citizens research council of michigan 1 november 3, 2004 standard federal bank troy, michigan...
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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 2
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
Citizens Research Council of Michigan 3
Michigan’s Structural Deficit An Overview
Tom Clay, Director of State Affairs
Citizens Research Council of Michigan
www.crcmich.org
Citizens Research Council of Michigan 4
Five Years of Budget Problems
• Declining GF Revenues• Slow Growth in School Aid Fund • Cyclical & Structural Causes • Future Prospects
Citizens Research Council of Michigan 5
• 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
Citizens Research Council of Michigan 6
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
Citizens Research Council of Michigan 7
External Causes
• Weak Economy• Stock Market• Falling Share – Auto Industry
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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
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Perspective On Revenues
• GF Revenues in FY03, FY04, & FY05 below FY1995
• Inflation-adjusted GF Revenues Below 1972 Level
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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
Citizens Research Council of Michigan 11
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
Citizens Research Council of Michigan 12
Corrections
• Largest State-Operated Program• 50,000 Prisoners• Over 30% of State Workers• High Incarceration Rate
Citizens Research Council of Michigan 13
States With More Than 500 Prisoners Per 100,000 Residents
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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
Citizens Research Council of Michigan 15
Revenue Forecasts for FY2005
• Economy – Recovery & Growth Projected
• Forecast – 4% Revenue Growth• Collections on Track• Risk is Likely on the Downside
Citizens Research Council of Michigan 16
• Spending Pressures Outpacing Economy
• Revenue Structure Cannot Keep up• Structural Deficit – Must Be Solved
Budget Outlook
Citizens Research Council of Michigan 17
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)
Citizens Research Council of Michigan 18
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
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Beyond FY2006The Structural Problem Continues
• Expenditure Causes– Medicaid– Corrections
• Revenue Causes– Antiquated Structure– Sources Unresponsive to Growth
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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%
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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
Citizens Research Council of Michigan 22
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%
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General Fund Budget Shares
Corrections Medicaid Other Programs
FY 1995 FY 2005 FY 2011
Citizens Research Council of Michigan 24
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
Citizens Research Council of Michigan 25
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
Citizens Research Council of Michigan 26
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)
Citizens Research Council of Michigan 27
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
Citizens Research Council of Michigan 28
$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
Citizens Research Council of Michigan 29
$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
Citizens Research Council of Michigan 30
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
Citizens Research Council of Michigan 31
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
Citizens Research Council of Michigan 32
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
Citizens Research Council of Michigan 33
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?
Citizens Research Council of Michigan 34
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
Citizens Research Council of Michigan 35
Issues With Services Taxation
• Would Services Such as Medical Care & Education be Exempt?
• Business to Business Services – Pyramiding Could Create Multiple
Taxation
Citizens Research Council of Michigan 36
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 37
Citizens Research Council
of Michigan www.crcmich.org
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