by Robert Kleine, Laurie Cummings, and Alec Rodney

The FY 1994–95 budget, released during last fall’s intense school finance reform debate, has been finalized. The budget, which begins on October 1, provides welcome increases for most areas of state government but few new programs. The major change is the new school financing system, which not only changes the composition of the FY 1994–95 budget but also has important implications for the longer term. this report describes the changes from last year’s appropriations and, for most departments, the changes from the governor’s recommendations.

Introduction

For fiscal year (FY) 1994–95 the legislature appropriated a general fund/general purpose (GF/GP) budget of $8,014.9 million, 1.7 percent below projected FY 1993–94 expenditures. This decrease is misleading, however, because of the change in the school finance system and onetime supplemental expenditures in FY 1993–94 of $171 million. Excluding school aid and these onetime items, the increase is 3 percent.

The GF/GP budget, excluding 1994 supplementals, increased by only $34.7 million due, in large part, to a $176 million reduction in school aid. As shown in Exhibit 1, the major increases are for law enforcement (mainly the departments of Corrections and State Police), higher education, and mental health.

Exhibit 2 shows appropriations and dollar and percentage changes for major programs and departments. The departments receiving the largest GF/GP increases are Education (36.8 percent, adjusted for program transfers), Public Health (15.4 percent), Commerce (12.7 percent, due to a financing shift), Judiciary (9.1 percent), Civil Rights (8.9 percent), Corrections (6.9 percent), and State Police (6.9 percent). (Although the Michigan Jobs Commission received a 33 percent GF/GP increase, most of this was due to transfers. Adjusted for transfers, the increase was only 4.8 percent.)

The budget assumes that combined GF/GP and current school aid fund (SAF) revenue (excluding new revenues) in FY 1994–95 will be an estimated $11,121 million, a 5.5 percent increase. This includes about $122 million in onetime revenue items, among which are a $67 million reduction in state revenue sharing and $33 million from an increase in the markup in liquor prices. (The latter is a permanent increase but is carried as a onetime item on the FY 1994–95 balance sheet.)

Adjusted gross appropriations for FY 1994–95 are $27 billion, up 22.3 percent. This large increase is due to an additional $4.2 billion in school aid, resulting from the new funding system. Excluding school aid, total expenditures are up 3.8 percent.

FY 1994-95 Spending Policy

The following discussion focuses primarily on the GF/GP and SAF portions of the budget, as these are subject to the control of the governor and the legislature (as opposed to programs supported by federal aid or restricted revenue). The GF/GP portion of the budget is only 27.9 percent of total spending, down from 36.2 percent in FY 1993–94 and 49 percent in FY 1991–92. The sharp decline from FY 1993–94 is a result of the state’s increased role in financing K–12 education.

Exhibit 3 presents data on state government employment by department (appropriations are for full-time equivalent employees, or FTEs). Employment will increase by only 515 workers, a 0.8 percent increase, in FY 1994–95, following a 1,500-worker increase in FY 1993–94. Due to a hiring freeze, employment is also below budget levels, as many positions are unfilled.

The large drop in Department of Education employment is due mainly to the transfer of several programs and 1,322 employees to the departments of Social Services (560) and Treasury (2.5) and the Jobs Commission (760). The largest increases, adjusted for these transfers, were 5.7 percent in the Department of Natural Resources and 4.8 percent for the judiciary.

Several supplemental FY 1993–94 appropriations (GF/GP) were made during the past legislative session that deserve mention. The funding was provided because of an unanticipated $400 million FY 1993–94 state revenue surplus. Public Sector Consultants estimates that $275 million will be deposited in the state’s rainy day fund; the remainder will be put back into the state budget.

As a result, some programs will have extra monies to work with this year. The SAF received $48.7 million to cover election costs, reimburse for TIFA projects, and compensate for a lower-than-projected increase in state property values. State universities and community colleges received $30 million for deferred maintenance, the capital outlay budget included $4.6 million (gross supplemental, $40.4 million) for airports, the DNR received $20 million for site clean up plus an additional $15 million for various purposes, and the Commerce Department received $10 million for child violence prevention programs. In addition, $16 million was appropriated for the state’s new accounting and information system, and $11.5 million was added to the Treasury budget to pay back a loan from the Veteran’s Trust Fund.

Education

The gross appropriation for FY 1994–95 school aid is $7,959 million, an increase of 113.3 percent over FY 1993–94 spending. In addition, Governor Engler has approved legislation adding $108.4 million in supplemental FY 1994–95 K–12 funding and carrying $800 million forward from FY 1993–94 to the FY 1994-95 school year to decrease the need for school districts to borrow. The large increase in the SAF is due to the state’s much larger role in K–12 education funding under the new school finance system.

The FY 1994–95 GF/GP grant to the SAF is $667.2 million, a decrease of 20.9 percent from the FY 1993–94 school aid appropriation and equal to the governor’s recommended amount. The decrease is due to the larger reliance on restricted funds under the new school finance system.

Michigan’s power equalization formula has been replaced by a foundation grant of $5,000 per pupil, which all districts will eventually receive.1 The system is being phased in because of its expense. In the meantime, aid will be based on each district’s FY 1993–94 per-pupil spending.

Categorical aid is given to eligible school districts and intermediate school districts to support specific programs, such as vocational education and retirement. Under the new system, much of this funding will no longer be allocated separately but will be included in the foundation grant. Schools wishing to continue these programs will have to pay for them out of their foundation grants. Social Security and retirement will no longer be provided by state categorical payments, and schools will also be required to pay them out of their basic foundation grants. Exceptions to this include professional development funds and special, adult, bilingual, and early childhood education, which will continue to be allocated by separate categorical grants.

The FY 1994–95 GF/GP appropriation for universities is $1,359.4 million, up 3.4 percent from FY 1993–94 spending and $3.1 million higher than the governor’s recommended amount. The long-awaited increase is well in excess of last year’s 0.2 percent. Grand Valley State University (GVSU), the state’s fastest-growing university, will receive an increase of 19.8 percent; most other universities will receive increases between 2.3 and 5 percent. Some universities, such as GVSU, received a onetime, catch-up increase to make up for historic differences in funding. The GF/GP appropriation for financial aid increased 4.5 percent from FY 1993–94 to $110.1 million.

The FY 1994–95 GF/GP appropriation for community colleges is $247.2 million, an increase of 3 percent and equal to the governor’s recommended amount. Across-the-board increases of 3.25 percent for all Michigan community colleges are contained in the budget.

The FY 1994–95 GF/GP appropriation for the Department of Education is $42 million, a 2.6 percent increase over the FY 1993–94 budget. It includes money to expand school readiness programs, to complete the state’s new student assessment program, and for implementation of the education reforms passed along with the new school finance system. The governor vetoed extra money for the State Board for Community and Junior Colleges and a school readiness grant.

The number of FTE jobs at the department was reduced from 2,249.2 in FY 1993–94 to 946 in FY 1994–95 because some of its functions were shifted to other departments. For example, the 760 jobs in the Michigan Rehabilitation Services Division were moved to the Michigan Jobs Commission.

Human Services

The Department of Social Services GF/GP appropriation of $2,195.1 million represents a $23.5 million (1.1 percent) decline from FY 1993–94. (Although the GF/GP appropriation fell, the total appropriation rose due mainly to a 5.9 percent rise in federal funding.) The final appropriation is equal to the governor’s recommended budget; however, the distribution of funds across programs differs. Significant changes from last year’s GF/GP budget include:

  • a $75.5 million increase to cover Medicaid caseload growth, utilization, and inflation;
  • $3 million to fund and 100 additional FTEs for the Michigan Opportunities and Skills Training (MOST) program that aids public assistance clients in locating and securing jobs; and
  • $43 million in net savings achieved through intergovern-ment Medicaid transfers that involve public hospitals and medical and mental health facilities.

At $1,011.3 million, the Department of Mental Health FY 1994–95 GF/GP appropriation differs from the governor’s recommended budget by only $40,000 and represents a 2.1 percent increase over last year’s budget. The budget continues the trend of increasing spending on community mental health (CMH) programs and deemphasizing the use of state centers. To this end, $23.2 million is appropriated for a new CMH line item—”support for expanded CMH services financed through reduced utilization of state facilities.”

Federally mandated nursing home reforms, such as preadmis-sion screening for mental illness and annual resident reviews, receive an additional $7.4 million. GF/GP appropriations for Community Residential Services programs are scaled back by nearly $5.4 million, a 44.5 percent decrease.

The GF/GP appropriation for the Department of Public Health is $177.2 million, the governor’s recommended amount. This represents a $23.6 million (15.4 percent) increase over FY 1993–94 appropriations. The budget includes a $15.1 million (88.5 percent) increase in state/local cost sharing for local health systems, making the state an equal partner in the provision of eleven basic services. Increased caseload and case management funding for Crippled Children Services ($4.1 million); an increase in the Medicaid reimbursement for substance abuse services ($3.1 million); economic adjustments for departmentwide compensation, insurance, and mileage costs ($1.6 million); and some minor cuts in other programs round out FY 1994–95 changes.

Safety and Defense

The FY 1994–95 GF/GP appropriation for the Department of Corrections is $1,184.1 million, a 6.9 percent increase from this year’s spending and about equal to the governor’s recommended amount. Although it is one of the largest increases in the state budget, it is much smaller than last year’s 13.1 percent and similar double-digit increases in previous years. The budget allows for additional probation and parole officers, increases for rising health care costs, extra mental health beds, and more funds to county jails. The governor vetoed $3.1 million, including $1 million for proposed community corrections pilot projects.

The FY 1994–95 GF/GP appropriation for the Department of State Police is $217.9 million, up 6.7 percent from FY 1993–94 spending, part of which will add 270 more state troopers, about a 20 percent increase. The budget also will help pay for a continued phase-in of a state-of-the-art radio system to improve communication between officers. Other highlights include money to increase police patrols on secondary roads and to fund a project to improve criminal record keeping.

The FY 1994–95 GF/GP appropriation for Military Affairs is $35.9 million, an increase of 5 percent from FY 1993–94 spending. Most of the increase is for economic adjustments and to pay for mandated improvements to two veterans’ facilities.

Regulatory

The FY 1994–95 GF/GP appropriation for the Department of Commerce is $64.7 million, an increase of 12.7 percent over current-year spending and $1.3 million less than the governor’s recommended amount. The large increase is due to replacement of about $6 million of Strategic Fund revenue with general fund monies. Adjusted for this financing shift, the increase is only 4.5 percent. The budget includes $25.5 million for the Michigan Equity Program and $4.2 million (GF/GP) for the Council for Arts and Cultural Affairs.

The FY 1994–95 GF/GP appropriation for the Department of Labor is $31.1 million, a 4.4 percent increase over FY 1993–94 spending and equal to the governor’s recommendation. The increase was primarily for economic reasons, such as to cover the cost of inflation.

The FY 1994–95 GF/GP appropriation for the Michigan Jobs Commission is $22 million, an increase of 33.3 percent over FY 1993–94 spending and $1.3 million above the governor’s recommendation. Most of the increase is due to the replacement of restricted revenues from the Michigan Strategic Fund with GF/GP money. Adjusted for transfers, the Michigan Jobs Commission received a 4.8 percent increase.

Natural Resources and Recreation

The FY 1994–95 GF/GP appropriation for the Department of Natural Resources (DNR) is $101.2 million, up 5.9 percent from last year’s budget and equal to the governor’s recommendation. The increase is primarily to replace lost Michigan Strategic Fund revenue.

The FY 1994–95 GF/GP appropriation for the Department of Agriculture is $42.9 million, an increase of 6.7 percent over FY 1993–94 spending and $1.4 million higher than the governor’s recommendation. Much of the increase is the result of a switch from restricted to general funds, such as using $3 million in general funds to pay for horse racing licensing formerly paid for out of restricted funds. The gross budget also includes $2.5 million for a new groundwater and freshwater protection program.

General Government

The FY 1994–95 GF/GP appropriation for this category, which includes six departments plus the Executive Office, legislature, judicial branch, and Library of Michigan, is $423.9 million, an increase of 5.8 percent above projected FY 1993–94 expenditures (excluding supplementals).

The GF/GP appropriation for the Department of Management and Budget is $52.3 million, 6.3 percent above the FY 1993–94 appropriation and $1.6 million more than recommended by the governor. The appropriation includes $22.8 million for the Office of Aging, $1.6 million more than recommended by the governor.

The Department of Treasury GF/GP appropriation is $43.5 million (excluding debt service and revenue sharing), a 1.2 percent increase from FY 1993–94 appropriations and $0.4 million more than the governor’s recommendation.

The FY 1994–95 GF/GP appropriation for the Department of State is $14 million after vetoes, down 6 percent from FY 1993–94 and $0.2 million above the governor’s recommendation. (The appropriation was 1.4 percent above the FY 1993–94 amount before the vetoes.) The major addition by the legislature was $1.3 million for election regulation. The governor vetoed $1.2 million to implement the National Voter Registration Act (a program to assist persons with disabilities, on public assistance, or without a drivers license to register to vote), a federal mandate.

The judiciary received a FY 1994–95 GF/GP appropriation of $133.4 million, up 9.1 percent from the FY 1993–94 appropriation and $5.3 million more than the amount recommended by the governor. The major addition was $4.9 million for the 36th District Court (Wayne County), with $4 million going for juror fee reimbursement. This is a new item intended to provide additional funding to outstate courts as well as to Wayne County.

The GF/GP appropriation for the legislature is $94.9 million, up 2.8 percent and $3.1 million more than the governor’s recommendation. The Office of the Auditor General received an additional $0.5 million, and $0.9 million was added to the legislative retirement system.

The FY 1994–95 GF/GP appropriation for the Office of Attorney General is $26.9 million, a 4.7 percent increase but $0.4 million less than recommended by the governor.

The GF/GP appropriation for the Department of Civil Service is $11.6 million, up 6.4 percent and unchanged from the governor’s recommendation.

There was no change from the governor’s revised recommendations for the Department of Civil Rights ($12.2 million) and the Executive Office ($4.4 million).

Other

The FY 1994–95 GF/GP appropriation for capital outlay is $150.7 million, down one percent from FY 1993–94 spending and at the level recommended by the governor. All of the GF/GP monies are appropriated for State Building Authority rent. The adjusted gross appropriation of $312 million includes some funds for new projects. Included in the FY 1994–95 budget is $22.1 million in user charges for the Michigan Administrative Information Network (MAIN).

The Department of Transportation is supported primarily by restricted funds (largely the gasoline tax, registration fees, and federal aid) and thus does not receive a GF/GP appropriation. The department’s adjusted gross appropriation for FY 1994–95 is $1,823.4 million, an 0.8 percent increase from projected FY 1993–94 expenditures.

Public Act 108 of 1994 requires that the total surplus for FY 1993–94 be deposited into the Budget Stabilization Fund. The estimated surplus is about $275 million. In addition, the formula (based on the change in real Michigan personal income) indicates that a payment of about $100 million will be required in FY 1994–95. The fund will have an estimated balance of about $610 million at the end of the current fiscal year and nearly $750 million at the end of FY 1994–95 (assuming a withdrawal is not made to cover a small deficit, projected by Public Sector Consultants, in the FY 1994–95 budget).

There are two important constitutional restrictions on the state budget. Article IX, Section 26 of the Michigan Constitution limits the revenue the state may collect to 9.44 percent of Michigan personal income in the calendar year prior to the year in which the fiscal year begins. The limit for FY 1994–95 is $18.4 billion.

Total state revenue, less federal aid and general obligation debt service and other adjustments and accounting for the $155 million reduction in taxes recently enacted by the legislature, is estimated to fall below the limit by an estimated $200 million. In FY 1992–93, revenues were $3.3 million below the limit, but the increase in state taxes to replace local school taxes, as approved by the voters on March 15 of this year, has pushed the state very close to the revenue limit. Current calculations, however, are based on preliminary 1993 personal income numbers. The final calculation will be based on the August revision, which we expect to be $1–1.5 billion higher, increasing the revenue limit by $100–150 million.

Article IX, Section 30 of the constitution requires that a minimum of 41.6 percent of spending from state sources be allocated to local units of government. This section has become largely irrelevant because of the new school finance system. The additional $4 billion plus in payments to K–12 school districts count as local spending, increasing state spending on locals to more than 55 percent and making it extremely unlikely that spending will ever fall below the required 41.6 percent.

Comment

The FY 1994–95 budget is, for most departments and programs, the most generous since the late 1980s. Most departments received an increase in excess of inflation, and higher education received the first increase in three years. This was made possible by the state’s strong economic recovery and the reduction in the expenditure base over the past few years. The future is very uncertain, however, because of the new school finance system and the ups and downs of the Michigan economy.

The major budget problem for the future is that the new school aid formula may be underfunded by about $700–800 million. This would require transfers from the general fund to make up the shortfall. As shown in Exhibit 4, we are projecting a general fund contribution to the SAF of more than $1.2 billion in FY 1995–96, nearly $600 million more than in FY 1994–95. Because of large balances in the BSF and the carryover of school aid fund monies from FY 1993–94, however, there will be a small projected surplus of $117 million in FY 1995–96 in the three funds.

In FY 1996–97 we are projecting a deficit of more than $600 million. We forecast a slowdown, and possibly a recession, in 1996 due largely to two factors. First, if motor vehicle sales increase in 1995 as expected, that will be the fourth year of increasing sales, and there has never been a longer period of increasing sales. Second, at the end of 1995 the current economic expansion will have lasted for 57 months—about equal to the third longest expansion since World War II and well in excess of the average economic recovery.

The potential future shortfall has been increased by the recent enactment of a $155 million reduction in income and SBT taxes and FY 1993–94 supplemental expenditures of more than $170 million. This comes on top of a $100 million cut in inheritance taxes enacted in 1993 and the $700 million reduction in state and local taxes contained in the new school financing program.

As we have said before, we believe it would be wiser to consolidate the gains of the past three years and take actions to insure that the current good times last beyond the next downturn in the economy. The Engler Adminis-tration’s response to this view is that the state will deal with any budget problems as they occur, as it has always done in the past. This misses the point, which is that if we plan properly when times are good we will not have to face these budget problems in the future when they are not.

1The power equalization formula for FY 1993-94 was $400 per pupil plus $102.5 per locally raised mill.



Copyright 1994

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