presidents council state universities of michigan board of directors march 23, 2006 lansing...
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Presidents CouncilState Universities of Michigan
Board of DirectorsMarch 23, 2006
Lansing
Michigan’s Budget Crisis and the Prospects for the Future
Michigan’s Budget Crisis and the Prospects for the Future
Tom Clay, Director of State AffairsCitizens Research Council of Michigan
www.crcmich.org
Tom Clay, Director of State AffairsCitizens Research Council of Michigan
www.crcmich.org
Citizens Research Council of Michigan 2
Citizens Research Council of MichiganCitizens 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
• 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 Central MessageThe Central Message
• The State of Michigan has a Structural Deficit Affecting:
-Public K-12 Education -General Fund Financed Programs• Its Causes Have Both Spending and
Revenue Components• We Will Not Grow Out of It• Only Structural Policy Changes Will Fix
The Problem
• The State of Michigan has a Structural Deficit Affecting:
-Public K-12 Education -General Fund Financed Programs• Its Causes Have Both Spending and
Revenue Components• We Will Not Grow Out of It• Only Structural Policy Changes Will Fix
The Problem
Citizens Research Council of Michigan 4
• Total State Budget - $41.2B• State’s Two Major Funds:
General Fund - $9.0BSchool 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
• Total State Budget - $41.2B• State’s Two Major Funds:
General Fund - $9.0BSchool 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
The Michigan BudgetFY2006 AppropriationsThe Michigan Budget
FY2006 Appropriations
Citizens Research Council of Michigan 5
Six Years of Budget Problems
Six Years of Budget Problems
• Worst Budget Problems Since World War II
• Declining General Fund Revenues• Slow Growth in School Aid Fund
Revenues• Structural and Cyclical Deficits at
Play
• Worst Budget Problems Since World War II
• Declining General Fund Revenues• Slow Growth in School Aid Fund
Revenues• Structural and Cyclical Deficits at
Play
Citizens Research Council of Michigan 6
Deficits DefinedDeficits 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
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
Components of the Structural Deficit Revenues
Components of the Structural Deficit Revenues
• Self-inflicted Changes in Revenue Structure -Tax Rate Cuts -Federal Changes in Tax Law—Failure to
Amend State Law -Increased Use of Slow or No-growth Revenue
Sources (e.g. Tobacco Taxes)• Weakening Connections of Economy With
Revenues -Sales Tax -Income Tax
• Self-inflicted Changes in Revenue Structure -Tax Rate Cuts -Federal Changes in Tax Law—Failure to
Amend State Law -Increased Use of Slow or No-growth Revenue
Sources (e.g. Tobacco Taxes)• Weakening Connections of Economy With
Revenues -Sales Tax -Income Tax
Citizens Research Council of Michigan 8
Components of the Structural Deficit Expenditures
Components of the Structural Deficit Expenditures
Health Care is Everywhere in the Budget
and Growing Faster Than Revenues• Largest Component in State Budget
-Medicaid
-Health Insurance for School & State Employees
-Health Insurance for School & State Retirees
-Prisoners
Health Care is Everywhere in the Budget
and Growing Faster Than Revenues• Largest Component in State Budget
-Medicaid
-Health Insurance for School & State Employees
-Health Insurance for School & State Retirees
-Prisoners
Citizens Research Council of Michigan 9
Components of the Structural Deficit Expenditures
Components of the Structural Deficit Expenditures
Corrections• Largest State-operated Program
• Employees Nearly 1/3 of All State Workers
• Michigan’s Costs Significantly Above Our Great Lakes Neighbors
• Incarceration Rate More Than 40% Higher
• Growth in Spending Outpacing Revenues
Corrections• Largest State-operated Program
• Employees Nearly 1/3 of All State Workers
• Michigan’s Costs Significantly Above Our Great Lakes Neighbors
• Incarceration Rate More Than 40% Higher
• Growth in Spending Outpacing Revenues
Citizens Research Council of Michigan 10
Budget Deficit PressuresBudget Deficit Pressures
• Both Funds Outspending “Regular Revenues”
• Operating Deficits for Six Straight Years
• Significant One-time Resources Used--$6.6 Billion
• Both Funds Outspending “Regular Revenues”
• Operating Deficits for Six Straight Years
• Significant One-time Resources Used--$6.6 Billion
Citizens Research Council of Michigan 11
General Fund & School Aid Operating Deficits
General Fund & School Aid Operating Deficits
($1,200)
($1,000)
($800)
($600)
($400)
($200)
$0
$200
$400
$600
($ i
n M
illi
on
s)
FY00 FY01 FY02 FY03 FY04 FY05
School Aid Fund
General Fund
($1,200)
($1,000)
($800)
($600)
($400)
($200)
$0
$200
$400
$600
($ i
n M
illi
on
s)
FY00 FY01 FY02 FY03 FY04 FY05
School Aid Fund
General Fund
Citizens Research Council of Michigan 12
Summary of One-Time Resources FY2001-FY2005
(in Millions)
Summary of One-Time Resources FY2001-FY2005
(in Millions)Rainy Day Fund $1,363 FY2000 School Aid Fund Surplus 984
FY2000 General Fund Surplus 212
Medicaid Benefits Trust Fund 561
Advance State Education Tax Collection Date 455
Tobacco Settlement/Merit Award Revenues 324
Temporary Federal Fiscal Assistance 655
Bond for Pay-as-you-go Capital Projects 211
Revenue Sharing Accounting Change 181
Refinance Bonds 250
Employee Wage Concessions 186
Other 1,203
$6,585
Citizens Research Council of Michigan 13
Causes of Michigan’s Budget Problems
Causes of Michigan’s Budget Problems
• Weak Economy
• Tax Cuts
• Stock Market Decline
• Michigan’s Deteriorating Share of Auto and Light Truck Market
• Structural Imbalance Between Revenues and Spending
• Weak Economy
• Tax Cuts
• Stock Market Decline
• Michigan’s Deteriorating Share of Auto and Light Truck Market
• Structural Imbalance Between Revenues and Spending
Citizens Research Council of Michigan 14
How Weak is the Economy?How Weak is the Economy?
Michigan’s Recent Statistics:• 50th in Personal Income Growth• 46th in Unemployment Rate• 48th in Employment Growth (Decline
for Michigan)• 49th in Index of Economic Momentum
(Population, Personal Income, Employment)
Michigan’s Recent Statistics:• 50th in Personal Income Growth• 46th in Unemployment Rate• 48th in Employment Growth (Decline
for Michigan)• 49th in Index of Economic Momentum
(Population, Personal Income, Employment)
Citizens Research Council of Michigan 15
Big 3 Losing Market ShareBig 3 Losing Market Share
12.913.9
15.114.8 15.115.215.617.0 17.417.216.8 16.616.916.8
02468
101214161820
1992 1995 1998 2001 2004
Mil
lion
s of
Uni
ts
40%
45%
50%
55%
60%
65%
70%
75%
U.S. Light Vehicle Sales Big 3 Share
12.913.9
15.114.8 15.115.215.617.0 17.417.216.8 16.616.916.8
02468
101214161820
1992 1995 1998 2001 2004
Mil
lion
s of
Uni
ts
40%
45%
50%
55%
60%
65%
70%
75%
U.S. Light Vehicle Sales Big 3 Share
Source: Automotive News, 2005 Sales are Agency Averages.
2005
Citizens Research Council of Michigan 16
Michigan Manufacturing Employment
Michigan Manufacturing Employment
500
600
700
800
900
1,000
1990 1992 1994 1996 1998 2000 2002 2004
Mon
thly
Em
ploy
men
t (1
000s
)
500
600
700
800
900
1,000
1990 1992 1994 1996 1998 2000 2002 2004
Mon
thly
Em
ploy
men
t (1
000s
)
Source: U.S. Department of Labor, Bureau of Labor Statistics.
November 2005671,000
Lost 1 in 4 Manufacturing Jobs
Jan 1992775,900
Jul 1999908,200
Citizens Research Council of Michigan 17
Perspective On RevenuesPerspective On Revenues
• General Fund Revenues in FY03, FY04, & FY05 Below FY1995
• Inflation-Adjusted General Fund Revenues Below 1972 Level
• General Fund Revenues in FY03, FY04, & FY05 Below FY1995
• Inflation-Adjusted General Fund Revenues Below 1972 Level
Citizens Research Council of Michigan 18
General Fund RevenuesGeneral Fund Revenues
$7,000
$7,500
$8,000
$8,500
$9,000
$9,500
$10,000
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Citizens Research Council of Michigan 19
General Fund BudgetFY2006
General Fund BudgetFY2006
85% of General Fund Spending in 4 Areas:1. Higher Education ($1.9B)2. Community Health—Mental Health,
Public Health, Medicaid ($2.9B)3. Corrections ($1.8B)4. Human Services—Family Services,
Juvenile Justice, Public Assistance ($1.1B)
All Other General Fund Programs—$1.3B
85% of General Fund Spending in 4 Areas:1. Higher Education ($1.9B)2. Community Health—Mental Health,
Public Health, Medicaid ($2.9B)3. Corrections ($1.8B)4. Human Services—Family Services,
Juvenile Justice, Public Assistance ($1.1B)
All Other General Fund Programs—$1.3B
Citizens Research Council of Michigan 20
Looking Back: Reshaping the General Fund Budget
Looking Back: Reshaping the General Fund Budget
Reductions
• Higher Education-$275M in 4 Years (13%)
• Human Services-$172M in 5 years (14%)
• School Aid-$323M in 5 years (84%)
• Revenue Sharing-$447M in 5 years (29%)
• State Employees-7,400 in 4 years (12%)– Smallest Workforce Since 1974
Reductions
• Higher Education-$275M in 4 Years (13%)
• Human Services-$172M in 5 years (14%)
• School Aid-$323M in 5 years (84%)
• Revenue Sharing-$447M in 5 years (29%)
• State Employees-7,400 in 4 years (12%)– Smallest Workforce Since 1974
Citizens Research Council of Michigan 21
Reshaping the General Fund Budget
Reshaping the General Fund Budget
Increases
• Department of Community Health-$263M in 5 years (10%)– Medicaid– Community Mental Health
• Corrections-$175M in 5 years (11%)
Increases
• Department of Community Health-$263M in 5 years (10%)– Medicaid– Community Mental Health
• Corrections-$175M in 5 years (11%)
Citizens Research Council of Michigan 22
Percentages of General Fund Spending FY2001-FY2006
Percentages of General Fund Spending FY2001-FY2006
FY2001 FY2006
Community Health 27.3 32.9
Corrections 16.3 19.8
Human Services 12.7 12.0
Higher Education 21.3 20.7
Other 22.4 14.5
Totals 100.0 100.0
Citizens Research Council of Michigan 23
Percentages of General Fund Spending FY2001-FY2006
Percentages of General Fund Spending FY2001-FY2006
• Community Health and Corrections Now Claim 52.7 Percent of General Fund Spending
• Increased from 43.6 Percent in FY2001
• Community Health and Corrections Now Claim 52.7 Percent of General Fund Spending
• Increased from 43.6 Percent in FY2001
Citizens Research Council of Michigan 24
State Revenue SharingState Revenue Sharing
• Revenue Sharing Allocations From State Sales Tax
• Constitutional—6 tenths of a penny—Distributed on Per Capita Basis
• Statutory—85 hundredths of a penny—Complicated Formula Distribution
• Statutory Payments Were Cut Beginning in FY2002
• Money Stays in General Fund
• Revenue Sharing Allocations From State Sales Tax
• Constitutional—6 tenths of a penny—Distributed on Per Capita Basis
• Statutory—85 hundredths of a penny—Complicated Formula Distribution
• Statutory Payments Were Cut Beginning in FY2002
• Money Stays in General Fund
Citizens Research Council of Michigan 25
Statutory Revenue SharingThe Other General Fund RevenueStatutory Revenue SharingThe Other General Fund Revenue
• Cuts in Statutory Revenue Sharing Add Revenues to General Fund
• FY2007 Budget Uses $600 Million to Supplement General Fund Revenues
• 1000 Cities, Villages, Townships Will Receive no Statutory Payments
• Over Half of Remaining Statutory Payments ($405M) Go to Detroit ($215M)
• Total Revenue Sharing Payments Down $442M Since FY2001
• Cuts in Statutory Revenue Sharing Add Revenues to General Fund
• FY2007 Budget Uses $600 Million to Supplement General Fund Revenues
• 1000 Cities, Villages, Townships Will Receive no Statutory Payments
• Over Half of Remaining Statutory Payments ($405M) Go to Detroit ($215M)
• Total Revenue Sharing Payments Down $442M Since FY2001
Citizens Research Council of Michigan 26
Beyond FY2007: The General Fund Structural
Problem Continues
Beyond FY2007: The General Fund Structural
Problem Continues
• Expenditure Causes– Medicaid– Corrections
• Revenue Causes– Antiquated Revenue Structure– Revenue Sources Unresponsive to Economic Growth
• Expenditure Causes– Medicaid– Corrections
• Revenue Causes– Antiquated Revenue Structure– Revenue Sources Unresponsive to Economic Growth
Citizens Research Council of Michigan 27
State Taxes as a Percent of Michigan Personal IncomeState Taxes as a Percent of Michigan Personal Income
6.0
6.5
7.0
7.5
8.0
1995 1997 1999 2001 2003 2005 2007
Fiscal Year
Pe
rce
nt
Citizens Research Council of Michigan 28
The Headlee Revenue LimitThe Headlee Revenue Limit
• FY1995—State Revenues at the Limit (9.49% of Personal Income)
• FY2007—State Revenues 18% Below the Limit (7.75% of Personal Income)
• Gap Equals $5.8 Billion
• FY1995—State Revenues at the Limit (9.49% of Personal Income)
• FY2007—State Revenues 18% Below the Limit (7.75% of Personal Income)
• Gap Equals $5.8 Billion
Citizens Research Council of Michigan 29
General Fund Budget Scenario
General Fund Budget Scenario
• Medicaid & Corrections Projections Growing Faster Than Revenues
• Other Areas of General Fund Spending Assumed to Increase at 3% per year
• Revenues Grow about 3% per year• Major Revenue Sources w/No Growth —Retard Overall Growth
• Medicaid & Corrections Projections Growing Faster Than Revenues
• Other Areas of General Fund Spending Assumed to Increase at 3% per year
• Revenues Grow about 3% per year• Major Revenue Sources w/No Growth —Retard Overall Growth
Citizens Research Council of Michigan 30
Combining Revenues and Spending Pressures
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 FY2007
• State Will Have Balanced Budgets— Constitutionally Required
• Incremental Problem Each Year Will Exceed $300M (Over 3% of Spending Base) After FY2007
Citizens Research Council of Michigan 31
General Fund Structural Deficit ProjectionsGeneral Fund Structural Deficit Projections
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
Fiscal Year
Millio
ns
Spending Pressures
Projected Revenues
Citizens Research Council of Michigan 32
Balancing Budget by Cutting SpendingBalancing Budget by Cutting Spending
• Gap Will Grow to $1.5 Billion by 2011• Exceeds the Projected Size of “All Other”• “All Other” Includes: Courts State Police Capital Outlay Legislature Governor’s Office Attorney General Treasury & 11 Other State Departments
• Gap Will Grow to $1.5 Billion by 2011• Exceeds the Projected Size of “All Other”• “All Other” Includes: Courts State Police Capital Outlay Legislature Governor’s Office Attorney General Treasury & 11 Other State Departments
Citizens Research Council of Michigan 33
School Aid Structural DeficitSpending Pressures Outpace Revenue GrowthSchool Aid Structural Deficit
Spending Pressures Outpace Revenue Growth
• Retirement Contributions• Employee Health Insurance• General Pay Raises• Other—Fuel, Utilities, Supplies• Revenues Growing Slowly• Annual Structural Deficit Over 3%
• Retirement Contributions• Employee Health Insurance• General Pay Raises• Other—Fuel, Utilities, Supplies• Revenues Growing Slowly• Annual Structural Deficit Over 3%
Citizens Research Council of Michigan 34
Examples of Structural ChangesExamples of Structural Changes
Spending• Reduce Prison Populations• Reduce Number of Higher Education Institutions• Eliminate Selected Health Benefits/Eligibility• Eliminate Remaining Aid to Local Government
Revenues• Sales Tax on Services• Modify Personal Income Tax—Increase
Exemption and Raise Rate
Spending• Reduce Prison Populations• Reduce Number of Higher Education Institutions• Eliminate Selected Health Benefits/Eligibility• Eliminate Remaining Aid to Local Government
Revenues• Sales Tax on Services• Modify Personal Income Tax—Increase
Exemption and Raise Rate
Citizens Research Council of Michigan 35
Citizens Research Council of Michigan Citizens Research Council of Michigan
CRC Publications Available at
www.crcmich.org
Providing Independent, Nonpartisan Public Policy Research Since 1916
CRC Publications Available at
www.crcmich.org
Providing Independent, Nonpartisan Public Policy Research Since 1916