Michigan League for Human Services

1. Michigan League for Human Services Update on the State Fiscal Crisis October 2005 Sharon Parks Vice President for Policy 1115 South Pennsylvania Avenue, Suite 202, Lansing, MI 48912-1658  (517) 487-5436 Fax: (517) 371-4546  Web site: http://www.MiLHS.org A United Way Agency Michigan League for Human Services

2. Michigan’s Fiscal Crisis Is In Its Fifth Year • Revenue decline began in 2001 • State revenues are nearly 30% lower than in 2000 • State revenues are at their lowest level since 1972 Michigan League for Human Services

3. State Actions to Address the Crisis • One-time revenue measures--over $6 billion since 2001 • Rainy Day Fund and Medicaid Trust Fund are depleted • Federal fiscal relief • Employee wage conesssions • Program reductions totaling more than $3 billion since 2001 • Higher Education • Revenue sharing • Medicaid reduced • School Aid Foundation Allowance flat; pro-ration reductions; categorical funding reduced • State workforce smallest workforce since 1974 Michigan League for Human Services

4. State Actions to Address the Crisis Cont’d. • Some revenue increases • Approximately $1 billion -- less than 13% of total deficits since FY 2001 • Cigarette and tobacco increases • Casino taxes • Bad driver fees Michigan League for Human Services

5. Why Do Michigan’s Fiscal Problems Persist? • National economy only partly to blame • Jobless recovery • Nearly 300,000 jobs lost in Michigan since 2001 • 61% of job losses in manufacturing • Michigan’s deteriorating share of auto market • Federal fiscal policies have hurt states (e.g. loss of federal fiscal relief, internet sales, No Child Left Behind) • Cost to Michigan 2002-2005 -- $5.5 billion or nearly 7% of General Fund budget • President’s budget could do more harm Michigan League for Human Services

6. Why Do Michigan’s Fiscal Problems Persist? Cont’d. • Multi-year state and federal tax reductions have eroded the state’s revenue base • Five year reduction in personal income tax rate; now at 3.9% • Phase out of the Single Business Tax • Phase out of federal estate tax • Since 1999 revenue losses from these tax cuts equate to as much as three-fourths of the $7.8 billion in deficits since their enactment Michigan League for Human Services

7. How We Have Coped:Revenue Reductions Associated with Multi-Year Tax Cuts Compared to Michigan’s Annual Deficits(Dollars in Billions) $3.5 $3 $2.5 $2 $1.5 $1 $0.5 $0 3.2 Tax Cuts/Revenue Losses .3 Deficits Covered by: 1.7 Fees and Taxes 1.9 Program Reductions .4 One-time Reserves and Adjustments 1.5 1.4 1.4 1.3 1.3 .1 .4 1.1 .2 .3 Unresolved Deficit .9 1.2 .4 .4 .6 .8 1.0 .6 .5 .4 .7 .5 .1 1999 2000 2001 2002 2003 2004 2005 2006 Forecast Fiscal Year Prepared by Michigan League for Human Services Michigan League for Human Services

8. Tax Cuts Contribute to Deficits:Michigan’s Cumulative Multi-Year Tax Cuts Compared to Cumulative State Deficits(Dollars in Billions) 7.8 $8 $7 $6 $5 $4 $3 $2 $1 $0 Cumulative Tax Cuts 1. 6.3 Deficits Covered by: 5.9 3. .6 Fees and Taxes 2.4 4.5 Program Reductions .7 One-time Reserves and Adjustments 3.2 3.1 3.8 .3 2.1 3.3 1.8 .3 1.2 2.1 .6 1.4 .4 .1 1999 2000 2001 2002 2003 2004 2005 Fiscal Year Prepared by Michigan League for Human Services Michigan League for Human Services

9. FY 2005-2006 Budget Continues a Mix of Solutions • Addressed a shortfall of approximately $700 million • No new taxes or fees • More one-time revenue fixes • Significant cuts in Medicaid/Human Services avoided • We can have our cake and eat it too—but for how long? Michigan League for Human Services

10. Michigan’s Problems Go Well Beyond Current Crisis • We cannot grow our way out of this problem • Michigan’s revenues will not keep up with the normal growth in government programs and services—particularly Medicaid and corrections. (i.e., a structural deficit) • Michigan’s current tax structure cannot generate sufficient revenues Michigan League for Human Services

11. Continuing Pressures on the Budget • Medicaid spending has increased (40% of GF appropriations in 2005) • Medicaid caseload up; growing numbers of uninsured • 1.4 million people covered by Medicaid (1 in 7) • Growth in Medicaid spending exceeds normal economic growth • The baby-boomers will enter the Medicaid program in a few short years; implications for long-term care Michigan League for Human Services

12. Continuing Pressures on the Budget Cont’d. • 75% of Medicaid enrollees are children and non-elderly adults • 30% of spending • Elderly and disabled – 25% of enrollees • 70% of spending Michigan League for Human Services

13. Continuing Pressures on the Budget Cont’d. • Increased needs in many areas • Basic needs/Safety net • Mental Health • Child Welfare • Prevention services • Early childhood education • Corrections budget continues to grow • Sentencing guidelines • Aging prison population; implications for health care Michigan League for Human Services

14. Continuing Pressures on the Budget Cont’d. K-12 Education More Dependent on State’s Fiscal Health Pre-Proposal APost-Proposal A Michigan League for Human Services

15. Continuing Pressures on the Budget Cont’d. • GF contribution to the School Aid Fund is declining • Teacher retirement and health care costs outstrip revenue forecasts for School Aid Fund • Per pupil funding drops with enrollment declines even though operating costs do not Michigan League for Human Services

16. Continuing Pressures on the Budget Cont’d. • One-time revenues no longer available • What about the next recession? • Rainy Day Fund depleted • Business cycle has not been repealed • Tax expenditures continue to grow while state revenues do not Michigan League for Human Services

17. Michigan Tax Expenditure and Revenue Trends (Actual Dollars in Billions) Estimated Actual Tax Expenditures Treasury Reported Tax Expenditures Total State Revenue Trend Data Sources: Michigan Department of Treasury and November 2004 Special Consensus Revenue Forecast Michigan League for Human Services

18. What Does This Mean for the Future? • Without actions to address the structural deficit, shortfalls of approximately $400 million/year are likely for the foreseeable future • Cutting spending is not the answer (W.E. Upjohn Institute for Employment Research: $1 billion in reduced spending equals a loss of 23,000 jobs statewide) • Further tax cuts are not the answer: Michigan is not a high tax state; MI compares well with other states • A structural deficit requires a structural solution • Preserve all revenue possible • Overhaul the state’s outdated tax structure Michigan League for Human Services

19. Ten Year Forecast of Michigan General Fund & School Aid Revenues and Liabilities (Dollars in Billions) $25.9 Expenditure Trend Line Structural Deficit $20.8 $18.7 Revenue Trend Lines    The expenditure trend line assumes inflation adjusted average annual growth of 3 percent. This growth rate, however, may be understated given continuing double digit health care cost increases and the likely growth in demand for services associated with declining insurance coverage, a rapidly aging population and significant increases in obesity and diabetes in Michigan. Projected increases in the state’s prison population may also increase the rate of expenditure growth. The revenue trend line assumes average annual revenue growth of 1 percent beginning in FY2006. This growth reflects a return to more typical historic trends subsequent to estimated real declines of 3.9 percent in FY2004 and .8 percent in FY2005 per the May Consensus Revenue Conference, and assumes action is taken to reform or replace the SBT in a manner that preserves current receipts. An alternative revenue trend line reflects the loss of approximately $2 billion in revenues associated with the sunsetting of the Single Business Tax in Calendar Year 2010. Michigan League for Human Services

20. What Are Michigan’s Revenue Sources that Fund Critical Programs and Services? Michigan League for Human Services

21. Total Revenue by Source FY 2004-2005Total Resources: $38.1 Billion Source: House Fiscal Agency Michigan League for Human Services

22. General Fund/General Purpose Revenue by Source FY2004-2005Total Resources: $7.8 Billion Source: House Fiscal Agency Michigan League for Human Services

23. School Aid Fund Revenue by Source FY2004-05Total Resources: $12.3 Billion Source: House Fiscal Agency Michigan League for Human Services

24. What Should Be Done? Cont’d. • No more multi-year tax cuts (such as Income and SBT rate reductions) • Decouple from the federal estate tax • Modernize the state’s sales tax by broadening the sales tax base to include services and e-commerce (MI taxes only 29 of 164 of Federation of Tax Administrators’ categories) • Services make up more than half of private economic activity • Stop “silent spending” by regularly reviewing the state’s tax expenditure budget • Means-test tax breaks for the elderly Michigan League for Human Services

25. What Should Be Done? Cont’d. • Stop relying on sin taxes to fund state government services and programs • Make the income tax more fair; Michigan is one of only six states with a flat tax • The SBT should be retained, or at least replaced with a tax that generates similar revenue (the SBT represents 25% of GF revenues) Michigan League for Human Services

26. What Should Be Done? Cont’d. • Michigan needs a tax structure for the future that is adequate, stable and fair • A tax structure that cannot generate growth is not adequate • A tax structure that fluctuates wildly is not dependable and is not stable • A tax structure that places the largest burden on those least able to pay is not fair Michigan League for Human Services

27. But Wait – What about TABOR? • TABOR is a Taxpayer Bill of Rights enacted in Colorado in 1992 that constitutionally limited yearly spending increases to no more than inflation + population growth • Similar legislation has been introduced in Michigan • A national group, FreedomWorks, claims 20 chapters in Michigan formed to put a TABOR-type of initiative on the ballot in Michigan in 2006 • FreedomWorks is active in similar efforts in numerous other states Michigan League for Human Services

28. After 12 Years of TABOR, Colorado Has Among the Nation’s Poorest Public Services For example: • Colorado ranks 47th in K-12 education funding as a share of state income • Colorado ranks 50th in the nation for on-time immunization rates • The share of low-income individuals enrolled in Medicaid is lower than in all but five other states Colorado voters will be asked in November to suspend TABOR for five years and allow the state to borrow for certain purposes. Michigan League for Human Services

29. Michigan already has a revenue limit—the Headlee Amendment. Current revenues are approximately $5.5 billion below the Headlee limit. If TABOR is enacted in Michigan, the state’s structural deficit could be substantially worse. Stay tuned. . . Michigan League for Human Services

30. Michigan League for Human Services The Michigan League for Human Services is a state-level policy organization focused on the needs of Michigan’s low-income families and individuals. The League’s activities include research, analysis, public education and advocacy. The League was founded in 1912 and is a private, nonprofit charitable organization. Michigan League for Human Services