An Overview of the Michigan Economy and Budget Crisis

1
An Overview of the Michigan Economy and Budget
Crisis

• Douglas C. Drake
• State Policy Center, Wayne State University
• Tom Clay
• Citizens Research Council
• February 12, 2003

2
The Changing Michigan Economy?

• Have we changed?
• Yes--
• Are we still changing?
• Yes--
• Are we still dependent on the auto industry?
• Yes
• Lets look at a couple of measures

3
Shares of Income

• 1991
• Services 20.60
• Retail 15.76
• Mfgr exAuto 20.28
• Auto Mfgr 13.30
• All Other 29.60

• 2000
• Services 23.95
• Retail 15.32
• Mfgr exAuto 18.39
• Auto Mfgr 12.70
• All Other 29.63

4
Employment / Income Ratios

• 1991
• Services 0.86 x emp.
• Retail 0.69 x emp.
• Mfgr exAuto 1.25 x
• Auto 1.94 x emp
• All Other 1.02 x emp

• 2000
• Services 0.87 x emp
• Retail 0.66 x emp
• Mfgr exAuto 1.25 x
• Auto 2.03 x emp
• All Other 1.05 x emp

5
Why Auto Emphasis?

• Still the Big kid on the block
• Even using a narrow definitionusing all
  suppliers and purchasing power of workers make it
  even more critical

6
Autos Still MatterA Lot

• Michigan has become the de facto research center
  for the industry
• Japanese and German, not just Big 3
• If technology is where the future of the auto
  industry lies, were along for the ride
• But these arent high paid, low skill jobs

7
Structural Labor Shortages

• Aging population
• Slow population growth
• Low immigration
• Surplus of low wage / low skill workers
• Shift to high pay / high skills jobs
• CHANGE THE WEATHER!
• Already very high labor force PARTICIPATION

8
Current Economic Situation

• No GDP growth last quarter
• Slow GDP growth this quarter
• No U.S. employment growth from year ago
• Michigan employment down from year ago
• Steepest business investment decline since 1930s
  depression
• Current economic signals mixed

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Light Vehicle Sales
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Risks to Forecasts

• War yes/no short or long?
• Terror incidentsimpact on confidence
• Inventory behavior Q3 strength may be a longer
  term weakness
• Business investment in equipment software
  recovery is fragile
• Major uncertainty in auto industry
• Cost of incentives
• UAW Contract September 14, 2003

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Income Tax Annual Payments
13
Income Tax Quarterly Estimates
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Ranking Michigan Taxes

• 2000 State Local Taxes
• 2.2 U.S. Avg. Per Capita
• 0.2 U.S. Avg. as Personal Income
• High State / Low Local
• Middle of Great Lakes States
• Middle of Large Industrial States
• Who Is Our Competition?

16
Potential Federal Tax Cut Impacts
17
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

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The Budget Outlook

• The Challenges for FY2004
• and Beyond

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The National Situation

• States face Worst Budget Crisis Since World War
  II
• State Revenue Structures Are Mismatched With
  Spending Responsibilities
• Medicaid a Nationwide Budget Problem for the
  States

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One-time Solutions FY2001-FY2003(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

23
General Fund School Aid Fund Operating Gaps
24
Revenue or Spending

• Is There a Spending Problem?
• -or-
• Is There a Revenue Problem?
• Answer So Far----A Revenue Problem?
• Can We Grow Out of Problem Rather Than Cut
  Spending?

25
SAF Expenditures v. Net Revenues
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School Aid---FY2004

• Appropriations Already Made for FY2004No
  Increase from FY2003 Appropriations
• Revenues 366 Million Short
• Revenue Growth Insufficient to Offset Loss of
  One-time Revenues
• Downside Risk

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Balancing School Aid FY2004

• Schools Face Significant Cost Increases
• -Health Insurance-Double Digit Increases
• -Retirement Contributions
• Enrollment Declines Add to the Problem for Many
  Districts

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Balancing Issues / Options

• General Fund Grant of 198 at risk
• Foundation grant a last resort
• Categorical programs
• Revenue enhancements

29
GFGP Net Revenues
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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

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Cutting 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--

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Balancing by Cutting Spending

• Across-the-board Reductions Not Realistic
• Fundamental Changes in Priorities Would Be Needed
  Such As
• Changing Who Pays For Higher Education
• Possibly Discontinuing Some Optional Medicaid
  Services or Eligibility
• Reducing Length of Stay in Prisons

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Higher Education

• State Pays Half of University Operating Costs
  (One third of Community Colleges)
• Across-the-board Share Of Reductions Implies Over
  20 University Tuition Increases
• Some Increases Larger Based on State Share of
  Operating Costs
• Higher Education Could be a Tempting Place to
  CutLarger Reductions Might be Made

35
Medicaid--States Options Are Limited--Federal
Requirements

• Optional Services---Examples
• Pharmaceuticals
• Nursing Home Care For Medically Indigent
• Dental, Eyeglasses
• Optional EligibilityChildren Above Federal
  Poverty Level, e.g.
• Provider Rates

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Corrections

• Largest State-operated Program
• 30 Percent of State Workforce in Corrections
• Use of Less-costly Options Would Require
  Reductions in Length of Sentence and/or Length of
  Stay in Prison
• Current Policies Imply Larger Prison Populations
  in Next Several Years8,200 from 12/02-12/06
• Additional 150 Million in FY2004

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Corrections Cost Pressures

• Bail Fix Targets Fugitives
• Wayne County 26,000 wanted people on streets
• Detroit News, February 10, 2003
• Tethers May Ease Jail Crowding, State Budget
• Detroit Free Press, February 10, 2003

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Family Independence Agency

• Maximum Grant for Family of Three (459 per
  month) is 38 of Poverty Level
• Food Stamps Raise Support to 60 of Poverty Level
• Caseloads Now One-third of 1994 Level
• Juvenile Justice Programs
• Foster Care, Adoption, Domestic Violence Programs
• Day Care for Working Public Assistance Recipients

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Local Government

• State Revenue SharingStatutory Payments Already
  Cut by 20 Percent
• Cuts are Likely to be Permanent
• More Reductions Will Likely Occur
• 790 Million Remains of Statutory Allocations
• Constitutional Support Totals 679 Million
• Significant Revenue Source For Local Government
  20 Of General Fund Revenues

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Is Revenue An Option?Recent Lessons

• Cigarette Tax and Pausing SBT Tax Cut-Summer 2002
• Provided Resources That Will Build in Future
  The First Permanent Revenue Increases Used to
  Balance Budget
• Other Options
• Decouple from Federal Estate Tax---150
  Million
• Delay or Suspend January 2004 Individual Income
  Tax Rate Cut--120 Million

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Is Revenue An Option???

• Governor doesnt want to increase taxes
• Legislative leadership says no
• Business community says no
• No public sense of crisis yet relative to
  impending budget cuts

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Conclusions

• Challenges
• Provide high quality services
• Health Care
• Education, K-12, Higher Education
• Public Safety
• Social Services
• Infrastructure
• Continuing improvements in education
• Interstate economic competition