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

This Advisor describes the FY 1997–98 state budget. Included are changes from FY 1996–97 appropriations and from the governor’s recommendations as well as discussion of the few measures about which there was particular controversy.

Introduction

For fiscal year (FY) 1997–98, beginning on October 1, the legislature has appropriated a General Fund/general purpose (GF/GP) budget of $8,344.3; this figure excludes capital outlay, which has not yet been approved. If the capital outlay budget is enacted at the $261.3 million level approved by the Senate, the final GF/GP appropriation will be $8,605.6 million, an increase of $237.5 million, or 2.8 percent, above current year (FY 1996–97) enacted appropriations. (Governor Engler vetoed programs totaling $3.5 million, reducing the FY 1997–98 budget to $8,602.1 million, including capital outlay.)

As shown in Exhibit 1, the major increases are for higher education and the Michigan Department of Community Health (MDCH). As was the case in the current fiscal year, there is a considerable reduction 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. Those receiving the largest increases (after vetoes) are State (175.5 percent), debt service (65.2 percent), Consumer and Industry Services (8.4 percent), and Civil Service (8.2 percent). The huge increase for State replaces with GF/GP funds about $43 million of restricted revenue that it previously had received from the Michigan Transportation Fund.

The largest declines are in the budgets for the departments of Management and Budget (DMB) (down 56.7 percent), Agriculture (10.5 percent), FIA (10.3 percent), State Police (8.5 percent), Military and Veterans Affairs (7 percent), and Natural Resources (6.7 percent). The total GF/GP budget is reduced $38.1 million as a result of projected savings from the state employees’ early retirement program. The large dip in the DMB budget is due to the transfer of the Office of Services to the Aging (budgeted $24.1 million for the current year) to the Department of Community Health; adjusted for this transfer, the DMB budget is down 17.6 percent. The decline in the Agriculture budget is due in part to eliminating a $2-million one-time appropriation for the acquisition of the E.C. Heffron metrology laboratory.

The enacted FY 1997–98 appropriation of $8,602.1 million (including capital outlay and after vetoes) is $46.7 million above the governor’s revised recommendation.

The budget assumes GF/GF and School Aid Fund (SAF) revenue in FY 1997–98 will be $17,418.4 million (this figure was arrived at in May by the Consensus Revenue Estimating Conference, a group of executive and legislative branch fiscal experts), up 3.9 percent (adjusted for tax policy changes) from the current fiscal year. (This compares with a projected increase of 5.1 percent in FY 1996–97). The FY 1997–98 revenue projection reflects enacted tax cuts of about $225 million. After these tax cuts and other adjustments, total available FY 1997–98 GF/GP revenue is estimated to be up 3.1 percent from FY 1996–97.

The adjusted gross appropriation (from all revenue sources—GF/GP and restricted), for FY 1997–98 is $27.8 billion, excluding the Transportation department and capital outlay budgets, which have yet to be approved—down 4.3 percent from the current year. For comparison, if these two items are excluded from the FY 1996–97 base, the gross appropriation is up 4.4 percent.

State Employment

Exhibit 3 presents data on state government employment (appropriated full-time equivalent positions), by department. The budget provides funding for 65,084 positions, down by 561 (0.9 percent) from the current fiscal year.

The only notable increases from the current fiscal year are the Michigan Jobs Commission (2059 positions, due to jobs being transferred from the Department of Consumer and Industry Services), Corrections (383) Community Health (258) Family Independence Agency (131). The only sizable declines are Consumer and Industry Services, (down 2,181, due to transfer of functions) and Transportation (down 216). The true number of positions in many agencies will be less than that shown in the exhibit, because the early retirement program reduced state employment by more than 4,000.

Department Budgets

The following discussion focuses primarily on the GF/GP and SAF portions of the budget, as these are subject to the control of the legislature (as opposed to programs supported by federal aid or restricted revenue). Mentioned are the budgets only to which substantial or particularly controversial changes have been made since the governor submitted his recommended budget to the legislature in February. The GF/GP portion is only 28.5 percent of total spending. Combined, the GF/GP and SAF appropriations account for about 56 percent of total spending.

Education

The FY 1997–98 total school aid budget will increase 3.6 percent, to $8,939.0 million, $378.6 of which is in general funds. The foundation grant (amount per pupil, statewide) will grow by $154, or 2.9 percent, to $5,462. In conference committee, the legislature boosted the budget to a figure exceeding the governor’s recommendation by additions including $22 million in new funds for education for at-risk (economically disadvantaged) students, $19.7 million for a pilot class-size-reduction program, and $17.8 million to move to a blended student count (a move that would result in higher funding for growing districts).

Between legislative passage and the governor’s signature, the school aid budget underwent some unanticipated changes, primarily because of the Durant ruling. This ruling, which came down after the school aid budget had been approved by the legislature, requires the state to pay $211 million to 84 Michigan school districts in reparations for the state’s having violated—by underfunding special education and other mandated services—the so-called Headlee amendment to the state constitution. The governor, stating that vetoes were necessary to ensure that there would be sufficient funds to reimburse the 84 plaintiff districts in the Durant case and possibly the remaining 440 districts (which could sue later if not included in the settlement), vetoed much of the additional funding that the legislature added to the school aid budget. He vetoed all $252 million budgeted for at-risk programs, arguing that he was unable to isolate the $22 million added by the legislature. The legislature no doubt will restore at least the $230 in at-risk funds originally proposed by the governor. In all, $305.9 million was vetoed from the school aid budget, but much of this is expected to be restored when the legislature returns from its summer recess.

To ensure that the state does not violate the Headlee amendment in the future, the legislature appropriated $140 million in additional special-education funds and changed the way in which such moneys are allocated: Special-education students no longer will be funded out of the foundation grant but instead by a special-education categorical.

In passing the school aid budget, the legislature declined to give the state power to take over “educationally bankrupt” schools—those that consistently perform poorly on student tests and by other measures—as the governor had recommended.

The state’s public institutions of higher education will enjoy GF/GP increases above the rate of inflation for the second consecutive year. The 15 universities’ appropriations are up 3.9 percent, to $1,552.9 million, following a 5.0 percent increase in the current fiscal year. Each university will receive a 4.0 percent hike, exceeding the 1997 inflation rate of 2.4 percent. The legislature also established a funding floor of $4,290 per student, below which appropriations for any given university may not fall. In addition, lawmakers passed one-time supplemental funding of $9.0 million for equipment, technology, and special maintenance needs. The FY 1997–98 GF/GP appropriation for financial aid remains at the current year level of $115.8 million, while the gross appropriation declines 2 percent.

The state’s 28 community colleges will receive a GF/GP increase of $12.8 million, or 4.9 percent, to $275 million. (Since community colleges are funded solely through general funds, the gross appropriation equals the GF/GP appropriation.) This follows an increase of 4.6 in FY 1996–97. Each college will receive at least a 3.0 percent increase, with the remainder of the additional funds distributed through the Gast-Mathieu funding formula. Lawmakers also passed a one-time $2-million supplemental for special maintenance, equipment, and facilities.

Human Services

The GF/GP appropriation for the Department of Community Health (which includes the Medicaid program and the former departments of Public and Mental Health) is $2,484.1 million. This is a $115.6 million, or 4.9 percent, boost over the current year. The total appropriation, including federal and other funds, is $7,226.7 million, a 7.1 percent increase over FY 1996–97 funding.

Medicaid is an area in which appropriations shifted significantly from the current year. Additional funds are allocated in the amount of (1) $88.0 million to cover the federally mandated increase—to 46.4 percent from 44.8 percent—in the share of Medicaid costs that the state must pay; (2) $46.1 million to increase base spending to cover inflationary increases; and (3) $6.0 million for transitional payments to former Medicaid recipients. Funding cuts occurred in the amount of (1) $70.0 million, due to federal funding shifts and (2) $56.5 million in Medicaid costs, due to clients changing to managed care from fee-for-service care.

The most contentious issue in the health budget was that of the governor’s recommendation to close three state psychiatric hospitals—the Detroit Psychiatric Institute, Clinton Valley (in Pontiac), and Pheasant Ridge (in Kalamazoo). The governor argues that these facilities are under-utilized and that their existing patients will be better served in the community mental health system. Public outcry followed the announcement of the proposed closings and the legislature voted to continue funding for the hospitals. However, the governor vetoed the appropriations for the three state psychiatric hospitals, and they will close on October 1.

The Family Independence Agency (FIA), formerly the Department of Social Services, will receive $1,015.0 million in GF/GP funds in FY 1997–98. The drop from current-year funding is considerable—$116.7 million, or 10.3 percent—and due primarily to a 125,000 decline in welfare caseloads. The gross appropriation is $2,944.7 million, a decline of $32.6 million, or 1.1 percent. The budget includes $12 million to enhance children’s programs, e.g., child-death reviews, child-safety assessment, and recruiting families to adopt children in foster care. The budget also includes a $16.7 million increase for day care, $16.8 million to pay for foster care caseload growth, and $5 million in adoption subsidies.

The Department of Environmental Quality, with primary responsibility for cleaning up contaminated sites and preventing future contamination, is slated for a 2-percent GF/FP reduction in FY 1997–98, to $86.3 million. Although this is 40 percent under the governor’s recommendation, it is due primarily to a transfer of debt service funds to the Treasury budget. The department’s gross appropriation is $403.5 million, an increase of 4.4 percent. The budget includes $53.5 million for the cleanup of 83 contaminated sites as well as $102 million for a revolving fund to enable municipalities to pay for combined sewer overflow and wastewater management projects. It also begins implementing the federal Safe Drinking Water Revolving Loan Fund by appropriating $4.8 million in state grants to local governments.

Corrections

The Department of Corrections will receive a GF/GP increase of $23.6 million, or 1.8 percent, to $1,322.9 million; gross funding is up 2.6 percent, to $1,376.9 million. The GF/GP figure is 6.2 percent lower than that recommended by the governor, largely due to a transfer of $80 million in debt service funds to the Capital Outlay budget. The Corrections budget was finalized in conference committee. To reach budget targets, lawmakers reduced proposed increases for the county jail program: The House had proposed funding the program at $19.1 million, the Senate at $22.6 million, but the final figure was about $18 million.

General Government

The FY 1997–98 appropriation for general government, which includes six departments plus the Executive Office, legislature, judiciary, and Library of Michigan, is $513.2 million, up about $10 million from the governor’s recommendation and down 3.3 percent from the current year.

The major change from the governor’s recommendation is a $10 million grant (in the Department of Treasury budget) to local governments for community policing. The major changes from FY 1996–97 are (1) for the Department of State, a $43 million shift of restricted transportation funding to GF/GP funding; (2) in the Department of Community Health budget, the transfer of the Office of Services to the Aging ($24.1 million in FY 1996–97) from the DMB; (3) for the DMB, a one-time $30 million supplemental in the FY 1996–97 budget to correct year-2000 computer problems; (4) for the Department of State, a one-time $5.5 million supplemental in the FY 1996–97 budget for information technology; and (5) for the Department of Treasury, a $6 million reduction in tax-increment-financing payments to local governments. Adjusted for these changes, the FY 1997–98 GF/GP general government budget is up 1.2 percent from the current year.

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. The Senate Fiscal Agency estimates that a pay-in of $80.9 million will be required in FY 1997–98. (Statute requires a pay-in when real Michigan personal income increases more than 2 percent above the previous year.) The fund is expected to earn about $82 million in interest in FY 1997–98, but $69 million of this will be transferred to the Michigan Transportation Fund to help pay for road and bridge maintenance.

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 percent of personal income in the calendar year prior to the year in which the fiscal year begins; if revenue exceeds this limit, a refund is made to taxpayers. The limit for FY 1997–98 is about $20.7 billion. In May, the Consensus Revenue Estimating Conference forecast that state revenue (which excludes federal aid) will fall about $1.9 billion below the limit. (The recently enacted transportation package will reduce this cushion by about $200 million.)

Comment

Enacting the FY 1997–98 budget was relatively painless. It was made easier in May when the consensus group raised the GF/GP and SAF revenue estimates by $185.4 million for FY 1996–97 and $91.2 million for FY 1997–98. The current economic expansion has stretched to 79 months and shows no signs of weakening, with the Michigan unemployment rate reaching record lows in recent months. As long as the economy continues to grow, the state budget process probably will remain relatively uneventful.

The most controversial budget issues were the transportation package and the Durant decision settlement. After several years of posturing and debate, lawmakers and the governor finally approved a $300-million increase in transportation funding that includes a 4-cent-per-gallon increase in the state gasoline tax. The Transportation Department budget has yet to be approved, however, in great part because there still is disagreement on how the funds are to be divided between the state and local governments. There is also concern among some local officials, road groups, and others that even the additional revenue will be insufficient to meet the large existing and future need for road and bridge maintenance and construction.

As discussed above, the Michigan Supreme Court finally ruled in the Durant case that the state has been underfunding special education and owes the 84 school districts that filed suit $211 million. In response, the governor vetoed $305 million of the school aid appropriation, including all of the at-risk categorical that provides extra support to districts that have a large number of disadvantaged students. Although observers expect the legislature to restore most of these funds in the next few months, this issue is far from settled because the state still faces a potential multi-million-dollar obligation to the 400+ school districts that were not parties in the Durant case but suffered from the same underfunding.

We expect no major surprises that would materially affect the FY 1997–98 budget. If anything, the revenue estimate for FY 1997–98 is conservative. Also, the BSF balance of $1.2 billion is a buffer against any costly surprises. Although there rightly has been reluctance to use the BSF for purposes such as paying the cost of the Durant ruling, the question does arise as to how large the BSF balance should be before its monies may used for other than its intended purpose: offsetting a revenue reduction caused by an economic downturn. The BSF balance currently is about 7 percent of GF/GP and SAF revenue—one of the largest of any state. Our view is that the balance should be sufficiently large to cover a recession that results in zero revenue growth for two years. To maintain expenditure increases of 3.5 percent, slightly above the rate of inflation, would require transferring $1.85 billion from this rainy day fund, about $650 million more than its current balance.

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Copyright © 1997
 

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