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Michigan’s Budget Crisis: Its Causes & Prospects for Resolution

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. Founded in 1916

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Michigan’s Budget Crisis: Its Causes & Prospects for Resolution

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  1. 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

  2. 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

  3. The Michigan BudgetFY2006 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

  4. Five Years of Budget Problems • Declining General Fund Revenues • Slow Growth in School Aid Fund Revenues Citizens Research Council of Michigan

  5. Dual Deficits at Play • Structural and Cyclical • General and School Aid Funds Affected Citizens Research Council of Michigan

  6. 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

  7. General Fund & School Aid Operating Deficits Citizens Research Council of Michigan

  8. Summary of One-Time Resources(in Millions) Citizens Research Council of Michigan

  9. General and School Aid Funds Face Structural Deficits • General Fund Somewhat More Severe • Schools Face Retirement & Health Insurance Costs Outpacing Revenue Increases Citizens Research Council of Michigan

  10. General Fund Budget 83% of General Fund Spending in 4 Areas: • Higher Education ($1.8B) • Community Health — Mental Health, Public Health, Medicaid ($2.5B) • Corrections ($1.7B) • Human Services— Family Services, Juvenile Justice, Public Assistance ($1.1B) All Other General Fund Programs - $1.5B Citizens Research Council of Michigan

  11. External Causes of Michigan’s Budget Problems • Weak Economy • Stock Market Decline • Michigan’s Deteriorating Share of Auto and Light Truck Market Citizens Research Council of Michigan

  12. 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) Citizens Research Council of Michigan

  13. Citizens Research Council of Michigan

  14. 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

  15. 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 Citizens Research Council of Michigan

  16. 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 Citizens Research Council of Michigan

  17. 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 Citizens Research Council of Michigan

  18. Corrections • 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 Citizens Research Council of Michigan

  19. States With More Than 500 Prisoners Per 100,000 Residents Citizens Research Council of Michigan

  20. 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

  21. 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 Citizens Research Council of Michigan

  22. 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 Citizens Research Council of Michigan

  23. 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

  24. FY2006 School Aid ProposalRisks 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 Citizens Research Council of Michigan

  25. Beyond FY2006The Structural Problem Continues • Expenditure Causes • Medicaid • Corrections • Revenue Causes • Antiquated Revenue Structure • Revenue Sources Unresponsive to Economic Growth Citizens Research Council of Michigan

  26. 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% Citizens Research Council of Michigan

  27. 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 Citizens Research Council of Michigan

  28. 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

  29. Citizens Research Council of Michigan

  30. 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 Citizens Research Council of Michigan

  31. 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

  32. General Fund Spending Pressures General Fund Revenues Citizens Research Council of Michigan

  33. 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

  34. Revenue Changes • Replace the “Lost” SBT Before 2010 Governor’s Proposal “Revenue-Neutral” • Broaden the Base of the Sales & Uses Taxes to Include More Services Citizens Research Council of Michigan

  35. 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 Citizens Research Council of Michigan

  36. 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 Citizens Research Council of Michigan

  37. 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 Citizens Research Council of Michigan

  38. Significant Demands On Revenues • Retirement Contributions • Employee Health Insurance • General Pay Raises • Fuel and Utilities Citizens Research Council of Michigan

  39. Public School Employees Retirement System • CRC Report Issued in September, 2004 • Covers Pension and Health Benefit Contributions Citizens Research Council of Michigan

  40. 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 Citizens Research Council of Michigan

  41. 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 Citizens Research Council of Michigan

  42. 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 Citizens Research Council of Michigan

  43. 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 Citizens Research Council of Michigan

  44. Citizens Research Council of Michigan

  45. 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 Citizens Research Council of Michigan

  46. 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

  47. A Structural Deficit in School Aid Fund? Cost Increases to Maintain Current Policies Outpacing Revenue Growth, Even in Good Economic Times Citizens Research Council of Michigan

  48. 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 Citizens Research Council of Michigan

  49. 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 Citizens Research Council of Michigan

  50. 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 Citizens Research Council of Michigan

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