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Michigan’s Financial Forecast
CorNet Michigan Chapter
January 14, 2010
Mark P. HaasChief Deputy Treasurer
Michigan Department of Treasury
2
Tax Administration
Tax and Debt Collection
Financial Management
Local Government Services
Financing Higher Education
Investing All State Funds
Treasury Responsibilities
3
Treasury Customers
82
175
843
1,858
549,160
720,000
Over 6,000,000
Colleges and Universities
Hospitals
Public Schools
Local Government Units
Public Retirees
Higher Ed Students
Michigan Taxpayers
4
Treasury’s Commitment
Maintain the State’s financial integrity.
Fair and consistent administration of tax laws.
Provide efficient and effective professional services.
Provide access to financial resources for higher education, K-12, local government, and hospitals.
5
2010 Treasury Budget
Pass Through FundsPass Through Funds
Revenue Sharing $1,133.7Revenue Sharing $1,133.7
GrantsGrants $103.8 $103.8
Debt ServiceDebt Service $82.2 $82.2
Payments in Lieu of Taxes Payments in Lieu of Taxes $14.4 $14.4 __________________
$1,334.1$1,334.1
Operations FundingOperations Funding
Revenue Generation $120.6Revenue Generation $120.6
Student Financial $37.5Student Financial $37.5
Investments $16.7Investments $16.7
Local Government $17.4Local Government $17.4 Customer Service $12.1Customer Service $12.1
State Banking $7.1State Banking $7.1
Revenue Forecasting $1.5Revenue Forecasting $1.5
Bond Finance $1.3Bond Finance $1.3 ________________
$214.2$214.2
Revenue Sharing
Grants
Debt Service
($s in millions)
All Funds $1,548,257.3 / General Fund (GF) $135,597.7
Operations
PILT
6
Overview
How bad was the recession?
Is it over?
What about Michigan?
Real estate turn around?
How does the State budget look?
What does Michigan need to do?
7
How Bad is the Recession?
8
Current Recession LongestSince Great Depression
13
811 10
810 11
16
6
16
8 810
19
1937-1938
1945 1948-1949
1953-1954
1957-1958
1960-1961
1969-1970
1973-1975
1980 1981-1982
1990-1991
2001 Avg.PostWar
2007ThruJun09
Number of Months from Peak to TroughU.S. Recessions
Source: NBER, Assumes recession ends beginning of 3 rd quarter 2009
9
Current Recession GDP DeclineSteepest on Record
-1.6%
-2.5%-3.1%
-0.5%-0.2%
-3.2%
-2.2%-2.6%
-1.4%
0.7%
-1.7%
-3.7%
1948-1949
1953-1954
1957-1958
1960-1961
1969-1970
1973-1975
1980 1981-1982
1990-1991
2001 Avg.PostWar
2007To
09Q2
Percent Change, Economy Peak to Trough
Source: Bureau of Economic Analysis, U.S. Department of Commerce. Data not avail for 1937-38 and 1945 recessions.
10
U.S. Employment DeclineThird Steepest
-7.9%
-5.0%
-3.1%-4.0%
-2.3%-1.2%-1.6%
-1.1%
-3.1%
-1.1%-1.2%
-2.9%
-4.9%
1945 1948-1949
1953-1954
1957-1958
1960-1961
1969-1970
1973-1975
1980 1981-1982
1990-1991
2001 Avg.PostWar
2007ThruOct09
Percent Change, Economy Peak to Trough
Source: Bureau of Economic Analysis, U.S. Department of Commerce. Data not avail for 1937-38 recession.
11
Net Worth Drops19 Percent From Peak
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
1952
Q1
1954
Q3
1957
Q1
1959
Q3
1962
Q1
1964
Q3
1967
Q1
1969
Q3
1972
Q1
1974
Q3
1977
Q1
1979
Q3
1982
Q1
1984
Q3
1987
Q1
1989
Q3
1992
Q1
1994
Q3
1997
Q1
1999
Q3
2002
Q1
2004
Q3
2007
Q1
2009
Q3
Net Worth Outstanding, Households and Nonprofit Organizations(billions)
Source: freelunch.com (Federal Reserve Bank Flow of Funds).
$53,4232009Q3
$66,0072007Q2
12
One for the Record Books
Calendar 2009 Estimate
April 2008
ForecastJan 2010 Forecast Comments
Light Vehicle Sales (millions) 15.2 10.3 Lowest Since 1970Housing Starts (million units) 1.131 0.558 Lowest Back to 1959US Unemployment Rate 5.8% 9.3% Highest Since 1983US Payroll Employment (% chg) 0.4% -3.7% Lowest Back to 1940US Personal Income (% chg) 3.6% -1.4% Lowest Since 1938
Source: Estimates Compare April 2008 and January 2010 Global Insight Forecasts
13
Is the Recession over?
14
Leading Indicators Point to National Recovery
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
1/5/
2007
4/5/
2007
7/5/
2007
10/5
/200
7
1/5/
2008
4/5/
2008
7/5/
2008
10/5
/200
8
1/5/
2009
4/5/
2009
7/5/
2009
10/5
/200
9
01/01/1024.2%
Weekly Leading Index, Smoothed Annual Growth Rate
Source: Economic Cycle Research Institute.
15
Recovery Observed in 3rd Quarter 2009
-1.3%
2.7%
-1.1%
1.4%
3.5%
2.1%2.0%
0.1%
1.6%
3.6%2.9%2.9%3.0%
3.5%3.1%
2.1%
5.4%
0.1%
3.0%
1.2%
3.2%3.6%
2.1%
-0.7%
1.5%
-2.7%
-5.4%
-6.4%
2.2% 2.0%2.3%2.2%
5.1%
6.9%
2.5%
-1.0%
3.2%
1.5%1.7%
4.1%
2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1
Figures are annualized percent change from preceding quarter in 2005 chained dollars.
Source: Bureau of Economic Analysis. Forecast quarters in red are the December 2009 Global Insight forecast.
3.0%Growth
Real GDP Growth
2009Q3
16
U.S. Has Lost 7.2 Million Jobs Since December 2007
215
120
(72)
(144)(122)(160)(137)(161)
(128)(175)
(321)(380)
(597)
(681)(741)
(681)(652)
(519)
(303)
(463)
(304)
(154)(139)(111)
4
(85)
Nov 07 Jan 08 Mar 08 May 08 Jul 08 Sep 08 Nov 08 Jan 09 Mar 09 May 09 Jul 09 Sep 09 Nov 09
Source: U.S. Bureau of Labor Statistics, U.S. Department of Labor
17
Stock Market Up 68 Percent From March 9th Low
600
800
1000
1200
1400
1600
1/2/
2001
7/2/
2001
1/2/
2002
7/2/
2002
1/2/
2003
7/2/
2003
1/2/
2004
7/2/
2004
1/2/
2005
7/2/
2005
1/2/
2006
7/2/
2006
1/2/
2007
7/2/
2007
1/2/
2008
7/2/
2008
1/2/
2009
7/2/
2009
S&P 500 Closing Level
Source: freelunch.com, reuters.com
156510/09/07
113601/12/10
67703/09/09
18
Blue Chip Economists’ Take on the Recovery
Consensus predicts real GDP will grow slightly exceeding its trend rate (2.8% to 3.1%) over the next five quarters.
Although with growth better than predicted six months ago, the projected rate of growth still falls well short of that typically seen after steep recessions.
Labor markets are expected to improve, but modestly, keeping the unemployment rate from falling back below 10% on a sustained basis until the final quarter of this year.
Source: December 2009 Blue Chip Indicators.
19
GDP Generally Strongin Year After Recession
Source: BEA and Dept. of Treasury calculations. Peaks and trough are as designated by NBER for economy.
Y-O-YPeak to GDP Growth
Recession Trough 4 QtrsTrough Change Later
1949Q4 -1.6% 13.4%
1954Q2 -2.5% 7.9%
1958Q2 -3.1% 9.5%
1961Q1 -0.5% 7.5%
1970Q4 -0.2% 4.5%
1975Q1 -3.2% 6.2%
1980Q3 -2.2% 4.4%
1982Q4 -2.6% 7.7%
1991Q1 -1.4% 2.6%
2001Q4 0.7% 1.9%
2009Q2 -3.7% ??
20
500
1000
1500
2000
2500
3000
3500
Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07
Receipts
Outlays
$ bi
llions
, 12-
mon
th su
m
Federal Outlays and Receipts
Source: US Treasury; Encima Global
(last obs. September 2009)
Government
Outlays are far outpacing receipts.
21
0
5
10
15
20
21916 23377 24838 26299 27760 29221 30682 32143 33604 35065 36526 37987 39448 40912 42376
debt held by public
$ tri
llions
current law
More likely
U.S. Federal GovernmentDebt Outstanding
Source: Department of Treasury; CBO; Encima Global
Government
(last obs. 2009, projected by CBO 2010 to 2019)
Rise in national debt (marketable debt held by the public) is likely to be much
higher than current estimates.
22
20
30
40
50
60
70
80
1950 1960 1970 1980 1990 2000 2010
% o
f GD
P
OMB forecast of President's FY2010 budget
CBO baseline
Federal Government Debtas % of GDP
Source: OMB; CBO; Encima Global
Government
(last obs. 2009, forecast 2010 to 2019)
Debt to GDP ratio heading toward 80% even with optimistic GDP growth
assumptions.
23
Social Security and Medicare/Medicaid Spending
Source: CBO; Encima Global
Government
0
2
4
6
8
10
12
1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
% o
f GDP
Medicare & Medicaid expenditures
Social Security expenditures
CBO projections
20152025
Medicare and Medicaid outlays much bigger than Social
Security’s.
24
Volatility in Headline CPI
Source: Bureau of Labor Statistics; Encima Global
(-1.3 year-over-year for last obs. September 2009, projected to December 2009)0
Prices and Markets
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09
y/y
% c
hang
e
25
What about Michigan?
26
Michigan Employment NeverRecovered in Past Expansion
Source: Bureau of Labor Statistics
Note: Peak is calculated from Michigan’s June 2000 Peak.
-20%
-16%
-12%
-8%
-4%
0%
4%
8%
Jun00
Jun01
Jun02
Jun03
Jun04
Jun05
Jun06
Jun07
Jun08
Jun09
Dif
fere
nce
fro
m P
eak
(%
)
Michigan
U.S.
Ohio
Indiana
27
Worst MichiganEmployment Drop on Record
-16.5%-20%
-10%
0%
10%
20%
30%
40%
50%
Jan-6
6
Jan-6
8
Jan-7
0
Jan-7
2
Jan-7
4
Jan-7
6
Jan-7
8
Jan-8
0
Jan-8
2
Jan-8
4
Jan-8
6
Jan-8
8
Jan-9
0
Jan-9
2
Jan-9
4
Jan-9
6
Jan-9
8
Jan-0
0
Jan-0
2
Jan-0
4
Jan-0
6
Jan-0
8
Source: Bureau of Labor Statistics. Non-seasonally adjusted data.
Ten Year Change
Nov 1999 – Nov 2009
28
Michigan Loses Nearly 1 Million Jobs
88.0
-112.7-76.7 -71.0
-17.0 -9.2
-63.2 -58.7
-109.2
-283.0
-85.0
-34.0
91-00
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Michigan Wage and Salary Employment Y-O-Y Change(In Thousands)
Note: Bureau of Labor Statistics. 2009-2011 estimates are from the January 2010 Consensus forecast.
Avg. Forecast
29
Michigan Unemployment Rate To Rise Sharply
3.7%5.2%
6.2%7.1% 7.1% 6.8% 6.9% 7.1%
8.4%
14.1%15.7% 15.3%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Bureau of Labor Statistics and January 2010 Consensus Forecast
Forecast
Michigan November Rate was 14.7%
30
Michigan Personal Income Falling Relative to U.S.
0.85
0.9
0.95
1
1.05
1.1
1.15
1.2
1.25
1929
1933
1937
1941
1945
1949
1953
1957
1961
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
2005
Source: Department of Treasury calculations from Bureau of Economic Analysis data.
Michigan per Capita Income as a Percent of U.S. Per Capita Income
87%
93%
122%
31
- 3%
- 2%
- 1%
0%
1%
2%
Forecast of Michigan Real DisposableIncome Growth (1982–1984 $), 2009–2011
2007 2008 2009 2010 2011
0.20.4
1.30.7
– 1.9
RSQE: January 2010RSQE: January 2010
32
Wage and Personal Income Growth 2001– 2008
U.S. Michigan
Total personal income 37.7% 16.6%
Per capita personal income 29.1% 16.6%
State rank, Michigan per capita income
37
2008
20
2001
RSQE: January 2010
33
Industry Restructuring25-Year Recovery Cycle
1960
1980
2000
New England Textile Industry
Pittsburgh Steel Industry
Michigan Auto Industry
34
Real Estate Turnaround?
35
Home Prices Fall Sharply
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08
Yea
r-o
ver-
Yea
r P
ct C
han
ge
Source: Case Shiller 10-Metro Area Home Price Index.
Oct 09-15.1%
U.S. 10 City
Detroit Area
U.S. Prices Fall After Sharp Run Up
36
0.2
0.4
0.6
0.8
1.0
1.2
1.4
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
4.5
5.0
5.5
6.0
6.5
7.0
7.5
New Home Sales (Left scale) Existing Home Sales (Right scale)
(Millions of units)
U.S. Home Sales TurningSwung by Homebuyers’ Tax Credit
(Millions of units)
Source: Global Insight
37
Record Low U.S. Housing StartsDown 75% from Peak
0
500
1000
1500
2000
2500
Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08
Jan 062,273
Source: New Privately Owned Housing Units Started (thousands), U.S. Dept of Commerce
Nov 09574
38
Michigan Home BuildingFalls Precipitously
New Private Housing Units Authorized in Michigan
Source: U.S. Department of Commerce. 2009YTD through November.
Detroit GrandYear PMSA Ann Arbor Rapids Lansing Total
2004 22,990 2,708 6,886 2,206 54,721
2005 17,326 1,676 5,826 2,121 45,328
2006 9,592 775 4,278 1,231 29,191
2007 4,325 565 1,866 768 17,767
2008 2,590 347 1,064 383 10,911
2009 YTD 1,223 187 721 219 6,503
39
Overall Michigan Property Value Growth Slowing
Source: State Tax Commission and January 2010 Consensus Conference .
Yearly Percent Change
Multiplier for Total SEV Taxable ValueProperty Growth Growth
1997 2.8% 8.2% 5.7%1998 2.7% 9.5% 6.1%1999 1.6% 9.9% 6.0%2000 1.9% 9.0% 5.5%2001 3.2% 10.0% 7.1%2002 3.2% 9.8% 6.7%2003 1.5% 7.5% 4.8%2004 2.3% 6.3% 5.7%2005 2.3% 5.9% 5.6%2006 3.3% 5.0% 5.8%2007 3.7% 3.8% 5.2%2008 2.3% -1.3% 1.4%2009 4.4% -5.4% -0.8%
2010est -0.3% NA -8.0%2011est 2.5% NA -4.3%
40
Michigan Real Estate Transfer Tax Falls
-40.00%
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
Jan-00
Aug-00
Mar-01
Oct-01
May-02
Dec-02
Jul-03
Feb-04
Sep-04
Apr-05
Nov-05
Jun-06
Jan-07
Aug-07
Mar-08
Oct-08
May-09
Dec-09
Source: Michigan Department of Treasury
Dec 09-1.2%
Year-over-Year Change in 6 Month Trailing Average
Sep 0424.0%
41
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
'63 '71 '75 '83 '87 '91 '95 '99 '07'67 '79 '03'65 '69 '77 '81 '93 '01 '05'73 '85 '89 '97 '09
'11
RSQE: January 2010
Michigan Building Permits1963 – 2008and Forecast 2009 – 2011
Forecast
42
Mortgage DelinquencyRates Double
Source: Economy.com using Mortgage Bankers Association Data
43
Real Estate Market ReboundDepends on Interest Rates
5.9
1.3
0.30.1
3.4
0.3
3.2
4.1
3.53.9
4.3
5.75.6
4.9
6.2
0
2
4
6
8
4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
Actual Forecast
’07 2008 2009 2010 2011
Per
cen
t
3-Month T-bill
10 Year T-Note
Conv. Mortgage
RSQE: January 2010
44
How Do StateRevenues Look?
45
Difficult Economic TimesReduce Revenue Growth
Recession
Housing Boom/Bust
Auto Industry/ Restructuring
Employment Loss and Income Loss
Credit Crisis and Consumption Drop
Relative Decline in Personal Income
Cause Effect
46
GF-GP Revenues Drop Sharplyin FY 2009 and FY 2010
7.5%
3.0%
-8.2%-6.3% -5.6%
1.0%3.3%
-0.5%
0.6%
12.5%
-21.3%
-6.3%
1.0%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
GF-GP RevenuesYear-Over-Year Pct. Change
47
State GF-GP Revenue at FY ‘91 LevelDown 19% Since 2000
$0.0
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
1961
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
2005
2009
2010$6.9B
1991$6.9B
Billions of Dollars
Note: GF-GP figures are presented on a Consensus basis. 2009 and 2010 are estimates.
2000$9.8B
48
GF-GP and School Aid Revenue
Baseline Growth Rates Before Tax Changes
-2.7%
6.5%
8.3%
6.1% 5.9%
7.9%
6.1%
-1.7%
1.9%2.6%
-10.5%
0.9%
3.8%
1.0%
2.9%
1.1%
6.0%
-0.9%-1.3%
5.5%
1.1%
-4.7%
-12.0%
-8.0%
-4.0%
0.0%
4.0%
8.0%
1990 1993 1996 1999 2002 2005 2008 2011
Average Agency Forecasts
49
Balancing FY 2011 GF/GPWill Be Difficult
Billions
Source: Michigan Department of Treasury
* ARRA funding available to offset GF expenditures will decline from $1.2 billion in FY10 to $0.2 billion in FY11.
Consensus Revenue Estimate $7.0
Other Resources $1.0
Total Estimated Resources $8.0
Expenditures: Current Services Estimate $9.6
Projected Year End Balance* ($1.6)
50
Balancing FY 2011 SAF BudgetTough on Schools
Source: Michigan Department of Treasury
FY 2011(billions)
Beginning Balance $0.1
Consensus Revenue Estimate $10.5
Fed Aid and GF Grant (assume FY 10 Amt) $1.6
ARRA Funds $0.2
Total Estimated Resources $12.4
Expenditures Current Services Estimate $12.8
Projected Year End Balance ($0.4)
5151
What Does Michigan Need to Do?
Consolidate government services at both the state and local level.
Reform the state’s tax structure so that it will grow with the State’s economy and not discourage economic growth.
Slow the growth of government healthcare and tax expenditures.
Maintain or increase the investment in education.
52
Many Units of Government
Local Governments 83 Counties 275 Cities 258 Villages 1,240 Townships
K-12 Schools 551 Local School Districts 230 Charter Schools 57 Intermediate School Districts
Colleges and Universities 15 Public Universities 29 Community Colleges
53
Three Types of State Spending:Grants, Services, and Tax Breaks
Grants - $15.3 Billion
Services - $13.1 Billion
Federal Funds - $14.9 Billion
Tax Expenditures - $35.8 Billion_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Pensions and Retirement Benefits
54
Tax Breaks / ExpendituresLarger Than Tax Credits
Source: House Fiscal Agency
Tax Breaks
Tax Collection
s
Lisa M Winans
55
Conclusion
U.S. recession worst in decades.
Michigan has been in a recession since 2001 due to auto sector restructuring and U.S. recession.
Michigan recovery will require U.S. recovery, stability in the auto sector, and time.
Michigan real estate market likely at bottom but slow recovery ahead.
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