Budget shortfall fears dim as Michigan sees unexpected surplus

Beth LeBlanc
The Detroit News

A previously expected budget shortfall for the coming fiscal year has vanished because of a boost in federal aid and an improvement in Michigan's economy that has increased state tax revenue collections above initial forecasts.

But the state's budget and economic experts warned Friday during a consensus revenue meeting that there should be caution moving ahead because of variables on the horizon such as COVID-19 cases, vaccine uptake and federal stimulus spikes and dips.

In June, state experts expected a $3 billion budget hole for the upcoming fiscal year that begins in October, and Gov. Gretchen Whitmer and Republican legislative leaders at the time called on the federal government for more help. 

Dave Massaron is Gov. Gretchen Whitmer's state budget director.

Michigan's tax revenue for fiscal year 2021 is coming in $1.2 billion higher than was predicted in August, but still about $505 million lower than last year's revenue, state finance officials reported Friday during the Consensus Revenue Estimating Conference.

Officials also boosted their predictions for 2022, when they expect a $874.8 million boost from the August estimate. 

As books close on the 2020 fiscal year, the state expects to have a $3.7 billion balance left over, with a $2.5 billion surplus in the General Fund and $1.2 billion cushion in the School Aid Fund, according to a Senate Fiscal Agency report. That money can be carried into the new fiscal year and spent.

Federal stimulus dollars have been a major factor in keeping the state economy afloat and in better shape than initially predicted, especially when compared with how the state fared after the 2008 recession, state Treasurer Rachael Eubanks said. But Michigan is not clear of economic peril yet. 

"We expect a robust recovery once we get COVID under control," Eubanks said. "We are in a deep hole right now. Even with healthy growth, we are looking at a multi-year recovery process. There is a limit to how much fiscal policy can do until the public health situation improves.”

Outside of federal aid to state departments, Michigan received about $43.3 billion in federal stimulus money during the second quarter of 2020 alone in the form of Paycheck Protection Program grants, stimulus payments and unemployment benefit increases.

Much of the federal stimulus money is made up of one-time funds, meaning the state can't rely on it long-term. 

"We'll still have a structural and real gap in fiscal year 2023," state Budget Director David Massaron said. "We need to make sure we keep our eye on that structural gap and have budget solutions that solve it."

GOP lawmakers' outlook was a little less optimistic as they criticized Whitmer's continued restrictions on Michigan businesses and a long-term over-reliance on federal funds.

The state government's financial outlook does not reflect the impact that Michigan families have suffered, said Sen. Jim Stamas, the Midland Republican who chairs the Senate Appropriations Committee.

"The rosy picture we see today at the state level is not an accurate depiction of what is happening in our homes around kitchen tables and in local businesses," Stamas said.

“Federal relief is not a sustainable revenue source, and we still do not know what the future may bring for our state’s economy," he said.

A welder works inside the new paint shop at the Factory Zero, Detroit-Hamtramck plant.

Extra federal "stimulus" aid prompted by the COVID-19 pandemic has acted as an artificial, "wildly unsustainable" prop to the state economy that should cause state leaders to spend carefully, said Rep. Thomas Albert, the Lowell Republican who chairs the House Appropriations Committee.

“There won’t be a real economic recovery — and the state budget won’t be truly healthy — until our economy is reopened," said Albert, while promising that future  appropriations do "not allow the governor to continue on this path."

"Until the governor stops overstepping her authority, she will have as much input into the budget process as she has afforded the Legislature and the people of Michigan during this pandemic," he said. 

Amid challenges, unexpected revenue

The predictions shared Friday are based on projected revenues that include the $900 billion stimulus passed by Congress in December, but they do not include the $1.9 trillion plan proposed Thursday night by President-elect Joe Biden that still requires congressional approval.  

Variables such as vaccination rates, COVID-19 cases, government restrictions, federal stimulus dollars, the inflation rate, financial valuations and the end of moratoriums on evictions and foreclosures all could affect the state's financial outlook in the years to come, said University of Michigan economist Gabriel Ehrlich. 

"COVID-19 remains in the driver’s seat of the economic recovery," Ehrlich said. 

Through October, the state had recovered about 60% of the job losses incurred at the height of the pandemic, according to the University of Michigan report. But, as of November, the state was still about 440,000 jobs below its February peak. 

November showed a slight drop in job numbers again and the data were gathered prior to Whitmer's Nov. 18 partial shutdown of certain service industries — meaning unemployment numbers may have since dropped even more, Ehrlich said.. 

The state lost as many jobs in 2020 as it did in the 2008-09 recession combined, said David Zin of the Senate Fiscal Agency. Michigan experienced its second most substantial decline in wages with a 9.5% decline last year since officials began to gather data in 1956, only outdone by a 9.8% drop in 1958, Zin said.

Economists were divided on whether the decrease in wages and jobs were due to government restrictions or private, voluntary precautions. 

Ehrlich noted it was hard to say which one played more of a factor, but IHS Markit Chief U.S. Economist Joel Prakken said the national picture was clearer.

"At the national level, the restrictions are actually more important than the cases, but both do matter," Prakken said. 

Even as unemployment spiked and wages dropped, Michigan's tax revenue increased — a phenomenon economists are attributing to federal stimulus aid, particularly the bumps in unemployment payments. 

The state was able to tax extra federal unemployment aid, causing withholding on unemployment alone to increase to $557 million — four times more than levels in fiscal years 2009 or 2010. 

Consumer habits also shifted last year, as residents spent more money on goods than services, which were prohibited or voluntarily stopped through much of 2020. 

For example, online spending in Michigan increased dramatically in 2020, boosting  online sales and use tax revenue to $493 million — a hike of about $318 million from the prior year.

Consumer habit changes during the pandemic such as increases in online shopping, working from home or decreased vehicle travel could remain long after the pandemic, all of which could affect the make-up of Michigan's tax revenue, Prakken said. 

Those potential consumer behavior changes combined with an eventual end to federal stimulus dollars have caused the state to look for smart one-time "investments" or targeted spending that will stabilize the economy for future years, Massaron said. It's essential the state and Legislature work to distribute the funding in a timely manner, he said. 

"We need to work very quickly to get that funding out to help Michigan residents recover and the state recover from the pandemic," Massaron said.