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 State
Facing $1 Billion in Red Ink in FY '06
MIRS, November 15, 2004
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Gov. Jennifer
Granholm and state lawmakers will have to solve a $1 billion
General Fund (GF) budget hole when they develop the state's next
budget (FY 2006) according to Tom CLAY of the Citizens Research
Council.
That figure makes the $110 to $140 million problem the state
faces this fall in closing last year's budget pale by
comparison.
"It's an amazing situation," said Clay, who notes the largest
chunk of the '06 budget gap will come from reduced federal
funding for Medicaid as well as new funding requirements and
rising drug costs.
Clay makes that assertion assuming that Fiscal Year 2006, which
would begin on Oct. 1, 2005, will see state revenue growth of 3
percent and using the current Fiscal Year budget as a baseline
for spending.
The problem, he argues, isn't declining revenue as in years
past, but ballooning costs.
Greg BIRD, spokesperson for Budget Director Mary LANNOYE
acknowledges that the administration is well aware that FY 2006
won't be pretty.
"I don't think I would dispute any of what Tom is saying," Bird
said. "FY 2006 is going to be a very challenging year. We're
very hopeful we can work with the Legislature to derive some
acceptable solutions."
Bird noted that not too long ago, Granholm was referring to a
$500 million budget hole in the upcoming fiscal year.
Ari ADLER, spokesperson for Senate Majority Leader Ken SIKKEMA
(R-Wyoming) said talk of the deficit in 2006 brings Sikkema's
point home. "Let's not fall into that trap."
Sikkema is arguing that spending doesn't naturally, or
automatically go up unless the governor and lawmakers decide to
allow it to go up.
"There may be circumstances beyond our control [on the spending
side]," Adler said. "But, if there is anything we can
effectively do to reduce the deficit that's what we're going to
be targeting."
Keith LEDBETTER, spokesman for House Speaker Rick JOHNSON (R-LeRoy)
warned that the $1 billion is only a prediction at this point.
"That's one of the reasons we're holding a revenue estimating
conference. I think we'll have a little bit better idea where
revenues are," said Ledbetter. "We're also eager to see what the
governor is going to present to us in February and we also know
we're going to have to hold the line on major spending
increases."
The following are the major categories of increased spending
pressure that lead the Citizens Research Council official to
arrive at the $1 billion gap. By adding up all the following,
one arrives at a General Fund deficit of approximately $1.011
billion on the low side to a high side of $1.11 billion.
- Medicaid - the state's Medicaid program alone will see
spending pressures of between $500 and $600 million. Why? First
of all, the state will take the third and final hit from
declining federal revenues due to the end of the special
financing approach the state had been taking. Recall that
reductions which began in the last fiscal year, were dealt with
this fiscal year and will again pop up in 2006.
Other Medicaid spending pressure will be derived from meeting
the federal government's requirement that State Medicaid
payments to Health Maintenance Organizations be "actuarially
sound." Clay also worked into his figures pressure from rising
pharmaceutical costs, which the state has no control over.
- Debt service payments are expected to rise by $55 million for
Fiscal Year 2006. Clay contends that this number is one that is
widely accepted among state officials involved in tracking the
budget.
- At the end of Fiscal Year 2005, employee concessions will come
to a close. New concessions could be negotiated, however, absent
that, the lifting of concessions will cost the state $76
million.
- Retirement and Health Insurance costs for the state are
expected to rise by approximately $50 million. This increase is
due in part to the fact that retirement contribution rates are
affected by the performance of the stock market (i.e. the
performance of retirement system investments). The poor stock
market years of 2001-2002 have driven up contribution rates and
will continue to do so until 2008. Health insurance costs for
the state are projected to go up for Fiscal Year 2006 by 10
percent.
- The Department of Human Services (currently FIA) will see a
likely $60 million budget issue. Clay said this is due to
caseload changes and the loss of some Temporary Assistance for
Needy Families (Federal) funds.
- The Department of Corrections is projecting that the prison
population for the next four years will rise by some 1,800
prisoners per year — the equivalent of several regional prisons.
That population increase in 2006 is expected to create an
additional $60 million in cost.
- If one simply removes the one time revenues that were used to
prop up the current Fiscal Year budget, that represents an
additional $95 million that must be realized through increased
revenue or slashed expenditures.
- When the budget drafting process begins, traditionally there
are certain categories of spending where a three percent
increase in spending is just assumed. Those include employee
economics, and funding for higher education at approximately
three percent. Those assumptions alone generate an additional
$115 million in new spending.
Fixing The Structural Deficit -- Tax And Budget Restructuring?
With Michigan lawmakers facing $1 billion in red ink (see
related story), the question quickly turns to how should
lawmakers and the governor address the issue.
According to Tom CLAY of the Citizens' Research Council and
other fiscal experts, the budget problem is structural and
cannot be overcome with one-time or quick fixes.
Even after the $1 billion deficit is addressed, Clay asserts
that in each of the three years following FY 2006 there will be
budget gaps of $300 million in the state's general fund.
Politically, Gov. Jennifer GRANHOLM has already been pushing
talk of both "tax restructuring" and realigning the budgeting
process.
"I think it will probably require a combination of structural
change in the scope of government services," said former House
Speaker Paul HILLEGONDS, who now heads Detroit Renaissance, a
business group in Detroit. "In other words, not just one year of
budget cuts but an evaluation of what government can do and what
it may have to cease doing."
Hillegonds along with Clay and former State Treasurer Doug
ROBERTS Sr., all spoke on Nov. 3 at Standard Federal Bank in
Troy about the state's structural budget deficit.
As a business leader, Hillegonds also agreed with Granholm that
the state must begin to look at tax restructuring, but that such
restructuring must be done carefully.
"Realistically, there doesn't seem to be an interest in raising
taxes. At the very least I believe taxes could be restructured
so there is the potential for more revenue growth as the economy
grows," Hillegonds said. "That of course leads to a discussion
of lowering the overall sales tax rate, but broadening the base
to include services."
Hillegonds added that Michigan certainly wouldn't be alone in
examining its sales tax.
"A lot of states now are looking to the sales tax either
statewide or regionally to address fiscal concerns," Hillegonds
said. "We're probably fairly competitive today. There's nothing
wrong with being even more competitive by lowering the rate.
There will be a debate about whether lowering the sales tax [but
broadening the base] will make us less competitive."
Hillegonds said he's not advocating such a shift on behalf of
Detroit Renaissance but his organization does acknowledge the
existence of a structural budget gap in Michigan -- one that
needs to be addressed on a long-term basis.
According to Roberts, his solution to the problem is simple:
one-third, one-third and one third.
"One third real tax increases, one third spending cuts and one
third smoke and mirrors," Roberts said. "If you get to the next
year and still have a problem, I'd recommend it again,
one-third, one-third and one-third."
Roberts argues that Michigan's past tax strategies have actually
helped out the state during the current downturn.
"The question isn't what has happened, it's why isn't it worse?"
Roberts asks.
One example Roberts points to is the state's unemployment rate
versus the national average. Throughout the 1960s, 1970s and
1980s the state's unemployment rate hovered anywhere from one
point to six points above the national average. Other than a
seven-year period in the 1990s when Michigan fell below the
average, that's always been the case.
During the downturn of the early 1980s the state's unemployment
rate was nearly six points above the national average. The
downturn of the 1990s saw Michigan's jobless rate 3 points
higher than the national average. Now during the downturn of
2002-2004, the state's jobless rate is one percent above the
national average.
The reason for the smaller gaps — the tax cuts of the 1990s have
helped the state's economy diversify.
One of the charts Roberts used during his Nov. 3 presentation
demonstrated the overall change in the economy by showing that
in 1970, there were just under 1.1 million manufacturing jobs in
the state. At that time, there were just over 400,000 so-called
service sector jobs.
By 1999, that had almost reversed. There were roughly 1.2
million service sector jobs compared to just over 900,000
manufacturing jobs (that was before the four year slide of
2001-2004 that saw the state shed an additional 194,000
manufacturing jobs).
It's that changing economy that has Hillegonds, Roberts, Clay
and others arguing that the state's current tax structure
doesn't reflect current economic activity.
On the tax restructuring front, Roberts points to several
statistics that suggest restructuring the business tax will be
politically difficult to say the least.
- One-tenth of one percent of all firms account for 27 percent
of Single Business Tax (SBT) revenue.
- Two percent of all firms pay 60 percent of the SBT.
Conversely,
- 27 percent of all firms have no SBT liability.
- 44 percent of all firms pay less than $1,000 in tax and
account for one half of one percent of total SBT revenue.
"The reason this is a problem is, now if you go to change that
tax and you eliminate the SBT and impose any other tax, in all
probability a number of people who pay little or no SBT are
going to wind up paying tax," Roberts adds.
Could lawmakers cut their way out? Possibly, but that too
presents real challenges.
Clay notes that when you adjust the general fund for inflation,
the entire fund today is worth less than it was 30 years ago. At
the same time, there are fewer state employees and more people
relying on the state (Medicaid serves 14 percent of the state's
population).
Over the past two years, lawmakers and Granholm have already cut
higher education by $297 million, or 14 percent an amount
equivalent to entirely eliminating appropriations for the
state's seven smallest universities. The other major area cut
was Revenue Sharing where cities and villages have seen dramatic
reductions to the point where many units have literally fallen
out of statutory revenue sharing all together.
Greg BIRD, spokesperson for budget director Mary LANNOYE also
pointed to work being done by the administration along the lines
of The Cost of Government. That book recommends basically a zero
based budgeting approach where priorities are listed and ranked.
Then resources are enumerated. The top priorities are funded
until the resources are gone.
Once resources are gone, every thing on the list remaining
unfunded, is essentially cut.
"Going through this newer process in terms of budgeting for
outcomes will help us in terms of matching our spending with
citizen priorities," Bird added.
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