Transcript budget042604 - Citizens Research Council of Michigan

Michigan’s Budget Crisis
An Update
Legislative Banquet
Kent Intermediate Association of
School Boards
April 22, 2004
Tom Clay
Director of State Affairs
Citizens Research Council of Michigan
www.crcmich.org
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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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Five Years of Budget Problems
• Declining General Fund Revenues
• Slow Growth - School Aid Fund
Revenues
• Situation Cyclical or Structural?
• Prospects for Improvement?
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The National Situation
• Worst State Budget Crisis Since World
War II
• Revenue Structures Mismatched With
Spending Responsibilities
• Spending Demands Outpacing Revenue
Increases
• Medicaid a Nationwide Problem
• Corrections Growing Rapidly in Michigan
and Some Other States
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The Michigan Budget
• Total State Budget - $39.1 Billion
• State’s Two Major Funds:
General Fund - $8.7 Billion
School Aid Fund - $12.5 Billion
• Other State Funds Restricted for Other
Purposes, e.g. Transportation, Federal
Revenues
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General Fund Budget
83% of General Fund Spending in 4 Areas:
• Higher Education ($1.8 B)
• Community Health — Mental Health,
Public Health, Medicaid ($2.5 B)
• Corrections ($1.7 B)
• FIA — Family Services, Juvenile Justice,
Public Assistance ($1.1 B)
All Other General Fund Programs - $1.5 B
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School Aid
• State Provides About 80% of Total State &
Local Revenues to Local Districts & Charter
Schools
• Almost All of the Revenue Base Earmarked
Specifically for Schools
• Sales Tax is Principal Revenue Source
(41%)
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External Causes of the
Budget Problem
• 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:
-46th in Personal Income Growth
-48th in Unemployment Rate
-49th in Employment Growth (Decline for
Michigan)
-49th in Index of Economic Momentum
(Population, Personal Income, Employment)
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Michigan Job Losses
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285,000 Jobs Lost in Three Years
Manufacturing Employment Down 174,000
19% Fewer Manufacturing Jobs
61% of Job Losses in Manufacturing
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The Stock Market
• Michigan Income Tax Receipts From NonSalary Income Dropped Over $500 Million
in Three Years (Nearly 40 Percent)
• Affected General Fund and School Aid
• Hangover Will Remain For Several Years
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Total U.S. Vehicle Sales & Big 3 Share 1992-2003
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 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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Internal Causes of the Problem
• Revenue Structure Mismatched With Spending
Responsibilities
• Spending Growth Outpacing Revenue Increases
-Medicaid a Nationwide Budget Problem for the
States
-Corrections Growing Rapidly
-Some Programs Are Being Crowded Out of
Budgets
• Tax Cuts Eroding the Revenue Base
• Failure to Implement Permanent Budgetbalancing Changes
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The Tax Rate 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 w/1/3 Less Revenue
• Roughly 13 Percentage Points of 34
Percentage Points Gone ($1.3 B)
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Summary of One-time Resources
(in Millions)
Rainy Day Fund
FY2000 School Aid Fund Surplus
FY2000 General Fund Surplus
$1,363
984
212
Medicaid Benefits Trust Fund
Advance State Education Tax Collection Date
Tobacco Settlement/Merit Award Revenues
Temporary Federal Fiscal Assistance
561
455
317
655
Bond for Pay-as-you-go Capital Projects
Revenue Sharing Accounting Change
Refinance Bonds
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181
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Employee Wage Concessions
11015
General Fund & School Aid
Operating Deficits
School Aid
Fund
$600
$400
($ in Millions)
$200
$0
($200)
General
Fund
($400)
($600)
($800)
($1,000)
($1,200)
FY00
FY01
FY02
FY03
FY04
FY05
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Perspective On Revenues
• Actual General Fund Revenues in FY03,
FY04, & FY05 Below FY1995
• 10 Years of Higher Costs & Increased
Needs Go Unfunded
• Some Programs Crowding Out Others
• School Aid Revenues Up $3.5 B Over
Same Period (45%)
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FY2004 Review—General Fund
• Budgets Cut $1.7 Billion
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– General Fund - $1,335 Million
– School Aid - $361 Million
Onetime Resources & Savings - $807 M
Fees & Other Revenues - $453 M
Other Changes - $155 M
Tax Increases Off the Table
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FY2004 School Aid Review
• School Aid Down Year to Year—
$128 Million
• First Decline Since Proposal A
• Retirement Percentage Held at
12.99%--Reserves Used to Postpone
Increase
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Summary of Other Budget Cuts
• Higher Education Cut 14% in 2 Years $297 M
• Revenue Sharing Cut 15% in 3 Years $293 M
• State Workforce Down 8,500 in 3 Years
(14%) - Smallest Workforce Since 1974
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Revenue Sharing Payments
Fiscal Years ’93 through ‘04
$1,600.0
$1,400.0
Statutory/
Constitutional
$1,200.0
$1,000.0
Actual/
Proposed
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3
'0
1
'9
9
'9
7
'9
5
$800.0
'9
3
In Millions
$1,800.0
Fiscal Year
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Medicaid
• Spending Up 40 Percent in 4 Years Nearly Double Digit Increases
• Caseload Up 27 % During Same Period
• Program Now Covers 1.35 Million
Michigan Citizens
• Pressures on Rates Paid Providers Could Add Significantly to Growth in
Future
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Corrections
• Largest State-Operated Program
• Most State Revenue Goes to Other
Organizations - Universities, Schools,
Hospitals, Local Government, etc.
• 50,000 Prisoners
• Over 30% of State Workers
• Share of Budget Has Increased 4
Percentage Points Since FY2000
• Spending Up $253 Million (17%)
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States With More Than 500
Prisoners Per 100,000 Residents
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25.0
20.0
15.0
10.0
5.0
0.0
FY
05
FY
03
FY
95
Corrections
Higher Education
School Aid
FY
93
FY
80
Percent of Total
Shares of the General Fund Budget
Fiscal Year
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State Government
Employment Trends
70,000
50,000
Corrections
40,000
All Other
Departments
30,000
20,000
10,000
Fiscal Year
2003
2002
2000
1995
1990
1985
0
1980
Employment
60,000
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State Employee Compensation
• Increases in Employee Compensation Costs Not
Funded In FY2004 Appropriations
• Pay Raises Negotiated in 2001—Three Year
Contract—2%(‘03), 3%(’04), 4%(’05)
• Other Increases—Group Insurance &
Retirement Contribution Rate
• General Fund Costs---$140 Million
• Concessions Preventing Loss of 3,000 Jobs in
Place
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Areas of Continuing Risk
• Economic and Revenue Outlook
-Traditional Michigan Recovery not Likely
-Auto and Light Truck Sales Already
Strong
-Incentives, Rebates and Low Interest
Loans Borrowed Sales From Future
-Big Three Losing Sales Share
• Revenues Not Likely to Hit Forecasts
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Revenue Forecasts for FY2005
January Consensus Agreement
• Recovery and Steady Growth Projected
for Economy
• Economic Forecast Produces
4% Percent Revenue Growth
• Most of Growth Needed to Replace FY04
One-time Revenues
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The FY2005 General Fund
Budget Challenge
• Projected Deficit of $1.15 Billion
• Projected Revenues $234 Million Below FY2004
Appropriations
• Additional Requirements---$916 Million
– Medicaid---$447 Million
– Employee Compensation-Existing Contract and
Expiring Concessions---$246 Million
– Corrections---$44 Million
– Family Independence Agency---$25 Million
– Higher Education Tuition Restraint---$52 Million
– Other---$102 Million
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FY2005 Proposed
Revenue Changes
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Increase Cigarette Tax $.75 - $295M
Decouple From Federal Estate Tax-$94M
Increase Liquor Markup - $32M
Merit Scholarship Accounting Change $64M (One-time)
• Increased Revenue Enforcement - $30M
• Most of Revenue Earmarked for Medicaid
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FY2005 Proposed
General Fund Spending Changes
• Eliminate Revenue Sharing for Counties-$183 M
- Create One-time Fund For Counties By
Collecting All Property Taxes In Summer
• Close Women’s Prison - $23 M
• Proposed Employee Savings & Concessions $148 M
• Eliminate Private College Scholarships - $65 M
• Limit Payments in Lieu of Taxes - $10 M
• Reduce GF Grant to School Aid - $196 M
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Closing The General Fund Gap
• Revenues - $451 M
• Spending Reductions - $705 M
• One-time Resources - $104 M
• Total - $1.260 B
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The FY2005 School Aid Proposal
• Foundation Allowance Minimum at $6,700
• General Fund Grant Reduced by $196 M to
$132M---Lowest in More Than 25 Years
• Membership Count Change “Saves” $43M
• Project Great Start Partly Funded By Decreasing
ISD Operations Support
• Total Spending Lower Than FY2003, $104M
Above FY2004
• Retirement Rate up 1.88 Percentage Points to
14.87 Percent
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FY2005 School Aid Will Cause
Significant Financial Pressures
• Retirement Percentages Will Consume
More Than The Small Increase
• Districts Will Have Large Increases in
Health Insurance Costs to Fund
• No Room for Other Higher Costs Without
Cutting Staff or Using Fund Balance (a
slippery slope)
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The Current Situation—FY2004
• Revenue Collections Lagging Behind
Forecasts—Problem Could Exceed $200 Million
-Sales Tax Weak---73% To School Aid
-Income Tax Weak—25% To School Aid
• Other Budget Problems
-Medicaid---$100 to $200 Million
-Sale of State Property--$65 Million
-Higher Education Tuition Commitment---$52
Million
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The Implications For FY2005
• Most of the FY2004 Problems Flow
Through To FY2005
• Revenues Would Have to Grow Faster
From a Lower Base to Make Forecasts
• Medicaid Costs Will Likely Add to FY2005
Proposal Under Consideration
• Many Elements of Proposal At Risk
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The Ongoing General Fund
Structural Problem - The Budget
Beyond FY2005
• Pressures On Health Care & Corrections
Spending to Outpace Future Revenue Growth
• Only Fundamental Structural Changes Will
Solve the Problem
• Revenues - Antiquated Tax Structure
• Medicaid Responsibilities - Federal/State
• Corrections Policies
• Eliminate Some Programs
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The School Aid Outlook
Beyond FY2005
• FY2005 Proposal Balances Spending &
Ongoing Revenues
• Continued Economic Growth Translates to
Budget Growth in FY2006
• Continued Revenue Growth Could Permit:
• About 4% Spending Growth in FY2006 &
Beyond
• Foundation Allowance Increases
• Retirement and Health Insurance Will Continue
to Claim Larger Shares of Revenues
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Revenue Structure Issues
• Level of Revenues
-Sufficient to Finance Desired
Programs -Now or in the Future?
• Source of Revenues
-Equitable?
-Representative of Economy?
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Level of Revenues
• Jury Still Out
• Elected Officials Have Not Yet Devised
Permanent Solution
• Actions So Far Suggest Level Insufficient
• Economic Growth Will Not Solve Problem
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Source of Revenues
• Tax System
• Narrow Base for Sales and Use Taxes
• Single Business Tax Scheduled for Repeal
in 2010
• Revenues Increase More Slowly than
Michigan Economy
• Overhaul of Tax System May be Desirable
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State Taxes as a Percent of
Michigan Personal Income
10.0
6.0
4.0
2.0
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04
20
03
20
02
20
01
20
00
20
99
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98
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97
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96
19
95
0.0
19
Percent
8.0
Year
Percent of Personal Income
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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
• Some Services Might be Excluded - e.g.
Health Care, Educational Services
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Reform Business Taxes
• Is it Realistic to Eliminate SBT Without
Replacement?
• Is it Time to For Many to Replace One?
• SBT Replaced 7 Taxes in 1970s
• Is Business Paying the Wrong Share of Taxes?
• Should Taxes Focus on Wealth? Profits?
• SBT Produces About 25 Percent of General
Fund Revenue
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A Medium-Range General Fund
Budget Scenario
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Assumed Revenue Growth - 4%
Community Health Growth - 9%
Corrections Growth - 7%
Remaining Programs Grow 3%
Projections Begin w/FY2005 Proposed
Budget
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General Fund Projections to FY2010
$12.0
Billions
$11.0
$10.0
Revenues
$9.0
Spending
Pressures
$8.0
$7.0
$6.0
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Y
F
06
Y
F
07
Y
F
08
Y
F
09
Y
F
10
Y
F
Fiscal Year
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Citizens Research Council
of Michigan
www.crcmich.org
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