by Robert Kleine, Vice President and Senior Economist, and Brian VanKlompenberg, Research Assistant

This Advisor describes the FY 1995–96 state budget, which is relatively generous and appears to be based on realistic budget assumptions. The report includes changes from last year’s appropriations and from the governor’s recommendations.

Introduction

For fiscal year (FY) 1995–96 the legislature appropriated a general fund/general purpose (GF/GP) budget of $8,438.6 million, 5.1 percent above projected FY 1994–95 spending. However, the governor vetoed programs totaling $45.5 million, reducing the budget to $8,393.1 million, a 4.6 percent increase.

The dollar increase in the GF/GP budget is $361 million, excluding FY 1994–95 Budget Stabilization Fund (BSF) payments of $125 million. As shown in Exhibit 1, the major increases are for social services (largely Medicaid), law enforcement, and higher education.

Exhibit 2 shows appropriations and dollar and percentage changes for major programs and departments. The departments receiving the largest increases (after vetoes), adjusted for program transfers, are the Executive Office (13.6 percent), State Police (10.4 percent), Corrections (7.1 percent), and Social Services (6.5 percent).

The budget assumes that combined GF/GP and current school aid revenue (excluding new revenues) in FY 1995–96 will be $11,980 million, a 4.7 percent increase. Including the new school reform monies, the total is $16,031 million, a 4.4 percent increase. This includes about $118 million in onetime revenue items, among which are a $81 million reduction in revenue sharing and $33 million from an increase in the markup on liquor prices (this was a permanent increase in 1993, but is still carried as a onetime item on the balance sheet).

Adjusted gross appropriations for FY 1995–96 are $28 billion, up 2.2 percent from FY 1994–95 (2.7 percent excluding the BSF payment).

FY 1995–96 Spending Policy

The following discussion focuses primarily on the GF/GP and school aid fund (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 29.9 percent of total spending, down from 36.2 percent in FY 1993–94 and 42.8 percent in FY 1989–90. The sharp decline is the result of the state’s increased role in financing K–12 education.

Exhibit 3 presents data on state government employment by department (appropriated full-time equivalent positions, or FTEs). The budget provides funding for 66,533 positions, down by 425 FTEs or 0.6 percent from FY 1994–95 and by 2,270 positions from FY 1991–92. The only significant increases were 668 additional positions in Corrections, 195 in the Michigan Jobs Commission (most of which were transferred from the Department of Education), and 141 in Treasury. These increases were offset by a drop of 686 employees in Mental Health, 218 in Education, 194 in Commerce, and 191 in Transportation.

Education

Michigan schools will receive an FY 1995–96 GF/GP school aid appropriation of $587.1 million, 11.7 percent less than the FY 1994–95 appropriation and just under the governor’s recommendation. When adjusted for transfers, however, the general fund appropriation for schools is a little higher than in the current fiscal year. The largest transfer is $72 million in job training and EDGE grants to the Jobs Commission’s Work First program. Other major elements of the school aid act include the following:

  • An appropriation of $7,551.7 million, $306.7 million over last year, is to be paid to local school districts in the form of foundation grants.
  • The basic foundation grant will increase from $5,000 to $5,153 per student. Districts currently spending below the basic foundation allowance will receive an increase of up to $305, twice the increase for other districts.
  • Last year’s funding of $230 million for at-risk programs, $4.2 million for bilingual instruction, $5 million for gifted and talented programs, $28.6 million for vocational education, and $185 million for adult education is continued.
  • Math and science centers receive $7.6 million, a 22 percent increase over the last school year.

The governor has vetoed just over $2 million in GF/GP money, including $2 million for professional development, which he believes was not well spent in the current fiscal year. He also has vetoed several onetime adjustments for school districts, arguing that the current formula is fair and such adjustments set a bad precedent.

The total appropriation of $8,297.6 million is a 3.5 percent increase over FY 1994–95. It reflects the fact that the state will receive $21.7 million less in federal aid in FY 1995–96 than in FY 1994–95.

The FY 1995–96 GF/GP appropriation for the Department of Education is $42.3 million, a 0.7 percent increase over the FY 1994–95 budget. It includes $2.1 million to expand and improve the MEAP and high school proficiency tests and $421,000 for a new charter schools office. The gross appropriation of $808.6 million is up 5.1 percent, due to higher federal grants such as an additional $19.2 million for the school lunch program, $28.5 million more for compensatory education, and $13.4 million for new Goals 2000 grants.

Higher Education

Universities will receive $1,308.1 million in FY 1995–96, all in GF/GP funds, a 4.7 percent increase from the current year. Each state university will enjoy a 3 percent increase over the current year. Michigan State University, Western Michigan University, and Grand Valley State University, all with low per-pupil appropriations compared to similar state universities, will receive onetime technological grants of $10 million, $4 million, and $1 million, respectively. The governor vetoed a $250,000 item for a new Nursing Opportunity Program.

A supplemental bill divides $18.8 million in lapsed funds among Michigan’s other 12 universities; the University of Michigan will receive nearly half of the money while other schools receive as little as $250,000.

The GF/GP community colleges appropriation for FY 1995–96 is $248.8 million, up less than one percent from the FY 1994–95 budget. A 3 percent increase in funds available for Michigan’s community colleges is distributed according to the Gast-Mathieu formula, resulting in increases for individual schools ranging from about 2 percent to more than 10 percent. Governor Engler has followed through on his threat to veto $6.2 million that the legislature appropriated for Highland Park Community College.

The FY 1995–96 GF/GP appropriation for financial aid is up 5.2 percent from FY 1994–95 at $115.8 million. Most programs receive 3 percent economic increases to keep pace with inflation. The Tuition Incentive Program, for current and former Medicaid recipients seeking associate’s degrees or certificates, received a nearly 50 percent increase of about $3.8 million. The state has begun phasing out funding for the Indian Tuition Waiver Program by cutting nearly $1 million, or about a third, of the program’s money.

Human Services

The Department of Social Services GF/GP appropriation of $2,380.4 million represents a $145.3 million (6.5 percent) increase from FY 1994–95. The final appropriation falls $43.4 million short of the governor’s recommended budget. The adjusted gross appropriation is $7,259.5 million, a 1.1 percent decrease from the current fiscal year.

Significant changes from last year’s GF/GP budget include:

  • an increase of $46.4 million to compensate for a decrease of more than $113 million in federal Medicaid special financing payments;
  • an additional $5.8 million for automation;
  • $12.7 million in economic increases;
  • a nearly $160 million GF/GP Medicaid base adjustment reflecting both inflation and caseload/utilization growth;
  • a $1 million ($3 million total appropriation) reduction in the Caring Program for Children, to reflect current spending levels;
  • a $84 million ($195 million total appropriation) reduction in AFDC funding to reflect declining caseloads; and
  • increases in state funding for various child and family services including $8.1 million for the adoption subsidy, $7.8 million for adult home help, $13.7 million for day care services, and $4.0 million for foster care.

The governor vetoed $11 million in GF/GP appropriations, including $6.6 million ($50 million gross) for the Wayne County Indigent Medical Care program, arguing that his original recommendation of $34.8 million should be appropriated when the legislature returns this fall; a $2.7 million state supplemental assistance line item; a $450,000 burial services provider increase; and a Medicaid personal care provider increase of $355,700.

At $1,018.9 million, the Department of Mental Health FY 1994–95 GF/GP appropriation is $20 million shy of the governor’s recommended budget and 2.8 percent above the FY 1994–95 adjusted appropriation. The total appropriation of $1,534.9 million is up 5.2 percent. The budget continues the transfer of services from state psychiatric hospitals to community mental health (CMH) programs, with the CMH programs section of the budget receiving a $69.2 million increase, including a $24.7 million transfer from state hospitals and centers.

Other budget highlights include:

  • an additional $2 million for community demand;
  • a $6.5 million economic increase for community residential care service providers; and
  • a nearly $20 million increase for forensic and prison mental health services, funded primarily by an interdepartmental grant from the Department of Corrections.

The governor has vetoed $15 million of one-time restricted funds, including $11.5 million for 100 percent staffing at state hospitals.

The GF/GP appropriation for the Department of Public Health is $182.4 million, a $0.2 million (0.1 percent) increase over FY 1994–95 appropriations. The final budget is $5 million less than the governor’s recommendation. The adjusted gross appropriation of $664.3 million, boosted by increased tobacco tax revenue, is up 4.5 percent.

Major increases over last year include:

  • $4 million for Medicaid substance abuse programs and $3 million for community substance abuse prevention, education, and treatment grants;
  • $18 million for expanded children’s health care services funded in part by federal matching dollars;
  • $4.5 million for pregnancy prevention programs;
  • $7.5 million for chronic disease prevention; and
  • $3 million for local immunization agreements and $3.5 million for the national vaccine compensation fund.

New line items include $1.75 million for physical fitness and nutrition programs, and $2.75 million for domestic violence prevention. Governor Engler struck language designating up to $100,000 for the department to print material for Michigan’s informed consent law. The governor argued that the money should have gone to local health departments to pay for distribution costs since a court has ordered state funding of the mandate.

Safety and Defense

The FY 1995–96 GF/GP appropriation for the Department of Corrections is $1,268.8, a 7.7 percent increase from this year’s spending, but falls $16.8 million under the governor’s recommendation. The budget attempts to deal with the state’s burgeoning prison population by providing $30 million more for state corrections facilities, a $5.8 million increase in funds to reimburse county jails housing state offenders, a new $4 million line item for counties to expand minimum security facilities, and an additional $9 million for parole and probation officers.

Funding for health care services increases by $4.5 million, and an additional $5 million will be spent on training for new employees. The budget prohibits spending state dollars on color televisions for prisoner use and motorized lawn care equipment, with the intent of using prison labor in its stead. All funding for higher education for prisoners will be transferred to vocational education unless prohibited by court orders or consent decrees, as is the case for the state prison of southern Michigan.

At $240.5 million, the FY 1995–96 GF/GP appropriation for the Department of State Policeis up $22.6 million from FY 1994–95. The 10.4 percent increase is among the largest in this year’s budget. The special operations portion of the budget enjoys particularly large increases, including an additional $2.5 million for a state public safety communications system, an extra $1.5 million for traffic safety, and a $894,300 line-item grant to Detroit, previously found in the regulatory budget, for the city’s crime lab and special events. The budget also increases funding for the law enforcement information network and the automated fingerprint information system.

The FY 1995–96 GF/GP appropriation for Military Affairs of $36.4 million, an increase of 1.4 percent, is about equal to the governor’s recommendation. An additional $1.5 million is appropriated for military training. Military retirement received a $200,000 cut. Veterans’ service organizations and veterans’ homes receive near inflation level increases.

Regulatory

The GF/GP appropriation of $24.8 million for the Department of Commerce in FY 1995–96 is $7.6 million below the governor’s recommendation. The appropriation is 61.7 percent below the FY 1994–95 appropriation; this large decrease is due primarily to program transfers to the Jobs Commission, including Tourist Business Development, International Services, Michigan Development Services, and Business Services. Almost $5 million appropriated last year for occupational and professional regulation will be replaced by fees. Additional fee revenue will also supplant GF/GP funding in other areas of Commerce’s budget such as executive direction and management services. The Michigan Equity Program is merged with the Council for Arts and Cultural Affairs, with a nearly $8 million cut in the combined budget.

The total appropriation is $303.6 million, down $95.5 million from last year. Again, the majority of this is due to the transfer of a program to the Jobs Commission, including more than $60 million for a federal small-cities community development block grant. The federal government is redirecting nearly $15 million from the Michigan State Housing Development Authority to local financial institutions.

The FY 1995–96 GF/GP appropriation for the Department of Labor is $27.5 million, an 11.6 percent decrease from FY 1994–95, but $7.1 million more than the governor recommended. The decrease in GF/GP funds is attributable in part to a $2 million cut in the department’s administration and a $1.2 million decrease in funding for workers’ disability compensation, which is replaced by money from the workers’ compensation administrative revolving fund.

The total appropriation is $245 million, or 14.5 percent above projected current year spending. The Michigan Employment Security Commission will receive an additional $5.5 million in federal funds, and a $26 million “payments to injured workers” line item is added to this year’s budget, funded by the Workplace Health and Safety Fund.

The Michigan Jobs Commission GF/GP appropriation of $112.8 million, although $5 million less than the governor asked for, is 412.7 percent above the $22 million budget for the current year. The enormous increase is due entirely to programs transferred to the Jobs Commission from other budgets. Without the transfers, GF/GP spending actually decreases. The commission’s new $32 million Economic Retention and Expansion section is created predominately from transfers from the Department of Commerce. More than $60 million in Work First grants are transferred from the school aid fund. GF/GP reductions stem mainly from reductions in various grants.

The total appropriation of $529.6 million is up 50.4 percent from last year. In addition to the changes discussed above, the large jump is attributable to the transfer of a $61 million community development block grant from the Department of Commerce to the commission and a new $9 million federal grant for School-to-Work programs.

Natural Resources and Agriculture

The FY 1995–96 GF/GP appropriation for the Department of Natural Resources is down 3 percent from last year’s budget, at $95.3 million, and falls about $1.1 million short of the governor’s recommendation. Significant changes include funding for a new Environmental Assistance Division to assist businesses, local governments, and local governments in understanding environmental protection regulations; $2.3 million less in GF/GP money for forest resource management, supplanted by a substantial increase in forest resource revenue; and an extra $1.5 million to eliminate a backlog of wastewater disposal and permit applications. The total appropriation fell by 14.8 percent but primarily reflects the elimination of a $100 million line item for MUSTFA (Michigan Underground Storage Tank Financial Assurance) program backlog reduction.

GF/GP funding for the Department of Agriculture is $43.9 million for FY 1995–96, up 2.3 percent from the FY 1994–95 budget. The increased funding primarily reflects economic adjustments to cover the cost of inflation. The largest program increase is an additional $1 million for the groundwater and fresh water protection program.

General Government

The FY 1995–96 GF/GP appropriation for this category, which includes six departments plus the Executive Office, legislature, judicial branch, and Library of Michigan, is $455.9 million, 7.3 percent above projected FY 1994–95 expenditures. This large increase is due, in part, to a 47.8 percent increase for the Department of Treasury. Excluding Treasury, the increase is only 2.7 percent.

The GF/GP appropriation for the Department of Management and Budget (DMB), after a $0.7 million veto, is $50.5 million, unchanged from the governor’s recommendation and 3.4 percent below projected expenditures for FY 1994–95. The budget includes $24.4 million for the Office of Aging. The gross appropriation for the department is $185.5 million, up 27.8 percent from the current fiscal year.

The Department of Treasury received a FY 1995–96 appropriation of $64.3 million (excluding debt service and revenue sharing), $6.9 million above the governor’s recommendation and 47.8 percent above FY 1994–95 spending. Most of this large increase is accounted for by the transfer of $12 million for Tax Increment Finance Authority payments from the school aid fund. In addition, the legislature added $5.4 million to reimburse local units for homestead affidavit costs associated with the new school finance system. Excluding these onetime payments, the budget increase was 7.8 percent. The gross appropriation for the department (including debt service and revenue sharing) is $1,562.3 million, up 10.6 percent from projected FY 1994–95 expenditures.

The GF/GP appropriation for the Department of State is $16.2 million, the amount recommended by the governor, and 2.5 percent above projected expenditures for FY 1994–95. However, adjusted for the transfer of the Vehicle Inspection/Maintenance program ($1.2 million) to the Department of Transportation, the budget is up 9.5 percent.

The judiciary received a FY 1994–95 GF/GP appropriation of $164.3 million, $29.4 million above the governor’s recommendation and 23.2 percent above FY 1994–95 spending. However, the governor vetoed the legislature’s additional $25 million funding for out-state courts, reducing the appropriation to $139.3 million, a 4.4 percent increase.

The other general government budgets changed little from the governor’s recommendations.

Other

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 1995–96 is $1,873.6 million, a 2.8 percent increase from projected FY 1994–95 expenditures. The appropriation is up $93.3 million from the governor’s recommendation, due mainly to higher than estimated restricted revenue and federal aid.

The FY 1995–96 GF/GP appropriation for capital outlay is $164.2 million, up 7.8 percent from FY 1994–95 spending and at the level recommended by the governor. Most of the increase, $10.1 million, is for State Building Authority rent requirements. The gross appropriation is $289.4 million, down 10.8 percent from FY 1994–95 spending. This sharp decline is due mainly to the transfer of Project MAIN ($15 million) to the DMB budget and the elimination of $29.9 million in transportation projects that were funded in the current year budget.

The balance in the Budget Stabilization Fund is estimated to be $1.16 billion at the end of FY 1995–96, an all-time high by a wide margin. The pay-in to the fund in FY 1994–95 will be about $302 million, including $177 million from the proceeds of the sale of the State Accident Fund. The FY 1995–96 budget includes no pay-in to the BSF, although the Senate Fiscal Agency estimates that the BSF trigger would require a pay-in of about $185 million.

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 personal income in the calendar year prior to the year in which the fiscal year begins. The limit for FY 1995–96 is $20,216 million. Our estimate is that state revenue (which excludes federal aid) will fall about $950 million below the limit. Without the tax cuts enacted in 1993 and 1995, revenue would have exceeded the limit by a large enough margin (more than one percent) in FY 1994–95 to trigger a tax refund.

Article IX, Section 30 of the constitution requires that 41.6 percent of spending from state sources be allocated to local units of governments. This section has become largely irrelevant because of the new school finance system. Because of the additional state payments to school districts, nearly 60 percent of state spending is now allocated to locals.

Comment

The FY 1995–96 budget is relatively generous and appears to be based on realistic budget assumptions. It is also well protected by the more than $1.1 billion BSF balance projected for the budget year. The major unknown is the adequacy of the new school aid fund to meet its obligations. We estimate that substantial transfers from the general fund will be required to offset a structural deficit in the fund.

If revenues continue to grow at a moderate pace of at least 4 percent, this should pose no problems. However, if there is a recession in the near term and revenue growth slows or revenues actually decline, as occurred in the early 1990s, there will be a shortfall that cannot be covered even by the large BSF balance.

At present, there appears to be a less-than-even chance that the economy could slide into a recession in 1996. Auto sales are slowing, consumer confidence is shaky, and federal budget cuts will dampen economic growth. However, the Federal Reserve Board has the ability to forestall a recession by further reducing interest rates.

One thing is certain, there will be another recession; the only question is when it will occur. The adequacy of the new school aid fund and the state tax structure, which has undergone considerable change in the last few years, will remain a question mark until then. Our fear is that the new system will prove to be more unstable and less responsive to economic growth than the old system.

An even greater concern for the state budget over the next few years is the effect of the efforts of Congress and the president to balance the federal budget. The new block grants will provide re-duced federal funding in most areas and are vulnerable to further reductions as the effort to balance the budget proves more difficult than expected. Also, those aid programs not rolled into block grants are likely to be reduced. The effect on the Michigan bud-get could exceed $2 billion over the next seven years.

The state budget process has been relatively painless for the last three budgets, but we expect the process to become much more difficult over the next few years. Fortunately, Michigan is in its best fiscal condition in a number of years, although this could quickly change as the economy slows. As always, those who plan best will be the least affected.



Copyright © 1995

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