State Budget Overview State Budget Overview Prospects for FY2004 and Beyond May 2003 Citizens Research Council of Michigan www.crcmich.org 1
The National Situation States face Worst Budget Crisis Since World War II State Revenue Structures are Mismatched with Spending Responsibilities Spending Growth Outpacing Revenue Increases Medicaid a Nationwide Budget Problem for the States 2
The Michigan Budget Total State Budget---$39.2 Billion State s Two Major Funds are Affected General Fund---$8.8 Billion School Aid Fund---$11.5 Billion Other State Funds are Restricted for Other Purposes and Generally Cannot be used for General and School Aid Fund Problem 3
The General Fund Structural Problem $11,000 Millions $9,000 $7,000 Revenues Expenditures $5,000 FY 98 FY 00 FY 02 FY 04 FY 06 4
School Aid Revenues and Spending Gaps (in Millions) $12,000 $11,000 $10,000 $9,000 $8,000 1997 1998 1999 2000 2001 2002 2003 2004 Base Revenues Non-Federal Spending 5
Causes Weak Economy Stock Market Decline Capital Gains Dropped Significantly Tax Cuts Eroding the Revenue Base Failure to Implement Permanent Budget Balancing Actions 6
The Tax Rate Cuts Single Business Tax 26% of General Fund Revenue Individual Income Tax Cut 8% of General Fund Revenue Implication: State Could Afford to Finance Existing Programs with a Third Less Revenue 7
Summary of One-time Resources (in Millions) Rainy Day Fund $1,264 FY2000 School Aid Fund Surplus 984 FY2000 General Fund Surplus 212 Medicaid Benefits Trust Fund 561 Advance State Education Tax Collection Date 474 Bond for Pay-as you-go Capital Projects 211 Tobacco Settlement Revenues 259 Employment Contingent Fund 90 Sale of Properties 72 Executive Order 2002-22 204 Other 168 Total $4,499 8
General Fund & School Aid Fund Operating Gaps ($ in Millions) $600 $400 $200 $0 ($200) ($400) ($600) ($800) ($1,000) ($1,200) ($1,400) ($1,600) General Fund School Aid Fund FY00 FY01 FY02 FY03 FY04 9
Current Status FY2003 Economy not Improving Yet Executive Order 2002-22---General Fund Cut $460 Million in December Executive Order 2003-3 General Fund Cut $158 Million in February School Aid Cut $127 Million May Consensus Reduced School Aid Revenues Again ($92 Million) Risk Still Downside 10
School Aid---FY2004 Appropriations Already Made for FY2004 No Increase from FY2003 Appropriations Revenues Forecasts Now $471 Million Short---4% Revision in Governor s Budget Will Be Necessary 11
General Fund---FY2004 Growth in FY2004 and FY2005 Constrained By Income Tax Cuts and Federal Tax Reform Gap of $1.7 Billion Gap is not Eliminated by Sustained Economic Growth in Long Run 12
The Initial FY2004 Challenge General Fund Short $1.7 Billion School Aid Fund Short $365 Million Tax Increases Off the Table May Revenue Revisions Add to the Challenge ($139 Million) 13
Perspective On Revenues General Fund Revenues in FY2003 and FY2004 Below FY1997 Seven Years of Higher Costs and Increased Needs Go Unfunded Some Programs Crowding Out Others School Aid Revenues Up $2 Billion Over Same Period 14
Cutting General Fund Spending 80% of General Fund in Four Areas Higher Education ($2.1B) Community Health Mental Health, Public Health, Medicaid ($2.4B) Corrections ($1.6B) FIA Family Services, Juvenile Justice, Public Assistance ($1.1B) --All Other General Fund Programs--$1.7 Billion-- 15
The Proposed Budget Reshaping The Structure Across-the-board Cuts Avoided Priorities Evident Health Care and Assistance for Poor Protected Higher Education Support Dropped Significantly Corrections Policy Changes Advocated Revenue Sharing Cuts Continue Tax Loopholes Closed A.K.A. Tax Policy Changes 16
Closing the $1.7 Billion FY2004 General Fund Gap Past Revenue Sharing Cuts $152 School Aid Subsidy $198 Corrections Policy Changes $122 Spending Tax Policy Changes $109 Fee Increases & Other $182 Reductions $937 17
Closing the General Fund Gap $1.7 Billion Problem -Cuts $937M -One-time Actions 42M -School Aid Fund Subsidy 198M -Corrections Policy Changes 122M -Tax Policy Changes 109M -Fee Increases 119M -Revenue Sharing Continue Past Cuts 153M -Other Resources 20M Total $1,700M 18
School Aid Revisions of $106 Million Needed Spending Reductions or Revenue Enhancements? General Fund Support? 19
Closing the $365 Million FY2004 School Aid Fund Gap (in millions) School Bond Loan Refinance $100 New Lottery Games $50 Spending Reductions$195 Tax Policy Changes $20 20
School Aid $365 Million Revenue Problem -New Revenue-Lottery & Tax Loopholes -School Bond Loan Fund Bond Refinance -Durant Bond Refinance -Cut Categorical Programs -Modify Enrollment Count Weighting -Eliminate General Fund Grant -One-time Savings From Revenue Sharing Total $ 70M 100M 40M 138M 40M (198)M 199M 389M 21
Categorical Program Reductions Career Preparation ($22M), Partnership for Adult Learning ($20M), Math & Science Centers ($10M), Gifted & Talented ($5M), and Six Others ($11M) Eliminated $69M Adult Education Cut 74% 58M ISD Operations Cut 7% 6M Other Reductions 5M Total Categorical Cuts $138M 22
School Aid Increases School Lunch Payments $3.2M Renaissance Zone Reimbursement 17.7M Court-placed Children 2.0M Total $22.9M Other Budget Assistance Retirement Contributions Made By Districts Temporarily Held at 12.99% of Payroll 23
School Aid First Year-to-Year Decline in School Aid Spending Since Proposal A ($78 million) One-time Resources Concentrated in School Aid First $328 Million of FY2005 Revenue Growth Will be Needed to Offset FY2004 One-time Revenues FY2005 Potential Spending Increases will be Very Small 24
Higher Education Appropriations Cut 6.5 Percent-- $120M Private College Degree Reimbursement Eliminated 7M Total $127M FY2003 Cuts Continued Two-Year Cuts Equal 10% Double Digit Tuition Increases Likely Some Will Exceed 20% Merit Scholarships Cut From $2,500 to $500 Eventual Savings Nearly $100M 25
Higher Education Privatization of State Universities? Budget Shares Have Changed Dramatically Appropriations/Tuition 1979 70%---30% 2002 49%---51% 2004 42%---58% 26
Corrections Largest State-Operated Program Over 30 Percent of State Workforce $150 Million Increase in Bedspace and Health Costs Largely Avoided $33 Million Increase Recommended Conditional Reintegration Program Eliminates need for 1,375 Beds Increased Use of Community-based Sanctions 27
State Government Employment Trends Employment 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Corrections All Other Departments 1980 1985 1990 1995 2000 2002 2003 Fiscal Year 28
Community Health--Medicaid Federal Waiver Constraining Health Benefits to Health Adults $110M Pharmaceutical Purchase Collaboration 40M Quality Assurance Assessment Declining Caseloads Projected 57M EPIC Coverage Increased (15,000 to 42,000) 38M 29
Family Independence Agency Programs Largely Unaffected Caseload Declines Projected General Fund Budget Down Slightly From Post E.O. 2003-3 Level Staffing May Be Most Significant Concern 30
Local Revenue Sharing Previous Cuts Maintained $153M Total Payments Reduced 3 Percent From FY2003 Levels 44M Total FY2004 Earmarked Growth Captured 72M Total $269M All Reductions Taken From Statutory Portion (27%) Statutory Percentage Equals 21.3% of Sales Tax at 4 Percent Rate Proposed Allocation is Equivalent of 15.5% Statutory Revenue Sharing will be Eliminated for Some Units Soon if Cuts Continue 31
Revenue Sharing Payments Fiscal Years 93 through 04 $1,800 $1,600 In Millions $1,400 $1,200 $1,000 $800 '93 '95 '97 '99 '01 '03 Statutory/ Constitutional Actual/ Proposed Fiscal Year 32
Employee Compensation Increases in Employee Compensation Costs Not Funded Pay Raise Negotiated by Former Administration Other Increases Group Insurance & Retirement General Fund Costs---$140 Million Concessions Assumed---3,000 Jobs at Stake 33
Areas of Risk Revenue Outlook---FY2003 and FY2004 Employee Concessions Higher Education & Revenue Sharing Cuts Federal Tax Changes Corrections Policy Changes Closing Tax Loopholes Fee Increases FIA & Medicaid Caseloads 34
The FY2005 Outlook General Fund Revenue Growth Still Constrained by Tax Cuts --Remaining Income Tax Cut $43M --Estate Tax Eliminated-Federal Tax Reform 55M --Federal Dividend Elimination??? 95M Total $193M Growth Also Must Cover $42 Million of One-time Revenues 4 Percent Growth Produces About $350M A Year of Very Constrained Budgets No Room for Increases 35
General Fund Structural Problem Is It Eliminated? No! Pressures For Spending (Cost) Increases (e.g. Health Care, Corrections) are Likely to Outpace Revenue Growth in Future Only Fundamental Structural Changes Will Solve the Problem -Revenue Structure -Program Responsibilities---Federal/State 36
FY2005 Outlook School Aid State Perspective Revenue Growth Must Cover $328 Million of One-time Revenues 4 Percent Growth Produces About $440 Million Small Spending Increase Possible--- Roughly One Percent Increased Retirement Contribution Percentage May Be Required--- 10+ Percent Increase in Rate 37
FY2005 Outlook School Aid Local Perspective Increased Retirement Contribution Percentage Could Claim Entire Potential Increase In State Funding Pressures on Health Insurance Premiums Will Continue Another Year of Austerity 38
The Next Steps The Governor Proposes and The Legislature Disposes ---Senator Harry Gast Appropriations Chair for 18 Years Will It Be A Long Hot Summer? 39
Citizens Research Council of Michigan www.crcmich.org 40