Michigan gets $2B budget surplus this year, a $1.5B bump next year
Lansing — Michigan has about $2 billion more in revenue than initially expected for this fiscal year, state fiscal leaders concluded Friday, thanks in large part to federal stimulus dollars and increased consumer spending on goods.
Budget experts also adjusted expected revenue for the fiscal year 2022 budget upwards from January estimates by $1.5 billion at the Consensus Revenue Estimating Conference.
"There has just been an incredible amount of federal income support over the past 13 months, and that’s played a big role in our forecast," said Jim Stansell, senior economist for the House Fiscal Agency.
The meeting came a day after the GOP-led Legislature and Gov. Gretchen Whitmer agreed to begin working together on the state budget and distribute billions of dollars in federal COVID-19 relief funding, some of which dates back to December.
Not only has the federal money served to cover extra public health costs during the COVID pandemic, but officials also see it as a way to free up state general fund money for what leaders hope will be long-term investments in areas like infrastructure and debt payoffs.
The $2 billion increase to Michigan's $26.3 billion in general and school aid funds represents a 6.2% increase from what was predicted in January.
Whitmer's recommended budget for fiscal year 2022, proposed in February, totals $67.1 billion. Without COVID-19 relief dollars from the federal government, the proposal marked a 6.8% increase from the past budget.
So far, the Senate has proposed a $66.4 billion budget while the House proposal is about $60.2 billion, which includes quarterly budgets for many departments. The House and Senate budgets were proposed before Thursday's agreement to negotiate with the governor on the spending plan.
The state's rainy day fund had a balance of about $1 billion at the end of fiscal year 2018 and ended fiscal year 2020 with a balance of $829 million. The decrease reflects about $350 million that was withdrawn last year when the state was facing a budget shortfall.
Whitmer has proposed putting about $175 million in supplemental money into the fund to increase it to $1.1 billion by the end of the fiscal year.
Members of Whitmer's administration were optimistic Friday about the projections for the coming fiscal years after a year of roller-coaster fiscal predictions tied to the pandemic.
Priority for surplus spending will be given to remaining public health concerns, service gaps identified during the pandemic and transformational, sustainable investments, said State Budget Director David Massaron.
"This gives us real resources to solve the real problems that exist in our state," Massaron said.
But House Appropriations Chairman Thomas Albert urged caution, arguing an overreliance on what he called "artificial" boosts from the federal government could cause problems down the road. The Lowell Republican suggested "targeted, one-time investments" rather than using the money on programs the government may not be able to sustain as federal aid dwindles.
“I’m deeply concerned that the same federal policies causing short-term revenue gain could lead to inflation and other monetary pressures that might hurt our economy in the near future," said Albert. "Fiscal and monetary policies like this are unsustainable in any nation."
Senate Appropriations Chairman Jim Stamas, R-Midland, also stressed the need to "be guarded" with federal funds.
“As we continue the process of finalizing a balanced budget on time and using federal relief funds this year, we must wisely and effectively use this once-in-a-lifetime funding for purposeful and lasting projects that improve our state for every Michigan family," Stamas said.
Michigan's economic recovery
Economists were optimistic about the state's recovery Friday. There was nothing structurally wrong with the economy prior to the pandemic that would prevent it from returning to normal, Stansell said.
Federal stimulus dollars and relief funds helped to pull the recovery forward so the state would see gains earlier, but those gains should balance out in the coming months, economists said.
While inflation in building costs, houses, and vehicles is evident, Stansell and other economists saw the increase as temporary.
"All of those things are pressures, but we don’t see them as significant going forward," Stansell said. "We see them as very transient.”
Still, economists warned there still are underlying factors that could disrupt their predictions.
While unemployment rates have improved in Michigan — down to 4.9% in April from a high of 22.7% in April 2020 — some of that decrease might be attributed to people dropping out of the workforce.
The state expects over the next few years it will regain about 85% of the 409,000 jobs lost during the pandemic, Stansell said.
"From our perspective, even by the end of 2023, we won’t be back to where we were in 2019," he said.
But University of Michigan economic researchers say they expect the state's payroll job count to recover to pre-pandemic levels by the end of 2023.
The UM researchers added that hesitancy among some workers to rejoin the labor force is hurting the economic recovery but added it should decrease as COVID case numbers continue declining. They also worry about a short-term increase in inflation after a nearly 1% rise in core prices in April, but they expect it to ease by next year.
Other uncertainties include the path of the pandemic, a return to "normal" fiscal policy after federal stimulus dollars are spent and a transition from spending on goods, which are taxed, to services, which are not.
"We expect sales tax revenue to grow more slowly and then we get something a little bit more normal in 2023, although it's still going to be affected by the continuing switch back from goods to services," said David Zin, chief economist for the Senate Fiscal Agency.