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The State's Fiscal Crisis: A Slow Motion Train
Wreck
from MIRS, October 11,
2002
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Over fiscal year's 2001, 2002 and 2003, the state has used
over $3 billion in one-time revenues to prop up spending,
according to Tom CLAY, of the Citizens Research Council of
Michigan. Those revenues disappear in '04, and the budget
situation for '03 is looking worse than expected.
“The year of reckoning, we thought was going to be `04, but
it's going to start in '03 with this latest revenue
development,” said Clay.
The Citizens Research Council of Michigan is now expecting the
revenues supporting FY 2001-02, the fiscal year that ended
last month, to come in $300 million shy. That shortage is due
to two factors. First, two pending land sales — $65 million
for the sale of the old Northville Psychiatric Hospital
property and $10 million for the Plaza office building in
Detroit didn't happen — the state was banking on those sales
to occur in FY 01-02. Second, revenues have not picked up as
expected.
Under the constitution, state leaders must reconcile the
budget before closing the books.
“They're [lawmakers and the administration] probably going to
have to find something around $300 million,” Clay said. “That
means they'll have to clean out the BSF [Budget Stabilization
Fund] that would impact the budget revenue for '03.”
Mitch BEAN, director of the House Fiscal Agency concurs. Bean
said the HFA just received tax revenue collection numbers for
September and on a year-to-date basis, the state's take from
taxes is down 2.2 percent from a year ago. The Consensus
Revenue Estimating Conference last June had pegged revenues to
come in 1.8 percent below year ago figures.
That four-tenths of one percent difference represents roughly
$200 million, said Bean. However, there is the possibility
that picture could improve since October revenues, which
reflect September economic activity, are accrued to the Fiscal
Year `01-02, said Bean.
“We get between $1.6 and $1.8 billion in revenue a month
[coming in], a slight change in that could make a big
difference,” said Bean on the bright side. The HFA chief did
acknowledge that there will be a shortfall, but added that the
question is, how much of a shortfall?
“It could be as high as $300 million, it could be less,” he
added.
Should the administration and the Legislature be forced to
clean out the state's Budget Stabilization Fund (BSF) to meet
the constitutional mandate for a balanced budget, the state
immediately loses $207 million in money [from the BSF] it was
planning on using for the current fiscal year (FY 02-03) which
began October 1.
For Fiscal Year `'02-`03, the state has a general fund,
general purpose budget of $9.2 billion worth of expenditures.
That budget, however, is built on a revenue stream in tax
dollars that is expected to generate only $8.6 billion,
according to Bean.
The difference between revenues and expenditures will be made
up by a number of one-time revenue enhancements.
Those include:
- $207 million from the BSF
- $100 million from the tobacco settlement and the Merit Trust
Fund
- A carry forward of $79.5 million from an Unemployment
Insurance Trust Fund transfer which occurred last fiscal year
- A reduction in revenue sharing of $120 million
- $35 million in additional tobacco tax revenue generated
between the August 1 (the implementation date of the higher
tobacco tax) and the end of the last fiscal year, which was
earmarked for Fiscal Year '03
The current fiscal year faces more potential challenges than
just slower revenue and the absence of any BSF funds. Should
Proposal 4 pass, the $100 million in tobacco settlement funds
could be in jeopardy.
In total, Clay estimates that the current fiscal year has a
funding hole of approximately $500 million.
“A half of a billion would be a pretty good guess at this time
of what will occur,” Clay said. “Even if the economy does pick
up [that shortfall will occur], and there's no signs that it's
perking up.”
Under the state's budget process, as soon as it becomes
apparent that revenues won't support the existing budget, the
governor is required to issue an Executive Order budget
reduction. That Executive Order would be cued by a special
Consensus Revenue Estimating Conference.
“The question is whether one will be called while [John]
ENGLER is still governor, or whether we'll wait until the next
administration,” Clay said. “It's not out of the question that
one of the two principles could be asked to convene a
conference and all it takes is one of them to call it.”
Clay also noted that from a budget perspective, the sooner a
solution is applied, the better.
“The advantage of doing it soon is it gives more time for
whatever actions are used [to balance the budget] to take
effect,” Clay added. “For example if you're talking about
budget cuts if they are known to those who are implementing
the cuts, they'll have more time.”
A special Consensus Revenue Estimating Conference can be
called by either the director of the House Fiscal Agency, the
director of the Senate Fiscal Agency, or the state's
treasurer.
According to Bean, there have been no formal discussions to
date about calling a special conference, in advance of the
already scheduled January conference.
“There's nothing set, but that doesn't mean it won't happen,”
Bean added. “At this point, nobody has made a decision to call
a conference before January.”
While the problem for '03 is larger than the problem for '02,
the state is facing an enormous budget shortfall for Fiscal
Year '04 according to Clay.
“[FY] '04 is at least a $1.2 billion out of whack,” Clay said.
That problem is due to two factors. First, when you eliminate
one-time revenue sources used in '03, you eliminate $750
million in revenues according to Clay. The second issue is
Medicaid funding. In '04, the state will receive less federal
funding for Medicaid and one time spending from the state's
Medicaid trust fund won't be available creating the need for
an additional $400 million just to maintain the same level of
Medicaid funding provided for in the current fiscal year.
Closing the gap, without revenue enhancements (tax increases)
is possible, according to Clay, but it would mean significant
changes.
“It can be solved, but it's going to require some fundamental
changes in the nature of state government,” Clay said. “If the
state's unwilling to do anything about changing prison
populations, that's taken off the table. That's $1.7 billion.”
For lawmakers, that means some tough decisions.
“Higher education, health care, Corrections and FIA [Family
Independence Agency] comprise over 80 percent of the general
fund,” Clay noted. “A little over $9 billion is in those four
areas. It's going to be real difficult to cut the budget
because so much of the spending base is in areas that are very
sensitive for a number of reasons.”
Both Bean and Clay contend that lawmakers and state officials
face some “challenging” decisions.
“There is really no prospect of growing out of this
situation,” Clay remarked. “It's a pretty miserable situation.
It's really a difficult situation to watch from the outside.”
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