billion over next
25 years)
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Michigan Local Governments
• Counties, cities, villages, townships
facing structural deficits as well
• Health care cost driving expenses
• Individual units not experiencing full
property tax revenue growth due to:
• Cap on assessment increases
• Headlee tax rate reductions
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Michigan Local Governments
• 5 years of State Revenue Sharing
funds diverted to General Fund for
other needs
• Assume current funding will serve as
base for future growth
• State keeps what has been
diverted
• Locals experience growth on
current base
• Counties re-enter program
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General Fund Revenues and
Spending Pressures
• Spending pressures grow 6.5% per year
• Revenues grow 2.8% per year
• Shortfall of 3.7% each and every year
without spending and revenue
• Policy changes required
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General Fund Structural Deficit Projections
Fiscal Years 2007-2017
$20,000
$18,000
$14,000
$12,000
$10,000
Spending
Deficit=$6.2 b in 2017
Revenues
$8,000
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
$6,000
FY
Millions
$16,000
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$16,000
$14,000
$12,000
$10,000
Spending
Deficit=$5.2b in 2017
Revenue
Revenues
FY17
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
$8,000
$6,000
FY07
Millions
General Fund Structural Deficit Projections
(w/o tax phase-outs)
Fiscal Years 2007-2017
$20,000
$18,000
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Policy Options
• Reduce rate of spending pressure growth
• Increase revenue growth
• Bend the two curves so they meet
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Spending Pressures
• Corrections incarceration policies
• Health care costs—reduce rate of
increase and overall costs
-Medicaid
-Employee health insurance
-Retiree health care
57
Revenues
• Change system so revenues grow in line with
economy and personal income
• Consider taxing services broadly
• Modify personal income tax by changing rate
and exemptions—or—implement graduated
income tax (Constitutional amendment
required)
• Consider taxing pensions and other
retirement income (area of greatest income
growth in future)
• Reduce reliance on “sin” taxes
58
Tax Scenario Arithmetic
• Expanding Sales and Use Taxes to
Virtually all services and reducing rate to
3% adds about 1% to growth rate of
those taxes
• Substituting graduated Income Tax with
revenue-neutral starting point nearly
doubles growth rate
• Together these actions would add nearly
1 percentage point to School Aid revenue
growth and nearly 1.5 percentage
growth to General Fund
59
Achieving Structural Balance
• Revenue system changes alone will not
be sufficient
• Policy changes reducing spending
pressure growth will be required
• Health care is the principal target
• National action may be required
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of Michigan
CRC Publications available at
www.crcmich.org
Providing Independent, Nonpartisan
Public Policy Research Since 1916
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