Revenue revisions a‘challenge’ for Mich. budget makers
Lansing — Republican leaders in the Michigan Legislature are forging ahead with plans close the state’s teacher pension system to new hires despite new revenue figures that complicate an already contentious budget debate they hope to wrap up next month.
State officials on Wednesday agreed to lower general fund revenue projections by a combined $292.9 million for the current and upcoming fiscal years, citing weaker-than-expected income tax collections that will force revisions in budgets already approved this month by the House and Senate.
But strong sales tax collections fueled projected growth in School Aid Fund revenue, which officials expect to result in a combined $340.3 million over earlier estimates, setting the stage for another potential budget shift from a fund that was traditionally used on K-12 education but has increasingly been tapped to support community colleges and universities.
“I think that’s on the table, without question,” said Senate Appropriations Chairman Dave Hildenbrand, R-Lowell. “We’ve been doing that all the way back to (Democratic Gov. Jennifer) Granholm.”
While the School Aid Fund shift started under Granholm, legislative Democrats have opposed similar efforts in recent years. House and Senate budget proposals for 2018 would spend about $630 million in School Aid dollars on community colleges and higher education.
Rep. Fred Durhal, vice chair of the House Appropriations subcommittee, said he’s happy School Aid Fund revenue is on the rise but does not want to see the extra money spent on pension reform or other budget areas.
“Constitutionally, you can use it for general fund, but I think it’s a little bit disingenuous for School Aid Fund revenue to be up and we’re not putting that money into the kids,” said Durhal, D-Detroit.
Separate House and Senate budgets approved this month trimmed new general fund spending proposals by GOP Gov. Rick Snyder to free up money for potential income tax cuts or teacher pension reforms, which could include significant up-front costs.
The Senate budget would reduce $270 million in general fund spending proposed by Snyder and skip a $266.5 million deposit into the state’s “rainy day” savings fund. The House budget proposed $272 million less in general fund spending than Snyder recommended.
Senate Majority Leader Arlan Meekhof, R-West Olive, said the new revenue figures pose a “challenge” for state budget makers, but he remains committed to reforming a teacher pension system saddled with more than $29 billion in unfunded liabilities.
Hildenbrand said the new revenue numbers are essentially a wash for the budget because various “funds are fungible,” meaning the Republican majority could move dollars around to achieve possible goals, including income tax cuts or pension reform.
“This is all good news from my standpoint, because the plan we set forward can continue with the numbers here,” he said. “We may have to shift some money around to accomplish some things and stay on the same course, but I think it’s all very doable.”
State Budget Director Al Pscholka said the new revenue figures provide a “good road map to get the budget in June” but point to continued concerns about the general fund, the state’s main piggy bank for discretionary spending.
“The general fund is under some pressure, and we see it over the next couple years. There’s been a lot slower growth, and there’s a lot of other things that are going to hit the general fund,” Pscholka said, noting property tax reforms and a road funding package that are both being phased in.
General fund revenue is still expected to grow in 2017, but at a rate of 0.9 percent, which is slower than the rate of inflation. The general fund is projected to grow 2.9 percent in 2018, officials said Wednesday.
Analysts with the House and Senate fiscal agencies attribute part of the sluggish general fund growth to ongoing losses from the Michigan Business Tax, which the state scrapped in 2011 and replaced with a Corporate Income Tax that generates about 40 percent as much revenue.
Refundable credits issued under the old tax continue to haunt the state budget. Michigan is expected to generate $1.1 billion from the replacement corporate tax in 2017 but lose $936 million on companies that still file under the old business tax to redeem credits.
All told, Michigan is expected to net $160.7 million on its principal business taxes this fiscal year, down from $2.06 billion in 2011 when Snyder and the Republican-led Legislature overhauled the tax code. The Senate Fiscal Agency projects a $219.2 million profit in 2018.
The reduced general fund revenue projections should kill a House Republican push to reduce the state’s personal income tax, said Michigan League for Public Policy President and CEO Gilda Jacobs.
“Given the fluctuation in state revenues, it was and continues to be foolhardy to consider tax cuts that would further jeopardize state services,” Jacobs said, urging legislators to instead make strategic spending increases in child care and heating assistance programs.
The Michigan House narrowly rejected an income tax cut in February. While early budget talks included plans for another push, the focus has recently shifted to teacher pension reforms.
Snyder, Meekhof and House Speaker Tom Leonard, R-Dewitt, continue to negotiate. Budgets will be finalized in conference committees in coming weeks and sent to each chamber for up or down floor votes.
Michigan legislators heard relatively good news on the economic front during Wednesday’s consensus revenue estimating conference, which also featured expert testimony from various state and national economists.
Michigan added nearly 97,000 jobs in 2016, a “scorching hot” pace that is ultimately unsustainable, said University of Michigan economist Gabriel Ehrlich.
U-M’s Research Seminar in Quantitative Economics projects Michigan will gain 31,900 jobs this year, 45,800 in 2018 and 58,000 in 2019. The estimate came the same day as Ford Motor Co. said it would cut 1,400 salaried jobs in North America and Asia by September.
The Michigan outlook is “a positive one,” Ehrlich said. “Although job growth is slowing from its previous pace, that’s to be expected as the labor market approaches full employment and the baby boomers retire in greater numbers.”
The state’s solid job growth in 2016 was driven largely by additions in professional and business services, pointing to a continued shift toward a knowledge economy. Manufacturing added 9,000 jobs but UM economists expect the sector to shed 7,000 jobs this year.
Michigan’s economy remains closely tied to the auto industry, which celebrated record sales of 17.5 million light vehicles in 2016. Sales are expected to taper off at 17.2 million this year and 17.1 million in 2018.
Despite recent and projected job growth, Michigan has still not fully recovered from the Great Recession, which hit the state earlier and harder than most. Even if projections hold true, the state will still have significantly fewer jobs than it did in April 2000, said House Fiscal Agency senior economist Jim Stansell.
“Yeah, we’ve had several years of employment gains, and that’s wonderful, but we’re still not there yet,” he said.
The state’s unemployment rate is expected to hold steady at 5.1 percent in 2018 before dropping to 4.8 percent by the end of 2019, according to UM economists. That’s higher than the national average of 4.4 percent, which the projections will fall to 4.1 percent in the fourth quarter of 2019.
But Michigan’s rate isn’t rising because people are not finding jobs, Ehrlich said, but because more people are entering the labor market to look for jobs.
In a sense, the projections “reflect a healthier labor market, not a weaker labor market,” he said.