Michigan predicts $3.2 billion budget shortfall, looks to feds for more aid

Beth LeBlanc
The Detroit News

Lansing — The state of Michigan will experience a roughly $3.2 billion shortfall in its current budget, state budget officials agreed Friday, and the Whitmer administration is hoping for an unlikely immediate gusher of cash from the federal government to fill the hole. 

The consensus estimate among budget officials is the main spending account known as the General Fund will see a $2 billion drop in tax revenue, while the School Aid Fund will experience a nearly $1.2 billion decrease in revenue from the 2019 budget.  

To call the estimates "sobering" is an understatement, State Budget Director Chris Kolb said. The $3.2 billion shortfall for the current year will be lowered by about $700 million in unspent money that was supposed to carry forward into 2021, leaving a $2.5 billion hole to fill in less than five months, he said.

Michigan Budget Director Chris Kolb

The huge shortfall will force Democratic Gov. Gretchen Whitmer and the Republican-led Legislature to make budget cuts before the end of September unless the federal government comes through with more aid. But there is no agreement in Washington, D.C., between the Democratic-led U.S. House and the GOP-controlled Senate and the Trump administration on the need for more immediate federal assistance.

Michigan House and Senate appropriation leaders called Friday on Whitmer to take immediate action to revise her recommendation for the coming budget year and find ways to balance this year's budget. 

"I stand ready to work with the governor to enact a budget correction plan as soon as possible that puts Michigan families first," said Sen. Jim Stamas, R-Midland. "Every day she waits leaves us with fewer options and less money.”

The $3 billion revenue shortfall makes up more than 30% of the remaining money in the General and School Aid funds, and it will continue to grow if it's not addressed, said Rep. Shane Hernandez, R-Port Huron. 

"The people need to hear from the governor what her priorities are that reflect this new reality facing our state," Hernandez said. "Time is of the essence, and we look forward to resolving this challenge.”

The state could eliminate 12 departments plus the budgets for the Legislature and judiciary and still not reach $2 billion, Kolb said. 

"The bottom line is if we’re going to save lives and provide critical services to Michiganders through this crisis, we’re going to need flexibility and support from the federal government," Kolb told reporters Friday. 

The state's rainy day fund has about $1.2 billion. If approved by the Legislature, the state could pull about $287 million from the fund this year.

When asked whether a tax increase is possible, Kolb didn't answer directly. 

"When you’re trying to fill a hole this large, I don’t think anything is really off the table, but we’re not insensitive to what’s going on in Michigan," he said.

Republican legislative leaders have opposed most tax increases, including Whitmer's call for a 45-cents-per-gallon hike in the state gasoline tax. 

The loss in revenue is the "unavoidable consequence of the statewide closures and restrictions" that have been in place for weeks now, said Patrick Anderson, an East Lansing-based economist. The state should have acted sooner to address the deficit, said Anderson, a former deputy budget director under Republican former Gov. John Engler.

"...These staggering losses were explicitly foreseen well over a month ago, and it is deeply disappointing that the state has avoided recognizing them until the middle of May," Anderson said in a statement.

"Even the federal government cannot bail out every state that falls into a fiscal hole that large and pay $600 a week to a large share of the population at the same time."

But University of Michigan economists and Whitmer officials pushed back on the argument that state restrictions were at fault, noting a lack of consumer confidence also would have driven down sales regardless of the executive orders.

"People are worried," state Treasurer Rachael Eubanks told reporters. "They don’t know what’s going to happen. They’re concerned about their health, about their future.”

Prospects are bleak for immediate aid from the federal government. The U.S. House on  Friday advanced a $3 trillion package that includes $500 billion for state governments and $375 billion for localities, but U.S. Senate's Republican leaders don't plan to take up the bill.

Senate Majority Leader Mitch McConnell, R-Kentucky, has called the $3 trillion House bill "a big laundry list of pet priorities" for Democrats. President Donald Trump has said he's in "no rush" for a new aid package.

The state will hold a third revenue estimating conference in late August or early September, when officials are expected to have a better idea of the state's financial situation. University of Michigan economists forecast the state's unemployment rate will hit 22% this quarter before starting to decline into next year. 

Revenue in fiscal years 2021 and 2022 will increase slightly from 2020, but will still be down $3 billion from what was projected for 2021 and $2 billion from what was projected for 2022, officials said. 

"We’re looking at an economic recovery that’s going to be slow and prolonged," said Jim Stansell of the House Fiscal Agency. 

The drops in state tax revenue are likely to be the largest since 2009 during the Great Recession. The state was forced to do about $300 million in cuts in early 2015 when businesses started cashing in lucrative state tax credits in bigger amounts than expected, forcing the state to negotiate restrictions with the Detroit Three automakers on how quickly they could cash in billions of dollars in credits. 

State lawmakers estimated Thursday the forecast — adjusted in the wake of the coronavirus-inspired stay-home orders as well as business closures and reduced operations — will trigger roughly $2.5 billion in cuts to the state’s current nearly $60 billion budget. 

Officials said the General Fund shortfall will need to be addressed quicker, while there will be a longer process for addressing School Aid Fund shortfall. 

A UM economist predicted the state's unemployment rate could peak this quarter at 22% and then decrease gradually through the end of the year. 

Enhanced unemployment benefits, which constituted raises for some workers and pay cuts for others, should even out to about 99% of average earnings in Michigan in the second quarter, said Gabriel Ehrlich, director of the UM Research Seminar in Quantitative Economics. 

He also forecast that by the end of 2022, Michigan will have regained nine out of 10 jobs lost in the second quarter of this year.

Both recovery forecasts hinged on the assumptions that Michigan will have not have a second virus wave that outstrips the first and that state and local governments will receive an additional $600 billion in federal aid over the next two and a half years.