Officials set to trim state budget $460M over 2 years

Jonathan Oosting
Detroit News Lansing Bureau

Lansing — Michigan legislators will be forced to scale back spending plans by $460 million in the current and upcoming fiscal years, Budget Director John Roberts said Tuesday, but Gov. Rick Snyder’s administration will continue seeking aid for Flint and Detroit Public Schools.

Officials from the state Treasury, Senate Fiscal Agency and House Fiscal Agency met Tuesday in Lansing and agreed to reduce projected revenues by $173.9 million this year and $159.2 million in the 2017 fiscal year that begins Oct. 1.

Total revenues are still expected to rise, but not as much as previously anticipated because of weak corporate tax collections and stagnating sales tax revenue.

Rising caseloads for Medicaid low-income health coverage and other government programs will cost the state an extra $130 million and create additional budget pressures, Roberts said. The administration will encourage legislators to reduce proposed spending increases rather than make significant year-over-year cuts to key programs, he said.

“Every investment is on the table,” Roberts told reporters after the Consensus Revenue Estimating Conference.

Officials reduced current-year revenue projections for the General Fund $109.7 million and for the School Aid Fund $64.2 million. For next year, they dropped General Fund projections $75.4 million and School Aid Fund projections $83.8 million.

The Michigan House and Senate have already approved separate budget proposals for fiscal year 2017 and hope to send the governor a finished product by early June.

Those spending plans will change, “but the key priorities you’ve seen from the governor won’t change,” Roberts said.

“Education will continue to see some sort of increase. Public safety will continue to be key. The Flint priories will stay at the top of mind, and then also the efforts that the Legislature and the administration are working on in DPS will also stay there.”

Roberts declined to discuss areas the administration will recommend scaling back, but he noted that the governor’s executive budget included proposed increases for information technology upgrades, specialized maintenance, higher education and health care.

Flint commitments

The revised revenue projections come as Snyder urges lawmakers to approve a 10-year $670 million debt relief plan for Detroit. He also has requested $128 million in current-year supplemental funding to address the Flint water crisis, along with another $39 million next year in Flint funding.

Snyder is “going to look at the Flint commitments very seriously,” Robertson said, but a separate proposal for $165 million in statewide infrastructure funding is “a little bit more up in the air.”

Senate Minority Leader Jim Ananich, D-Flint, didn't welcome any consideration of a potential cut.

"State government failed the citizens of Flint and the children of Detroit," Ananich said in a Tuesday statement. "It’s absolutely unthinkable that this administration would even consider backing out of the commitment they made to fix the disasters they created – all because they can’t budget properly.”

Experts say the reduced revenue estimates are not necessarily a reflection of the condition of Michigan’s economy, which continues to grow. Income tax collections are on the rise this year, but corporate tax collections are down and sales tax revenue continues to stagnate for the second straight year.

Income tax collections are on the rise so far this year, but sales tax revenue is sluggish and Corporate Income Tax collections are down more than 20 percent compared with this time last year because of falling corporate profits.

The corporate tax, approved by Snyder and the Republican-led Legislature in 2011 and implemented the following year, has proved difficult to predict. Many of the state’s largest employers continue to file under the old Michigan Business Tax because they have large outstanding credits that continue to put pressure on the budget.

“Corporate Income Tax is tied to corporate profits, which tend to be more volatile,” Treasurer Nick Khouri said. “…It’s just the nature of the Corporate Income Tax. We’ll get better forecasting it as we get more details about what’s driving it.”

But Rep. Sam Singh, D-East Lansing, said the new corporate income tax was poorly thought out and is now posing significant challenges for state budget makers.

“My hope is, as we go through the next few weeks, that we actually find some of the resources we need for our long-term problems,” Singh said. “Because if we don’t invest in Flint, if we don’t invest in Detroit Public Schools, the cost will actually be much more to us down the road.”

Jim Stansell of the House Fiscal Agency said stagnating sales tax collections can be summed up in two words: “Gas prices.”

Michigan is among a handful of states that charges sales tax on gasoline, and fuel prices that have ranged from $1.50 to $2 a gallon in the past few months have driven down collections more than 20 percent through April compared with 2015, according to Stansell.

A new state law requiring out-of-state companies to collect Michigan sales tax on Internet purchases is projected to generate $60 million in revenue in 2017, but Khouri said he remains very concerned by sales tax collections this year and last, especially as more transactions occur online.

“It’s our responsibility to make sure the tax system evolves as the economy evolves, and as more and more transactions become non-taxable, we need to talk about what is the revenue base going forward.”

Economic rebound continues

During Tuesday’s revenue conference, a University of Michigan economist outlined the extent of Michigan’s economic rebound and auto industry outlook.

Michigan is in the seventh year of an economic recovery after bottoming out during the Great Recession, according to University of Michigan economist George Fulton, who said the recovery is expected to continue for at least two more years, albeit at a slower rate by some measurements.

The state is projected to add 146,000 jobs between the first quarter of 2016 and the end of 2018, Fulton told lawmakers during the conference. If that happens, Michigan will have recovered roughly 73 percent of all jobs lost between 2000 and 2009.

The university is projecting 17.6 million light vehicle sales in 2016 and 17.8 million sales in 2017, which would be “the highest annual level in history,” said Fulton, and Detroit’s Big Three automakers are expected to increase their market share.

But new light vehicle sales are expected to drop back to 17.6 million units in 2018, a decline driven by an influx of used cars on the market, said U-M research professor Daniil Manaenkov.

“New vehicles are going to be competing with old vehicles, and that’s going to drive a slowdown in light vehicle sales,” he told legislators.

While Michigan’s economy remains closely linked to the auto industry, Fulton said the state can still add jobs even if auto sales growth slow down but remain stable.

“Where we get in trouble is where the auto jobs tank, and then we have to tank,” Fulton told legislators. “It’s just the way it is.”

Michigan’s unemployment rate, which held steady at 4.8 percent in March, is expected to dip to 4.5 percent by 2018, Fulton said.

But Michigan’s job and personal income growth are still expected to remain below national and historical averages, according to the Senate Fiscal Agency, which lowered its economic expectations this year for both the state and nation.

Inflation-adjusted personal income grew by 5.8 percent in Michigan last year but is projected to increase 2.7 percent in 2016, 1.1 percent in 2017 and 1.6 percent in 2018, the agency said Friday.

The biggest risk to the Michigan economy is the limited growth potential unless an industry other than autos shows substantial growth, according to the Senate report.

“As a result, for both the economy and State tax revenue to improve markedly, more substantial employment gains in the economy as a whole will need to occur,” it said.