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State and Local Public Finance Challenges in Michigan. Rochester Rotary Club. Craig Thiel Citizens Research Council of Michigan October 5, 2010 www.crcmich.org / [email protected] Citizens Research Council of Michigan. Founded in 1916 Statewide Non-partisan Private not-for-profit

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State and local public finance challenges in michigan

State and Local Public Finance Challenges in Michigan

Rochester Rotary Club

Craig Thiel

Citizens Research Council of Michigan

October 5, 2010

www.crcmich.org / [email protected]


Citizens research council of michigan
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 – accurate, independent and objective

  • Relies on charitable contributions of Michigan foundations, businesses, and individuals

  • www.crcmich.org


The last decade has been an economic disaster for michigan
The Last Decade Has Beenan Economic Disaster for Michigan

*GDP growth is for 2000 through 2008.

3


Almost every sector in michigan has lost jobs
Almost Every Sector in MichiganHas Lost Jobs

Source: Bureau of Labor Statistics. CRC calculations.


State forecast no job growth for michigan yet
State Forecast – No Job Growth for Michigan Yet

Michigan Wage and Salary Employment Y-O-Y Change

(In Thousands)

Avg.

Source: Bureau of Labor Statistics. 2010-2011 estimates are from the May 2010 Cons. Forecast.


Michigan has become poorer relative to other states
Michigan Has Become PoorerRelative to Other States

Michigan per Capita Income as a Percent of U.S. Per Capita Income

Rank has fallen from 20th in 2001 to 37th in 2009

122%

93%

87%

Source: CRC calculations from Bureau of Economic Analysis data. March 24, 2009 personal income release for years

Prior to 1969. March 2010 release for years after 1969. Ranking excludes Washington D.C.



Revenue and spending effects
Revenue and Spending Effects

  • Revenue

    • All major state taxes affected

    • Property tax begins to show weakness

    • General tax increase in 2007

    • “Rainy Day” funds depleted or at very low levels

  • Spending

    • Spending on “counter-cyclical” programs rises

    • “Required” personnel costs (pensions and retiree health) do not abate


The michigan budget story has not changed
The Michigan Budget Story Has Not Changed

  • The state budget has generally tracked economy, but other forces at work too

  • Since FY2001, budget faces structural budget problems

  • Prospectively, the State will have to confront dual structural deficits affecting:

    - Public K-12 education

    - General Fund-financed programs

  • Its causes have both spending and revenue components

  • We will not grow out of it – long-term problem

  • Conclusion: Significant spending cuts and/or tax increases will be required to align on-going spending and revenues


On going discretionary revenue gf gp at fy1965 and one half of fy2000
On-Going Discretionary RevenueGF/GP at FY1965 and one-half of FY2000

Billions of 2010$

FY2000

$14.4B

FY1965

$6.9B

FY2010

$6.9B

Note: GF-GP figures are presented on a Consensus basis and adjusted for inflation to 2010 dollars using the state and local government price deflator. 2009 and 2010 are estimates.


On going dual deficits fy08 benefitted from tax increases
On-Going Dual DeficitsFY08 Benefitted from Tax Increases

Note: Operating deficits equal difference between on-going revenues and spending in GF/GP and SAF; revenues exclude temporary ARRA funding

* FY10 is an estimate


State spending from state sources down sharply in real terms
State Spending From State SourcesDown Sharply in Real Terms

  • From FY2000 to FY2010

  • Inflation up approx. 23%

  • Total state spending up 22.5% but increases in federal aid drove increase; state spending from state sources up only 2.3%

  • Spending changes from state sources:

    • K-12 +8.2%

    • Community Colleges +0.7%

    • Universities/financial aid -13.7%

    • Revenue sharing -34%

    • Corrections +27.2%

    • Medicaid +49.9%

12

Source: Senate Fiscal Agency.


Michigan s gf gp budget significant changes
Michigan’s GF/GP Budget Significant Changes

Total: $9.9 Billion

Total: $8.1 Billion

Source: Senate Fiscal Agency


There is a new chapter in budget saga focus shift to short term problems
There is a New Chapter in Budget SagaFocus Shift to Short-Term Problems

  • Severe recession: all of 2008 and most of 2009

  • Impacts on state budget were massive - primarily in FY2009 and FY2010, and lingering into FY2011

    • Revenue declines unprecedented

    • Spending demands spiked

  • State budget unprepared to deal with current recession

    • Exhausted reserves earlier in decade

    • Few non-recurring resources available

    • General tax increases of 2007

  • Challenge facing policymakers - Must correct for two problems simultaneously

    • Structural deficits

    • Cyclical deficits

    • Each problem requires specific set of tools


Revenues crash in fy2009 recover in fy2011 but slowly
Revenues Crash in FY2009Recover in FY2011 but Slowly

Annual Growth Rates

Note: Projected totals are the May 2010 Consensus Revenue Estimates.


Fy2009 and fy2010 budgets attention to short term problem
FY2009 and FY2010 BudgetsAttention to Short-Term Problem

  • Revenue decline in FY2009: -21%

    • Major taxes affected by economy

    • Tax policy changes contributed too

    • After 13% increase in FY2008 (income tax rate increase)

    • Overall: $2 billion hit to General Fund

  • Another 10% decline in FY2010

    • Economy and tax policy factors continue

    • Another $700 million

      Two-year decline: $2.7 billion


Fy2010 gf cuts were severe
FY2010 GF Cuts Were Severe

Medicaid provider rates (cut 8% from original FY2009 level)

Non-Medicaid CMH funding ($40M cut)

Elimination of $238M from DHS budget

Revenue Sharing to CVTs down 9.7%

State employee concessions/layoffs (varied)

Average of -8.4% cut (GF-GP) across all state departments

Some larger than others

Some areas protected from cuts per ARRA

Scholarships to university students cut by two thirds (incl. elimination of Promise Grants)

Budget also supported by $1.2 billion in stimulus funds


Balanced budget achieved heavy reliance on one timers
“Balanced” Budget AchievedHeavy Reliance on One-Timers

  • *Based on projected spending

  • Based on May 2010 Consensus Revenue Estimate

  • Fund balance = $458 million on 10/1//08


Fy2010 school funding cuts initially very sizeable
FY2010 School Funding CutsInitially Very Sizeable

  • On-going revenue $750 million below FY2008

    • Budget enacted with sizeable cuts, including:

    • $165 per pupil ($263M)

    • ISD reduction ($16M)

    • “Hold Harmless” Districts veto ($52M)

    • Others ($35M)

  • Budget includes $450M in stimulus funding

  • Some funding later restored



Fy2011 budget more of the same solution includes 1 billion in one time fixes
FY2011 Budget – More of the SameSolution Includes $1 Billion in One-Time Fixes

  • Non-recurring resources ($945M)

    • Federal Medicaid match increase ($620M)

    • Unclaimed property changes ($166M)

    • Tax amnesty program ($62M)

  • Some structural reforms, but not as much as exec. budget

    • Retirement system changes ($80M)

  • Spending reductions – ($256M)

    • Debt refinancing ($77M)

    • Higher Education ($43M)

    • Human Services ($66M)

    • Corrections ($42M)

      Many of the reductions deemed “aggressive” by Governor


Fy2011 school aid budget completed early
FY2011 School Aid BudgetCompleted “Early”

  • Original revenue picture: add’l $250 per-pupil reduction ($400M shortfall) in FY2011

    • Sales tax restructuring and MBT phase-out

    • Add’l net revenue in FY2011 to solve problem, but revenue neutral in out-years

    • Mid-year cut for FY2010 ($127 per pupil)

  • May revenue estimate: major improvement for FY2010 and FY2011

    • Add’l rev. $292M in FY2010 and $352M in FY2011

    • Eliminate projected shortfalls and possible cuts

    • Portion of fund balance ($208M) used in GF

  • Budget deal: completed on July 1 - 3 months earlier

    • FY2010 cuts retained ($11 per-pupil cut restored)

    • $318M of fed. Edu Jobs will help restore FY2010 cuts


Problem only gets bigger in fy2012 general and school aid fund budgets face min 1 6b shortfall
Problem Only Gets Bigger in FY2012General and School Aid Fund Budgets Face Min. $1.6B Shortfall

  • Use of nearly $1.5B in non-recurring resources in FY2011 will be added to:

    • First year of income tax rate reduction: $150M

    • Other tax changes

    • Spending pressures related to caseloads and employee economics

  • Some relief provided by:

    • Revenue growth coming out of the recession

    • Early retirement plan and pension reforms

    • Fed. Medicaid match still high because of economy

    • Upcoming employee contract negotiations


State revenues make the turn but local revenues fall
State Revenues Make the Turn, butLocal Revenues Fall

  • To date, local property tax has provided stability to local government revenue picture ~ 5% growth/yr (‘00 – ‘07) and flat in ’08 and ‘09

    • In short-term and fairly short order, this picture changes dramatically

    • Taxable values fall in 2010 and 2011

    • State revenues will not be positioned to help

  • Coming out of the downturn, tax value growth capped (Prop. A) – restrains revenue growth

  • Local cuts are coming and will be much more visible than many state cuts


Tv growth stable but taxable value now falling
TV Growth Stable But Taxable Value Now Falling

% Change in Total Taxable Value

Average

Source: State Tax Commission and May 2010 Consensus Conference.


Previously above the u s ave not the case any longer
Previously Above the U.S. Ave, Not the Case Any Longer

Source: US Census


Long term fiscal challenges combination of revenue and spending
Long Term Fiscal ChallengesCombination of Revenue and Spending

  • One-time resources eventually run dry (ARRA, Edujobs)

  • State taxes reduced, but underlying relationship between taxes and economy unaffected

  • Constitutional tax limitation (Headlee) will control growth in property tax receipts at unit level

  • Constitutional tax limitation (Prop. A) will control growth of property value at parcel level

  • Local governments more limited tax base and they are constrained in tax choices (no sales tax)

  • Spending pressures facing state and localities similar – health care and retirement, long-term obligations


State revenue growth does not keep pace with economy
State Revenue Growth Does NotKeep Pace with Economy

  • 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

  • Tax Policy – reduce “natural” growth

    • Earned Income Tax Credit

    • Phase-out of Income Tax increase


Structural deficit spending pressures outpace revenue growth
Structural DeficitSpending Pressures Outpace Revenue Growth

  • Over 85% of GF/GP budget concentrated in four areas:

    • Community Health ($2.4B)

    • Corrections ($1.9 B)

    • Higher Education ($1.8 B)

    • Human Services ($0.9 B)

  • Most significant spending pressures:

    • Health care

    • Corrections – personnel costs

    • Employee compensation – pay and fringes

  • Caseload and “inflationary” increases drive spending


Without structural reforms problem compounds
Without Structural Reforms Problem Compounds

Source: CRC, Michigan’s Fiscal Future


Structural spending reforms actions taken to date
Structural Spending ReformsActions Taken To Date

  • Corrections – focus on decreasing prison population through reducing the length of stay

    • Administrative actions to date – 6,300 prisoner reduction since 2006 peak

    • Gov. proposal to restore “good time credits” to reduce 10,000 prisoners – not adopted by legislature

  • Public employee compensation – focus on benefits

    • New employees: 20% premium sharing

  • State pension plans – require employees to pick up cost of retiree health care (cost shift from employer)

    • Recent changes require 3% contribution; however, some savings offset by “early out” plan


Other potential areas of reform topics under consideration
Other Potential Areas of ReformTopics Under Consideration

Tax Structure – Potential goals include: faster growth; more favorable to economic development; increased progressivity; additional revenues; property tax limitations (Headlee and Prop. A)

Local Government Service Consolidation or Service Collaboration – Increased service sharing among local governments, or outsourcing of service provision in an attempt to achieve cost savings

Investments in Areas Deemed Key for Economic Development – Potential areas include infrastructure, higher education, targeted tax credits for key industries (e.g. film credits, battery credits)

32


Challenge looking forward
Challenge Looking Forward

  • Michigan has to come to grips with new reality – sooner the better

  • No shortage of solutions - problem fairly well defined

  • Generating consensus around a reform agenda – very sharp philosophical differences exist

  • Long-term problem - will require a long-term solution (no “silver bullet”)

  • For those dependent on public dollars and absent reforms – likely to get worse before it gets better


Citizens research council of michigan1
Citizens Research Council of Michigan

CRC Publications available at

www.crcmich.org

Providing Independent, Nonpartisan Public Policy Research Since 1916


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