citizens research council of michigan 1 november 3, 2004 standard federal bank troy, michigan...

Citizens Research Council of Michigan 1

November 3, 2004Standard Federal Bank

Troy, Michigan

Sponsored by Standard Federal Bank; Varnum, Riddering, Schmidt & Howlett LLP;

and Michigan Manufacturers Association

Michigan’s Structural Budget Deficit: Its Causes & Prospects for Resolution


Citizens 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


Michigan’s Structural Deficit An Overview

Tom Clay, Director of State Affairs

Citizens Research Council of Michigan

www.crcmich.org


Five Years of Budget Problems

• Declining GF Revenues• Slow Growth in School Aid Fund • Cyclical & Structural Causes • Future Prospects


• State Budget ($39.1 B)• Two Major Funds:

– General Fund ($8.7 B) – School Aid Fund ($12.5 B)

• Other Funds Restricted Purposes, e.g. Transportation, Federal Revenues

The Michigan Budget


General Fund Budget

83% of GF Spending in 4 Areas:• Higher Education ($1.8 B)• Community Health — Mental Health,

Public Health, Medicaid ($2.5 B)• Corrections ($1.7 B)• FIA — Family Services, Juvenile Justice,

Public Assistance ($1.1 B)

All Other General Fund Programs - $1.5 B


External Causes

• Weak Economy• Stock Market• Falling Share – Auto Industry


Internal Causes

• Spending Growth Outpacing Revenue Increases:– Medicaid (Double Digit Growth)– Corrections– Programs Crowded Out

• Cuts Eroding Revenue Base• Limited Permanent Budget - balancing

Changes• $6.5 B of one-time fixes – 5 Years


Perspective On Revenues

• GF Revenues in FY03, FY04, & FY05 below FY1995

• Inflation-adjusted GF Revenues Below 1972 Level


Significant Cuts

• Higher Ed. Cut 14% in 2 yrs ($297 M)• Rev. Sharing Cut 15% in 3 yrs ($293 M)• State Workforce Down 8,500 in 3 yrs

(14%) • Smallest Workforce Since 1974


Medicaid

• Spending Up More Than 40% in 4 yrs • Caseload Up 30%• Program Now Covers 1.4 Million• Pressures on Rates Paid Providers –

Could Add Significantly to Growth in Future


Corrections

• Largest State-Operated Program• 50,000 Prisoners• Over 30% of State Workers• High Incarceration Rate


States With More Than 500 Prisoners Per 100,000 Residents


State Government Employment Trends

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

1980

1985

1990

1995

2000

2002

2003

Fiscal Year

Em

ploy

men

t

Corrections

All OtherDepartments


Revenue Forecasts for FY2005

• Economy – Recovery & Growth Projected

• Forecast – 4% Revenue Growth• Collections on Track• Risk is Likely on the Downside


• Spending Pressures Outpacing Economy

• Revenue Structure Cannot Keep up• Structural Deficit – Must Be Solved

Budget Outlook


FY2005 General Fund BudgetSignificant Progress Made

• Permanent Solutions Total ($1 B)• GF Spending Cuts ($340 M)• Revenue Sharing – Counties ($182 M)• Reduce GF Grant to School Aid ($163 M)• Revenue Increases ($390M)• Funding Shifts & Other Cuts ($299 M)• New Revenues Total ($390 M)


FY2006 General Fund OutlookProblem Approaching $1 Billion

• Medicaid – $500 to $600 M• Debt Service – $55 M• FY05 Employee Concessions – $76 M• Retirement & Health Insurance – $50 M• FIA – $60 M• Corrections Increases – $60 M• Replace One-time Revenues – $95 M• Pressures for Increases @ 3% (e.g.

Higher Ed.) – $115 M


Beyond FY2006The Structural Problem Continues

• Expenditure Causes– Medicaid– Corrections

• Revenue Causes– Antiquated Structure– Sources Unresponsive to Growth


Medicaid

• Projected Spending Exceed Revenue Growth

• Significant Revenue Sources Will Not Grow – e.g. Tobacco Revenues

• GF Requirements Grow at 150% of Total Spending Growth

• Near Term Increases at 12%


0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

FY04 FY05 FY06 FY07 FY08 FY09 FY10

Fiscal Year

In B

illio

ns

Federal Revenue

General FundRevenue

State and LocalRestrictedRevenue

Medicaid Funding Projections


Corrections

• Largest State-operated Program• Employs 50% of Employees Paid from GF• Crime Rates Falling – Prison Populations

Increase• Projected to Increase 1,800/yr until 2010• Annual Cost Increase – ($100M)• Annual Increases about 7%


General Fund Budget Shares

Corrections Medicaid Other Programs

FY 1995 FY 2005 FY 2011


Structural Revenue Issues• Revenue System – Economy of 50s,

60s, and 70s• Revenues Grow Slower than Economy• Consumption Taxes – Goods Oriented• Few Services Taxed• Services are Over 50% Private Sector

Economic Activity


A Medium-Range General Fund Budget Scenario

• Medicaid & Corrections Projections Incorporated

• Starting Point is FY2005 Appropriations – Ongoing Revenues and Spending are Nearly Balanced

• FY06 Spending Pressures Reflected• Other Areas of GF Spending Assumed

@ 3% per yr


General Fund Revenues

• Projections – Moderate Average Growth Rates

• Grow about 3% per yr. • Major Revenue Sources with No

Growth Retard Overall Growth• SBT Eliminated at End of Calendar

2009 (23% of GF Revenue)


Combining Revenues and Spending Pressures

• Constitutionally Required Balanced Budgets • Incremental Problem Each Year

– Exceed $300 M– Over 3% of Spending Base after FY06

• Holding All Programs Except Medicaid & Corrections Constant Would Not Close Gap


$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

FY05 FY06 FY07 FY08 FY09 FY10 FY11Fiscal Year

In M

illio

ns GeneralFundRevenues

GeneralFundSpendingPressures

General Fund Structural Deficit


$0$500

$1,000$1,500$2,000$2,500$3,000$3,500$4,000$4,500$5,000

In M

illio

ns

FY05 FY06 FY07 FY08 FY09 FY10 FY11Fiscal Year

Expanding Structural Deficit


Implications

Balanced Budget w/Spending Cuts:• Will Require Changes to Medicaid &

Corrections• Changes to Rev. Sharing & Higher Ed.• Failure to Slow Medicaid & Corrections

Means Slow Starvation for Others


Responsiveness of Taxes to the Economy – AKA ‘Elasticity’

• Most Major State Taxes Increase More Slowly Than Michigan Personal Income

• Personal Income Tax Slightly Elastic • Sale Tax, Use Tax, Gasoline Tax All

Somewhat Inelastic


0.01.0

2.03.04.0

5.06.07.0

8.09.0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Year

Per

cent

State Taxes as Percent of Michigan Personal Income


New Revenues?

• Replace “Lost” SBT before 2010• Broaden Base of Sales & Uses

Taxes to Include Services• Revenue Neutral w/More Growth

Potential• Net Revenue Gain?


Broadening the Sales & Use Taxes Base

• Most Services not Taxed• Services – Over 50% Economic

Activity• If Revenue-neutral, Rate Reduction

Could Occur• Revenues Grow Faster Than Current

Sales & Use Taxes


Issues With Services Taxation

• Would Services Such as Medical Care & Education be Exempt?

• Business to Business Services – Pyramiding Could Create Multiple

Taxation


Importance of Restoring Fiscal Balance

• Fiscal Problems Crowd Out Other Important Issues

• Budget Situation Threatens Credit Rating– Affects Credit Standing of Schools &

Local Government Units– Increases Borrowing Costs


Citizens Research Council

of Michigan www.crcmich.org

citizens research council of michigan 1 november 3, 2004 standard federal bank troy, michigan...

Documents