by Robert Kleine, Vice President and Senior Economist, and Laurie A. Cummings, Senior Consultant for Economic and Education Policy

This Advisor describes the FY 1996–97 state budget. Included are changes from 1995–96 appropriations and from the governor’s recommendations and discussion of measures about which there was particular controversy.

Introduction

For fiscal year (FY) 1996–97, which begins October 1, the legislature has appropriated a general fund/general purpose (GF/GP) budget of $8,224.6 million, 2.5 percent and $218.1 million below projected current-year (FY 1995–96) expenditures. The governor vetoed programs totaling $9.9 million, reducing the budget to $8,214.7 million and a 2.6 percent decline from current-year spending . However, when the numbers are adjusted for the increased earmarking of the state income tax revenue to the School Aid Fund (SAF) (from 14.4 percent to 23 percent), the budget is up 4 percent ($334.9 million).

As shown in Exhibit 1, the major increases are for state colleges and universities, the departments of Environmental Quality and Corrections, capital outlay, and debt service. There is a large decline in the budget for the Family Independence Agency (FIA), due in large part to a drop in the Aid to Families with Dependent Children (AFDC) caseload.

Exhibit 2 shows appropriations and dollar and percentage changes for major programs and departments. The departments that will receive the biggest increases (after vetoes) are Environmental Quality (85.9 percent) and Consumer and Industry Services (26.0 percent); the latter comprises the former Labor and Commerce departments. Also receiving sizable increases are debt service (61.2 percent) and capital outlay (16.6 percent). The largest declines are in the budgets for the Family Independence Agency (12.2 percent), State (30.7 percent), Agriculture (18.3 percent), and Treasury (18.2 percent). The appropriation for school aid is down 50 percent because more money is being earmarked for that purpose from state income tax revenue.

The budget assumes GF/GP and school aid revenue in FY 1996–97 will be $16,444 million (a figure arrived at in May by the Consensus Revenue Estimating Conference, a group of executive and legislative branch fiscal experts), up 5.1 percent from FY 1995–96; GF/GP revenue is projected to increase 5.9 percent and school aid revenue 4.1 percent.

Adjusted gross appropriations for FY 1996–97 are $30.1 billion, up 5.8 percent from FY 1995–96. Much of this growth is based on the expectation that the state will receive a hefty increase in federal Medicaid funds. Excluding the Department of Community Health, which administers the Medicaid program, gross appropriations are up only 0.3 percent over the current year.

State Employment

Exhibit 3 presents data on state government employment (appropriated full-time equivalent positions, or FTEs), by department. The budget provides funding for 66,267 positions, down by 216 FTEs (0.3 percent) from the current fiscal year and 2,536 positions (3.7 percent) from five years earlier, in FY 1991–92. The only notable increases from the current year are 423 additional positions in Corrections and 181 in the new Department of Environmental Quality, but they will be offset by a decline of 471 positions in the Department of Community Health, 163 in the Family Independence Agency, 72 in Military Affairs, and 64 in the Department of Education.

Department Budgets

The following discussion focuses on primarily on the GF/GP and SAF portions of 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). Mentioned are only budgets to which substantial or particularly controversial changes have been made since Gov. John Engler submitted his recommended budget to the legislature in February. The GF/GP portion of the budget is only 27.1 percent of total spending, down from 36.2 percent in FY 1993–94 and 42.8 percent in FY 1989–90. Combined, the GF/GP and school aid budget account for 54 percent of total spending.

Education

The school aid budget proved to very controversial, as a long-standing debate over adult education funding came to a head. As detailed in our March 15 Advisor, in his budget recommendations Governor Engler proposed virtually eliminating the funding that enables school districts to provide free adult education. After much debate, the Senate and House agreed, in conference committee, to fund adult education at $102 million through the regular K–12 budget and $83 million through a supplemental appropriations bill (Senate Bill 599). The governor went along with the $102 million in the school aid bill, but he did veto the $83 million supplemental.

At $102 million, FY 1996–97 adult education will be funded at only 55 percent of the current year’s funding, and many districts will severely cut or eliminate their programs. Although some legislators have expressed interest in trying to get the two-thirds majority vote necessary to overturn the veto, most observers agree that an override is unlikely.

Because the governor is skeptical about the new interstate lottery’s producing as much revenue as the legislature anticipated in creating the school aid budget, he vetoed $33 million in the appropriations bill. The vetoed funds would have paid for professional development grants, math and science centers, and a loan to one district that must repay $1.7 million to a taxpayer who won a tax appeal.

Also noteworthy is the school aid budget’s schools of choice provision. Students will be permitted to attend school in any of the participating districts within their intermediate school district (ISD). Districts must decide by August 1 if they will participate in the schools of choice program; participants must publish the names of the schools, grades, and special programs (if any) in which nonresidents may enroll. Participating districts may limit the number of students they accept from elsewhere in an ISD, but acceptance or refusal may not be based on academic or athletic ability, race, religion, disability, or other criteria. Districts are not required to provide transportation to nonresident students.

As the governor recommended, appropriations for universities will be 5 percent higher in FY 1996–97—the biggest hike increase in ten years. However, if federal welfare reforms do not pass this year, and more state money than originally thought must be directed into social service programs, lawmakers may be inclined to take back some of the higher education funding.

Financial aid is slated to receive the same amount of GF/GP funds as in the current year, although there are a couple of noteworthy program changes—all funding for the Indian Tuition Waiver Program ($2 million) has been eliminated, and $3 million is added for tuition reimbursement for advanced technology training.

Human Services

The total budget for the Michigan Department of Community Health (formerly the departments of mental health and public health and the Medicaid agency) is approximately $1,571.2 million larger than the current year, due mostly to the assumption that there will be federal welfare reform that transfers to the states the money to run assistance programs. The assumed increases have been appropriated to a theoretical “lock box,” and if federal reform does not materialize, the lock-box funds will not be expended. (In addition, to make up for not getting the federal money, an additional $168.5 million in state general funds likely will have to be shifted from other departments’ budgets.)

For several programs, the legislature made appropriations in excess of the governor’s recommendation, including immunizations (the additional amount is $450,000), respite home-care services ($929,900), the foster grandparent and senior companion program ($100,000), and AIDS/HIV risk-reduction programming ($1 million).

The budget also authorizes the department to implement mandatory enrollment in capitated managed care plans (plans that pay providers on a per patient basis rather than a fee-for-service basis) for the disabled, medically needy, developmentally disabled and emotionally disturbed, Medicaid-eligible elderly, and Children’s Special Health Care Services program participants.

For the Family Independence Agency, the total GF/GP 1996–97 budget is $1,061 million; the final figures were ironed out in conference committee, and the agreement resulted in additional monies being appropriated for Project Zero (to reduce welfare caseloads) and efforts to move toward a one-caseworker-per-family system. The budget is based on the assumption that federal welfare reform will pass, but the bill contains a contingency in case it has not occurred by October 1 (the beginning of the fiscal year), which includes spending some lapsed funds and general funds to make up the difference.

Other

The FY 1996–97 GF/GP appropriation for general government, which includes six departments plus the Executive Office, legislature, judicial branch, and Library of Michigan, is $484.4 million, up 2.8 percent from projected current year expenditures. Although there are sizable increases for the judiciary and the Department of Management and Budget (due mainly to program transfers), other agency budgets are largely unchanged or down from the current year.

The judiciary will receive an FY 1996–97 GF/GP appropriation of $152.8 million, $13 million more than recommended by the governor. The bill imposes a major restructuring on the court system: Under its provisions,

  • effective October 1, 1997, Recorder’s Court is abolished and merged with the 3d circuit court;
  • a $50 million “court equity fund” is created, which will be distributed to all counties, based on their level of court activity;
  • the state pays 100 percent of trial court judges’ salaries, up from 95 percent, at a cost of $3 million in FY 1996–97;
  • the State Judicial Council—the body that funds Recorder’s Court, the 3d circuit and the 36th district courts—is abolished; and
  • the Trial Court Assessment Commission is created, the main duties of which will be to classify civil and criminal cases and develop criteria for determining the differing complexities of cases.

The gross judiciary appropriation for FY 1996–97 is $195.9 million, $32.4 million below current year expenditures. The decline is because the $12-million (federal funds) Child Support Enforcement System will be transferred to the Department of Management and Budget, funding for Wayne County Friend of the Court will be eliminated (the $20.5 million in federal funds will be allocated to Wayne County), and $2 million in federal funding for anti-drug programs is being eliminated.

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 1996–97 is $2,097.9 million, a 12 percent increase from the current year appropriation. This substantial hike is due to an expected 40 percent jump in federal aid.

Other Issues

The balance in the Budget Stabilization Fund (BSF) is expected to be $1.2 billion at the end of the current fiscal year. There was a pay-in of about $86 million this year, and the Senate Fiscal Agency estimates that a pay-in of $12 million will be required in FY 1996–97. (Statute requires a pay-in when real Michigan personal income increases more than 2 percent above the previous year.) The fund also will earn about $50 million in interest this year and about $60 million in FY 1996–97.

There is one important constitutional restriction on the state budget: Article IX, Section 26 of the Michigan Constitution limits the revenue that the state may collect to 9.49 of personal income in the calendar year prior to the year in which the fiscal year begins. The limit for FY 1996–97 is about $20.3 billion. Based on the May consensus revenue forecast, state revenue (which excludes federal aid) is expected to fall $1.144 billion below the limit.

Comment

Despite the failure of Congress and President Clinton to agree on federal Medicaid and welfare reform, the state’s FY 1996–97 budget appears to be on solid ground.

Federal Welfare Reform

The appropriation bills contain “boilerplate” (formulaic) language that provides for adjustments in the state budget if the assumed federal budget reforms do not materialize. Absent federal reform, expenditures for the Department of Community Health and the Family Independence Agency will have to hiked by an estimated $248 million. To come up with the money, the boilerplate language spells out $190 million in spending cuts; in addition, if federal tax reform is not enacted (the state budget assumes there will be a reduction in the federal capital gains and estate taxes), GF/GP revenue will be $54 million higher because state tax revenue piggybacks on the federal rate. These adjustments will leave a small deficit that likely can be offset by expenditure lapses.

The FY 1996–97 budget also assumes that the FIA will realize $90 million in GF/GP savings from federal welfare reform. This assumption is not covered by contingency language, however, and if there is no reform, further budget adjustments will be required. However, with nearly $1.2 billion in the Budget Stabilization Fund, this is not a serious concern.

The Economy

The key to continued fiscal stability is the economy. Although the current economic recovery has reached 65 months, the third longest since World War II, there is no indication that the end is in sight. As long as inflation stays under control and the Federal Reserve Board does not miscalculate and raise interest rates too much, the recovery should continue, albeit at a more modest pace.

The Michigan economy is slowing, but growth continues to be solid, with motor vehicle sales exceeding expectations. As mentioned in the introduction to this Advisor, the May Consensus Revenue Conference agreed that $16,444 million is a reasonable FY 1996–97 GF/GP and SAF revenue estimate; this is up 5.1 percent from the current year’s estimated revenue but down $28 million from the January consensus figure. The May number is attainable, but a modest slowdown from current economic levels of activity could slow revenue growth by one percent or more. In terms of state revenue, a one percent shortfall amounts to about $160 million.

A longer-term concern is the extent of state-local tax cuts enacted since 1991. These cuts total an estimated $1.57 billion in the current fiscal year and will reach an estimated $2.79 billion in FY 1999–2000. Assuming baseline revenue growth of 5 percent, these tax cuts eat up 36 percent of the increase in revenue, still allowing budget increases near the inflation rate. If revenue growth averages only 3 percent over the next four years, which doesn’t seem likely at the moment but could happen if there is a recession, the tax cuts will take about 62 percent of available revenue. This would put a considerable strain on resources and require very tight management of the state budget.

Due to a combination of creativity, skill, and luck, the Engler administration has managed the state’s finances well. We would not bet against a continuation of this record. With the BSF cushion of $1.2 billion, the governor and his fiscal managers should continue to have few major worries on the fiscal front.

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