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.