State: Revenue up but 'growing pressures' could squeeze budget
Lansing — Michigan government's coffers are expected to be more flush with cash for the current year, but slowing growth in the economy still promises to pinch the state's main account due to other spending pressures, state officials said Friday.
The General Fund — the state's basic checking account — is estimated to experience a $235 million surplus by increasing to $11 billion this year from a May forecast, according to a consensus estimate released Friday by the state Treasury Department as well as the Senate and House fiscal agencies. The School Aid Fund is anticipated to have an $85 million surplus when it expands to $13.9 billion.
Although University of Michigan economists expect the state has almost no chance of experiencing a recession in 2020, a slowing economy means the 2021 Fiscal Year budget is expected to have slight revenue increases to $11.1 billion for the General Fund and $14.3 billion for the school fund.
The revenue growth normally would mean more cash for legislators to disburse, but state officials at the Consensus Revenue Estimating Conference warned that almost $2 billion in spending is already diverted toward a 2015 road funding plan, tax reimbursements and tax credits. The road plan is supposed to dedicate as much as $600 million annually from the General Fund toward road and bridge repairs.
But the administration of Gov. Gretchen Whitmer has been seeking to eliminate the $600 million annual road spending commitment for what it calls a longer-term funding solution. Whitmer's proposed 45-cents-a-gallon gas tax increase was supposed to generate $2.5 billion annually and undo the $600 million commitment so it could be applied to other programs.
After the Republican-led Legislature last year rejected Whitmer's gas tax hike plan, the Democratic governor is preparing a new road funding proposal to be unveiled around her scheduled Jan. 29 State of the State speech.
In addition, “growing pressures” such as federal match decreases, increased Medicaid costs and state policy changes putting more money toward indigent defense and expungement will “eat up a ton of that money,” State Budget Director Chris Kolb said.
“The good news is that we have this additional income,” Kolb said. “The other side of the equation is we have these ongoing cost pressures that have to be addressed.”
Sen. Jim Stamas, R-Midland, celebrated the economic forecast and projected revenue increases, which he said in part resulted from past budget reforms.
"...We’ve transformed Michigan from a state with annual budget shortfalls and high unemployment to a place where workers are in demand and we can regularly increase our investments in important priorities like education," said Stamas, chairman for the Senate Appropriations Committee.
But Stamas also urged diligence in the use of the additional money. Talks continue with the governor about restoring hundreds of thousands of dollars in vetoed money for local roads and job training, he said.
Leaders are keeping a close eye on changes in federal programs that could increase pressure on the state budget, including hikes in state Medicaid contributions, said Rep. Shane Hernandez, chairman for the House Appropriations Committee.
But the Port Huron Republican said the House's budget last year showed there was room to maneuver money within the General Fund even amid budget pressures. Many changes in the Legislature's final budget were vetoed or scaled back by Whitmer before they took effect.
"As a whole, I think the people of the state of Michigan still expect us to be creative with their tax dollars and be responsible with their tax dollars and look for way to meet the needs of the state of Michigan with the dollars that we have," Hernandez said.
The increase in revenue comes despite a challenging year for the state’s economy, in which manufacturing and the auto industry were pinched by escalating trade tensions with China, a global market slowdown, the General Motors-United Auto Workers strike and uncertainty over the future of the U.S.-Mexico Canada Agreement, economists said Friday.
The uncertainties are expected to ebb as each situation is resolved in 2020. The replacement for the North American Free Trade Agreement is expected to get Senate approval, and China and the Trump administration is getting closer to finalizing a first-phase trade settlement pact.
But tensions with Iran and the presidential elections will inject new uncertainties, the UM economists said.
The unemployment rate is expected to drop from 4.1% in Michigan in 2018 and 2019 to 3.8% in 2020, lagging slightly behind federal rates, which are expected to drop to 3.5% by 2020. Personal income is expected to increase 3.8% in the coming year and wages and salaries 2.9%.
U.S. vehicle sales are expected to drop to 16.8 million units in 2020 from 17 million in 2019. The Detroit Big Three accounted for 6.9 million units in 2019 and are forecast to dip to 6.8 million this year.
The decrease in unit sales doesn’t necessarily signal a decrease in profit, as vehicles may sell for more, experts said.
The four main taxes that make up 85% of the state's revenue are those assessed on sales, use, income and property, said Eric Bussis, director of the Office of Revenue and Tax Analysis at the state Treasury Department.
Sales tax revenue has been boosted since the U.S. Supreme Court decided last year that states can apply the sales tax to online sales. The state also expects the recreational marijuana tax to boost sales tax revenue totals.
Combined, the online sales tax and marijuana sales tax are expected to generate $350 million annually in future budgets, said Gabriel Ehrlich, director of UM's Research Seminar in Quantitative Economics.
As of Monday, recreational sales totaled $8.25 million and generated $1.37 million in combined excise and sales tax revenue, according to the Marijuana Regulatory Agency.
Other new revenue sources stem from new sports betting and online gaming options signed into law at the end of 2019.
"When it phases in more fully in '21 and '22, the thought is that this would generate roughly $50 million in revenue — about $35 million of that would go to the School Aid Fund," said Jim Stansell, House Fiscal Agency senior economist.
Since sports and online gambling are expected to cut into Michigan Lottery revenue, "the net result is expected to be about $5 million plus to the School Aid fund since the expectation is that the lottery sales would decline as a result," he said.