Transcript budget9-8-05 - Citizens Research Council of Michigan

Michigan’s Financial Crisis and the
Outlook for School Funding
U.P. Education Legislative Summit
Marquette, MI
September 8, 2005
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
Citizens Research Council of Michigan
2
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
Citizens Research Council of Michigan
3
Five Years of
Budget Problems
• Worst Since World War II
• Declining General Fund Revenues
• Slow Growth in School Aid Fund
Revenues
• Structural and Cyclical Deficits at
Play
• General & School Aid Funds
Affected
Citizens Research Council of Michigan
4
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
Citizens Research Council of Michigan
5
Budget Deficit Pressures
• Both Funds Outspending “Regular
Revenues”
• Causes
– Economy
– Tax Cuts
– Structural Imbalances In Spending and
Revenues
Citizens Research Council of Michigan
6
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
Citizens Research Council of Michigan
FY04
FY05
7
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
8
Causes of Michigan’s Budget
Problems
• Structural Imbalances
• Weak Economy
• Tax Cuts
• Stock Market Decline
• Michigan’s Deteriorating Share of
Auto and Light Truck Market
Citizens Research Council of Michigan
9
How Weak is the Economy?
Michigan’s Recent Statistics:
• 50th in Personal Income Growth
• 50th 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)
Citizens Research Council of Michigan
10
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
Citizens Research Council of Michigan
11
Michigan Manufacturing
Employment
Monthly Employment (1000s)
Lost 1 in 4 Manufacturing Jobs
1,000
Jul 1999
908,200
900
800
June 2005
Jan
700 1992
775,900
671,400
600
500
1990
1992
1994
1996
1998
2000
2002
2004
Source: U.S. Department of Labor, Bureau of Labor Statistics.
Citizens Research Council of Michigan
12
The General Fund
• Revenues May Be Spent for Any State
Program
• Income Tax and Single Business Tax
Comprise Nearly 3/4 of Revenues
• Both Taxes Have Been Cut Significantly in
Recent Years
• Annual Cuts Now Total $1.3 Billion
Citizens Research Council of Michigan
13
Perspective On Revenues
• General Fund Revenues in FY03,
FY04, & FY05 Below FY1995
• Inflation-Adjusted General Fund
Revenues Below 1972 Level
Citizens Research Council of Michigan
14
General Fund Revenues
$10,000
Millions
$9,500
$9,000
$8,500
$8,000
$7,500
$7,000
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Fiscal Year
Citizens Research Council of Michigan
15
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
Citizens Research Council of Michigan
16
Significant Cuts
• Higher Education Cut 14% in 2 Yrs $297M
• Revenue Sharing Cut 26% in 4 Yrs $399M
• General Fund Support for School Aid
Cut 75% in 3 Yrs - $284M
• State Workforce Down 8,500 in 3 Yrs
(14%) - Smallest Workforce Since 1974
Citizens Research Council of Michigan
17
Medicaid
• Spending Up 40% in 4 Yrs—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
Citizens Research Council of Michigan
18
Corrections
•
•
•
•
•
Spending Up 14% in 3 Years
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
Neighbors
Citizens Research Council of Michigan
19
States With More Than 500
Prisoners Per 100,000 Residents
Citizens Research Council of Michigan
20
Beyond FY2006:
The General Fund Structural
Problem Continues
• Expenditure Causes
– Medicaid
– Corrections
• Revenue Causes
– Antiquated Revenue Structure
– Revenue Sources Unresponsive
to Economic Growth
Citizens Research Council of Michigan
21
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
Citizens Research Council of Michigan
22
Corrections
• Crime Rates Falling but Prison
Populations Continue to Increase
• Populations Projected to Increase 1,800/
Year until 2010 (if Current Policies
Continue)
• Annual Cost Increases About $100M
• Annual Increases About 7%—Twice as
Fast as Revenues Will Grow
Citizens Research Council of Michigan
23
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
Citizens Research Council of Michigan
24
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
Citizens Research Council of Michigan
25
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
Citizens Research Council of Michigan
26
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
Citizens Research Council of Michigan
27
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
Citizens Research Council of Michigan
28
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
Citizens Research Council of Michigan
29
School Aid:
Growing Spending Pressures
and Weak Revenue Performance
• Retirement Contributions
• Employee Health Insurance
• General Pay Raises
• Revenues Growing Slowly
Citizens Research Council of Michigan
30
School Aid Revenues
$12,000
Millions
$11,000
$10,000
$9,000
$8,000
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Fiscal Year
Citizens Research Council of Michigan
31
The School Aid Fund
• Revenues Earmarked Exclusively for Public
Schools
• FY2006 Forecast $12.6 Billion
• Slow Growth in Revenues Since FY2003
• Main Sources of Revenue:
–
–
–
–
Sale and Use Taxes- $5.5 Billion (40%)
Income Tax- $2.1 Billion (16%)
State Education Property Tax- $2.0 Billion (15%)
Other Revenues Include Lottery, Cigarette, Federal
Citizens Research Council of Michigan
32
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
Citizens Research Council of Michigan
33
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%
Citizens Research Council of Michigan
34
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
Citizens Research Council of Michigan
35
School Aid Outlook Beyond FY2006
• Moderate Revenue Growth ($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
Citizens Research Council of Michigan
36
Significant Continuing Demands
On Revenues
•
•
•
•
Retirement Contributions
Employee Health Insurance
General Pay Raises
Fuel and Utilities
Citizens Research Council of Michigan
37
Public School Employees
Retirement System
• CRC Report Issued in September, 2004
• Covers Pension and Health Benefit
Contributions
• Projections Still on Target
Citizens Research Council of Michigan
38
School Retirement Funding
• School Districts Pay Contributions for
Employees
• Rate for FY2006 16.34% of Payrolls
• Contribution Rate Composed of Two Parts
– Regular Pension Benefit
– Health Care Benefits
• Both Parts Will Continue to Increase
Dramatically in the Future
Citizens Research Council of Michigan
39
Pension Funding Component
• Stock Market Crash in 2001 and 2002
• Lost 22% of Market Value In 2 Years
• Gap Between Assumptions and Actual
Returns Was Nearly 40%
• Contribution Rate Subsidized By Reserves
in FY04, FY05 and FY06
• Rate Jumps From 7% in FY04 to 12% in
FY08
Citizens Research Council of Michigan
40
Retiree Health Benefits Component
• Funded on a Pay-As-You-Go Basis
• Now Costs 6.55% of Payroll
• Unfunded Liability Has Increased Tenfold
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
Citizens Research Council of Michigan
41
Combining Health and Pension
Contribution Rates
• Rate Jumps From 12.99% in FY04 to 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 Million of
Reserves
• Per Pupil Increase In FY2006---$80
• Total Three-year Increase About $600 Million
• Three Years of 3.5% School Aid Revenue
Growth Produces About $450 Million Per Year
Citizens Research Council of Michigan
42
MPSERS Contribution Rates
Fiscal Years Ending 1991 Through 2020
35
Percentage of Payroll
30
25
20
Pension
Health Benefit
Total Contribution
15
10
5
0
1991 1994 1997 2000 2003 2006 2009 2012 2015 2018
Fiscal Year Ending
Citizens Research Council of Michigan
43
Employee Health Insurance
• Double-digit Premium Increases Recently
• Schools Spend About $1000 Per Pupil on
Health Insurance Premiums
• Annual Increases Around $100 Per Pupil
Likely For Next Several Years
Citizens Research Council of Michigan
44
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
Citizens Research Council of Michigan
45
The Numbers—School Aid
• Revenues Grow About $250 Per Pupil Per
Year
• Spending Pressures and “Requirements”
-Retirement and Health Insurance--$225+
-Salaries and Wages (3%)--$150+
• Structural Deficit Exceeds $125 Per Pupil
Each Year (Nearly 2%)
Citizens Research Council of Michigan
46
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
Citizens Research Council of Michigan
47
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
Citizens Research Council of Michigan
48
Some Policy Options
The State
• State Could Allow Some Local District Taxing
Authority
• State Financial Incentives for Inter-district
Cooperation and Consolidation
• State “Take-over” of Employee Health Insurance
• Modify Retiree Health Benefits and Vesting
Provisions
• Change Basic Pension Benefit (Prospectively) to
Defined Contribution Plan
Citizens Research Council of Michigan
49
Some Policy Options
Local Districts
• Make Greater Use of ISD Services
• Contract (“privatize”) Some Noninstructional Services (e.g. Food Service,
Transportation, Custodial)
• Reduce Number of Days in Attendance
and Increase Length of Days to Offset
Reduction
Citizens Research Council of Michigan
50
Responsibility and Authority
• Public Education a State Constitutional
Responsibility
• Providing Tax Revenues to Pay the
Expenses of State Government is a State
Constitutional Responsibility
• Legislature and Governor Have Both the
Responsibility and Authority to Deal With
the Problem
• The Solutions Reside Primarily in Lansing
Citizens Research Council of Michigan
51
Citizens Research
Council of Michigan
CRC Publications Available at
www.crcmich.org
Providing Independent, Nonpartisan Public Policy Research Since 1916
Citizens Research Council of Michigan
52