by Robert J. Kleine, Vice President and Senior Economist; Laurie A. Cummings, Consultant for Economic Policy; and Alec R. Rodney, Economist

This report examines the Fiscal Year 1994 – 95 State of Michigan Executive Budget — Gov. John Engler’s spending recommendations for the state government for the fiscal year that begins October 1, 1994, and ends September 30, 1995.


The governor sent his recommended state budget for FY 1994 – 95 to the legislature in December. This was the earliest presentation in memory, and the governor did it to give the legislature information about the effect that the cost of school finance reform would have on the rest of the budget. At the time, most observers thought that the relatively generous increase in state K – 12 school support resulting from the switch from local to state financing would necessitate big cuts in the rest of the budget, and some legislators were supporting reductions of $1 billion or more.

It appears now that any required budget cuts will be modest — the improving economy has boosted state revenue above earlier estimates. The January consensus general fund/​general purpose (GF/​GP) revenue estimates, agreed to by the administration (represented by the Treasury Department) and the legislature (represented by the House and Senate fiscal agencies), are up $125 million for the current (FY 1993 – 94) budget year and $330 million beyond the figures on which the governor’s budget for the coming fiscal year is based.

The FY 1994 – 95 GF/​GP budget recommendation is $7.33 billion, an increase of 3.6 percent from the current year appropriations, adjusted for post‐​presentation changes the governor made in his revenue sharing recommendation. The budget recommendations would fund 66,455 FTE (full‐​time equated) state government employees, a figure almost unchanged from the current year. As shown in Exhibit 1, the major budget increases are $89.2 million for law enforcement, $58 million for education (excluding K – 12 education), and $44.8 million for health. This increase for education is the first of significance in three years.

The grant to the school aid fund (SAF) is not included in the $7.33 billion figure because the new school finance reform plan won’t be decided until the special election in March. Depending on whether the electorate decides to adopt the ballot proposal or defeat it and let stand the backup statutory plan already in place, in FY 1994 – 95 the GF/​GP grant to the SAF will be $438 million or $387 million, respectively. In future years a percentage (not yet determined) of state income tax revenue will be earmarked for K – 12 education, displacing the former annual GF/​GP grant, but the legislature still will be able to appropriate GF/​GP monies to the SAF if it wishes to give schools additional funding.

As shown in Exhibit 2, for the first time in several years the governor has recommended only a few reductions in department budgets. Recommended funding is down 1.1 percent from current year expenditures for the Department of Social Services (DSS) — which mainly reflects the use of federal aid to replace GF/​GP monies, 7.4 percent for the Department of State, and 0.9 percent for capital outlay.

The largest increases are recommended for the Department of Education (30 percent), reflecting new education reform programs; the Michigan Jobs Commission (25.5 percent) and Department of Commerce (15 percent), both due to replacement of restricted revenues with GF/​GP money; and the Department of Public Health (15.4 percent), due to a large expansion in funding for local public health cost sharing. The 6 percent increase for the Department of Corrections is the smallest in several years; the average annual increase from FY 1989 – 90 through FY 1993 – 94 was 10.9 percent.

Every year the budget recommendations include a number of upward and downward adjustments as well as program transfers and financing shifts, but as the economy and revenues have improved, the number of adjustments has declined. As shown in Exhibit 3, the main changes included this budget are $101.7 million in current program increases, mostly in Social Services (mainly in Medicaid) and $175.2 million in new programs and discretionary increases.

The new money in the governor’s recommendations for FY 1994 – 95 is directed mainly to higher education and the departments of Corrections, Mental Health, and Public Health. The $85.6 million in financing shifts for the DSS are changes designed to increase the amount of federal funding department programs receive. The large technical reduction, in school aid, reflects changes under the new school finance plans.

Economic Revenue Assumptions

The governor’s FY 1994 – 95 budget is based on seemingly very conservative economic assumptions. Modest economic growth is forecast, with real (adjusted for inflation) gross domestic product (GDP) forecast to increase 2.7 percent in 1994 and 2.4 percent in 1995. Motor vehicle sales are expected to expand about 5 percent (to 14.4 million units) in 1994 and 2 percent (to 14.7 million units) in 1995. These estimates are at the low end of the range of predictions by forecasters surveyed by Business Week magazine and The Automotive News.

Although the Engler administration has been claiming that Michigan is leading the national economic recovery, the governor’s recommended budget assumes that economic growth will be slower in Michigan in 1994 and 1995 than in the nation. The administration projects that real Michigan personal income will increase 2.1 percent in 1994 and 1.7 percent in 1995, wage and salary employment will increase 1.3 percent in 1994 and 1.5 percent in 1995, and the unemployment rate will average 6.6 percent in both years (down from 7 percent in 1993).

Public Sector Consultants expects stronger economic growth than does the Engler administration, both nationally and in Michigan, with revenue growth (baseline—that is, adjusted for changes in tax policy) of 6 percent in the current fiscal year and 5.5 to 6 percent in FY 1994 – 95.

As is the case almost every year, legislation and policy changes will affect FY 1994 – 95 revenue. This year many of the changes are related to the school finance reform plans.

Under the ballot proposal, we estimate that GF/​GF revenue will drop by about $340 million; under the statutory plan, $315 million. In addition, an estimated $70 million (from the baseline estimate) will be lost because the state inheritance tax was repealed. (The legislation was enacted in 1993, and in FY 1993 – 94 the revenue lost by the repeal is expected to be about $125 million).

The budget also assumes about $118 million in one‐​time revenues: The largest are (1) a $70 million savings in revenue sharing by basing these payments to locals on the previous year’s growth in the shared taxes, and (2) $32.7 million from an increase in the state price markup on liquor.

Revenue and Sources and Expenditure Allocations

Federal aid is the state’s largest revenue source, an estimated $6.8 billion in FY 1994 – 95, up 4.2 percent from FY 1993 – 94. Funds from state and other sources make up the balance. Exhibits 4 and 5 present the own‐​source funding sources and expenditure allocations of the recommended FY 1994 – 95 budget.

Own‐​source revenue is that generated by the state. It excludes funds from federal and public and private sources and is the most meaningful way to look at the budget because it includes all state revenue, both earmarked (dedicated to a specific purpose) and not, but excludes federal and other aid, which is largely outside the influence of the governor and the legislature. (It should be noted, however, that this administration has taken several creative steps to increase federal aid, which has the effect in many instances of reducing GF/​GP expenditures.)

Exhibit 4 shows the origin of state own‐​source revenue. About 72 percent is generated by just four types of taxes: individual income, single business, insurance premium, and sales and use. Although the measures enacted to support school finance reform are expected to boost state revenue at least $3 billion in FY 1994 – 95, the percentages in Exhibit 4 do not reflect the new revenue because the set of taxes — statutory or ballot — that will be used to replace local school property taxes will not be known until the people vote on March 15.

Exhibit 5 illustrates the governor’s recommended distribution of own‐​source revenue among state program areas for FY 1994 – 95. K – 12 education, health, social services, transportation, and revenue sharing account for about 74 percent. K – 12 education is up sharply, to 45 percent from about 33 percent in FY 1993 – 94, because of the expanded state spending for it in the school finance reform legislation. The governor’s budget reflects his original proposal to spend $9.4 billion, but the school aid bill passed in December appropriates about $10.5 billion.

FY 1994 – 95 Spending Policies

One of the most interesting budget trends in recent years is the decline of GF/​GP expenditures as a share of total spending. As shown at the bottom of Exhibit 6, this share declined from 44.4 percent in FY 1989 – 90 to 36 percent in FY 1993 – 94. The FY 1994 – 95 numbers are distorted by the school finance changes, but if school aid is excluded, this share has fallen from 48.4 percent in FY 1989 – 90 to 37.6 percent in FY 1994 – 95.

A decline in GF/​GP spending as a percentage of total spending has occurred in recent years in almost every program area. This is most pronounced in the departments of Social Services, Commerce, Labor, and Natural Resources. Recommended GF/​GP expenditures for the DSS for FY 1994 – 95 are 29.5 percent of the total, down considerably from 50.4 percent in FY 1989 – 90.

A major reason for this drop is the sharp increase in federal aid, particularly for Medicaid; federal aid to the DSS increased an estimated 90 percent from FY 1989 – 90 to FY 1994 – 95. More federal aid and more use of restricted funds are the major causes for the declining share of GF/​GP expenditure in most departments. This change is a consequence of the Engler administration’s efforts to balance the state budget in the face of weak revenue growth (from 1989 to 1992) without raising taxes.

Following are highlights of Governor Engler’s budget recommendations for most departments and programs. The focus is on GF/​GP spending, but total recommended spending is included in cases where federal aid and/​or restricted funding is a significant factor in the department budget.


The governor’s recommendation for school aid in FY 1994 – 95 is $9.6 billion, slightly below total K – 12 spending in the current year. However, this recommendation was made before lawmakers agreed on a new school finance reform system, and since then the Senate Fiscal Agency has estimated that the figure required for school aid will be $10.6 billion, a 4 percent increase over the current year. (When adjusted for the transition payments — described below — in FY 1993 – 94, the increase is about 6 percent.) The increases are due to the state’s much larger role in K – 12 education funding under the new school finance system.

The recommended K – 12 budget reflects the state’s new school finance system in ways other than extent of funding. Formerly, school aid was based on the power equalizing formula, that is, the state attempted to equalize the resources of school districts because the property tax base per pupil varied widely; the allocation for FY 1993 – 94 is $400 per pupil plus $102.5 per locally raised mill.

Under the new system, school aid will be based on a per‐​pupil foundation grant of $5,000, which all districts eventually will receive. (The system is being phased in because of its expense.) In the meantime, aid will be based on each district’s per‐​pupil spending in FY 1993 – 94.

Districts spending less than $4,200 in FY 1993 – 94 will receive in FY 1994 – 95 either $250 more per pupil or $4,200 per pupil, whichever is greater. Districts spending between $4,200 and $6,500 in FY 1993 – 94 will receive additional funding of $160 – 250 per pupil, based on a sliding‐​scale formula. Districts spending more than $6,500 per pupil in FY 1993 – 94 will be permitted to levy enough mills to raise per‐​pupil revenue equal to FY 1993 – 94 revenue plus $160.

Categorical (special purpose) aid is given to eligible school districts and intermediate school districts (ISDs) to support specific programs, such as bilingual education and vocational education. Under the new system, most such funding no longer will be allocated separately, but will be included in the foundation grant.

Exceptions to this blending of categorical and general school aid include funds for professional development as well as special, adult, bilingual, and early childhood education. If districts want to continue programs formerly funded by categorical aid (examples are curriculum for dropouts or health programs), they will have to pay for them out of their foundation grant funds.

The 1994 – 95 School Aid Act, passed in December, provides $300 million for interim payments during 1994 and 1995 to help districts with cash flow problems during the transition to the new financing system — each district will receive about $189 per pupil per payment. The payments, to be made in August and October 1994 and in August and September 1995, will be deducted from the state’s payments to districts later in the year.

The FY 1994 – 95 GF/​GP appropriation for school aid is expected to be $438 million under the ballot proposal or $387 million under the statutory plan. After the 1994 – 95 school year ends, GF/​GP monies no longer automatically will be used to make up shortfalls in the SAF, as was the practice under the old school financing system.

The governor’s recommended GF/​GP spending for the Department of Education is $39.9 million for FY 1994 – 95, an increase of about 30 percent over current year appropriations. Much of the increase will be used to implement such school reform measures as developing new assessment tests and effecting school accreditation programs.

The total recommended appropriation for the Department of Education is $733.8 million, an increase of 8.3 percent from current year appropriations. The majority of the department’s funding comes from federal aid, and it expects to receive about $50 million in additional federal funds in support of the school lunch program ($38.8 million), financial aid ($6 million), vocational education ($5.8 million), and other miscellaneous programs.

Higher Education

After two years without an increase, the governor recommends $1.2 billion in GF/​GP funding for the state’s public universities, a 3 percent increase over FY 1993 – 94 levels. Each of the 15 institutions would receive a 2.3 percent increase, and the five with the lowest appropriations per student would be given sufficient additional funding to bring them to $3,500 per student.

Recommended GF/​GP spending for community colleges is $247.2 million, 3.0 percent more than FY 1993 – 94 appropriations, distributed equally to each of the state’s 29 community colleges. The Job Training and Retraining Investment Fund and the At‐​Risk Student Success programs also would receive a 3 percent increase.

The FY 1994 – 95 recommendation for financial aid is $110.4 million, an increase of 4.9 percent over current year spending. A 15 percent increase is recommended for the Indian Tuition Waiver program and a 40 percent increase for the Tuition Incentive Program, which helps students from low‐​income families attend a community college.

Human Services

The governor’s FY 1994 – 95 GF/​GP recommendation for the Department of Social Services is $2.2 billion, down 1.1 percent from FY 1993 – 94 appropriations. The decrease is not a move to cut programs but rather a reflection of the administration’s aggressive pursuit of federal funding. Total spending, including federal funds, would increase 3.6 percent to $7.4 billion.

Nearly $321 million in GF/​GP savings is achieved through intergovernment Medicaid transfers that involve publicly operated medical and mental health facilities. The discontinuation of a similar transfer program with the University of Michigan Hospitals will increase GF/​GP spending by $278 million, resulting in net savings of $43 million from intergovernment transfers. Without these transfers, the state would have to cut back Medicaid programs or impose a tax on health providers. These savings are offset by a $75.5 million increase in Medicaid utilization and inflation increases.

The governor’s budget recommendations would have DSS add 200 staff positions — $4.4 million GF/​GP — to implement the “Healthy Kids” and the “To Strengthen Michigan Families” initiatives. The former provides medical insurance to children of low‐​income households, and the latter allows working welfare parents to keep a certain percentage of their earned income without losing state benefits.

The governor recommends for the Department of Mental Health a GF/​GP increase of $21.2 million — 2.1 percent — to a little over $1 billion. Total recommended spending is $1.5 billion. The budget includes a GF/​GP increase of $28 million for community mental health programs as efforts continue to move care from state hospitals to community programs.

Increased funds for community demand services and for programs that provide alternatives to nursing home placement total $2 million and $7.4 million, respectively. The department expects to save nearly $17 million through various program and revenue changes.

Under the administration’s recommendations, GF/​GP spending for the Department of Public Health would increase $23.6 million to $177.2 million in FY 1994 – 95. The budget includes a $15.1 million increase in state support for local public health programs — making the state a 50 – 50 partner in funding basic local services.

Children’s special health care services ($4.1 million) and substance abuse programs for chemically dependent pregnant women and children ($3.1 million) also would receive significant increases. Total recommended spending for the department in FY 1994 – 95 is $575.5 million, up from $537.8 million in the current year.


The governor’s FY 1994 – 95 GF/​GP recommendation for the Department of Commerce is $66 million, up 15 percent over current appropriations. Much of the nearly $9 million hike is due to the expiration of the Michigan Strategic Fund, which used revenues from oil and gas extracted from state lands to support department programs. Since the fund will terminate in 1994, and its monies no longer will be available to the department, the governor recommends increasing GF/​GP appropriations to offset the loss. Also, $2 million in GF/​GP funds are proposed for the Homeless Program, which previously was supported with restricted revenue.

The total budget recommendation is $386.6 million, a 5 percent decline from current year appropriations; the dip results from a spending reduction of $36.1 million due to the sale of the Accident Fund of Michigan. The budget includes a significant increase in federal funds for expanding low‐​income housing services by the Michigan State Housing Development Authority.

Recommended FY 1994 – 95 GF/​GP spending for the Department of Labor is $31.1 million, a 4.2 percent increase over FY 1993 – 94 appropriations. Major increases would go to the Commission for the Blind ($1.1 million), the Michigan Employment Security Commission targeted‐​employment services ($1.5 million), and for such economic adjustments as salary and inflation increases ($1.4 million). Total expenditures are recommended at $206.2 million, only a 1.3 percent increase.

A recommendation of $20.7 million is made for the Michigan Jobs Commission, a 26.1 percent increase over the FY 1993 – 94 GF/​GP appropriation. This substantial boost would help the commission expand its job creation and job promotion programs. (These numbers are adjusted to reflect the recommended transfer of the Michigan Rehabilitation Services program — $10.2 million GF/​GP — from the Department of Education.)

Safety and Defense

The governor recommends $216.9 million in FY 1994 – 95 GF/​GP spending for the State Police. This 6.4 percent increase over FY 1993 – 94 appropriations largely would fund training for three classes of new troopers, which would maintain and perhaps increase the number in the state.

The Military Affairs GF/​GP budget would increase 5.1 percent, to $35.9 million, under the governor’s recommendations. Changes include a $2.1 million economic increase, 87.7 percent of which would go to veteran’s service organizations. The total budget recommended is $80.7 million, up only 3.4 percent.

The recommended budget for the Department of Corrections is $1.1 million in GF/​GP funding, an increase of 6.0 percent over FY 1993 – 94 appropriations. This is a much smaller increase than has occurred in recent years: From FY 1989 – 90 to FY 1993 – 94 corrections spending growth averaged about 10.9 percent annually.

The smaller increase for the upcoming year is due largely to cost‐​cutting measures (such as bunking two inmates instead of just one in each cell), which can be expected to continue in coming years. Also, bills have been introduced to place some state prisoners in county jails, which tend to be less crowded.

Natural Resources and Agriculture

Recommended FY 1994 – 95 GF/​GP spending for the Department of Natural Resources is $98.9 million, up 3.5 percent from FY 1993 – 94. The governor recommends that $1.7 million of this go toward replacing lost Michigan Strategic Fund revenue and $2.1 million be expended for economic adjustments.

The recommended budget also reflects $1.3 million in property tax savings under the new school finance system. (The state makes payments to local governments in lieu of paying property taxes on state‐​owned lands. These payments, based on local millage rates, will drop sharply due to the lower millages.) The recommended total appropriation for the department is $348.5 million, up about 5.5 percent.

Recommended GF/​GP spending for the Department of Agriculture is $41.5 million for FY 1994 – 95. Although this is a decrease of 5.7 percent since cutbacks began in FY 1989 – 90, it is a 3.2 percent increase over current year spending. The additional GF/​GP funding next year would go for ground‐ and freshwater protection, energy conservation programs, rural development activities, and a $1.1 million economic adjustment. (These numbers are adjusted to reflect the governor’s recommendation to switch $13.2 million in horse racing revenue from restricted status to the general fund.)<

General Government

This category consists of six departments, the Executive (governor’s) Office, and the judicial and legislative branches of state government. The recommended GF/​GP general government appropriation for FY 1994 – 95 is $383.7 million, 3.4 percent above projected FY 1993 – 94 appropriations.

The recommendation for the Department of Treasury has been adjusted since the governor presented his executive budget in December and is now $43.1 million, 3.9 percent above current year appropriations. The December recommendation included $177 million to reimburse local units because revenue sharing payments to local governments were to be discontinued as one way to save state money to finance schools, but the discontinuation was dropped from the final school finance package. Included is a $2 million increase in the senior cooperative housing tax exemption. When the legislature eliminated school property taxes, it had reduced the FY 1993 – 94 appropriation for financing this exemption, but with the restoration in the school finance package of a portion of the millage, some of the exemption money also must be restored. A further adjustment to the appropriation to finance the exemption will be required, but the amount will depend on which school finance plan takes effect.

In FY 1979 – 80 the state borrowed money from the Veteran’s Trust Fund for a loan to balance the budget. The governor recommends repayment of the loan with proceeds from the sale of the Accident Fund of Michigan. This would save the state $927,000 annually in interest payments.

The recommended FY 1994 – 95 GF/​GP appropriation for the Department of Management and Budget is $51.7 million, including $21.2 million for the Office of Services to the Aging (OSA). The recommended figure for the department is up $2.4 million (4.9 percent) from FY 1993 – 94 appropriations and includes an additional $1 million for the Home and Community Board Medicaid Waiver program in the OSA and $1 million to audit state aid payments to local school districts.

The total appropriation is $169.3 million, down 2.1 percent, due mainly to the transfer of the Justice Assistance program to Social Services ($2.2 million) and a $2 million reduction in federal anti‐​drug abuse grants.

The FY 1994 – 95 GF/​GP budget recommendation for the Department of State is $13.8 million, down 7.4 percent from FY 1993 – 94 appropriations. The decrease reflects the elimination of $2.3 million for automobile emission testing programs; this assumes that the U.S. Environment Protection Agency will approve the governor’s request for designation of southeast and west Michigan as areas that have attained the desired air quality, which could eliminate the requirement for emission testing.

The department budget also includes $0.3 million to suspend the driver’s license of people convicted of a drug offense or of failing to take responsibility for their child’s welfare and $0.2 million to allow business greater access to department data. The total recommended appropriation is $144.2 million, up 2.1 percent.

The FY 1994 – 95 GF/​GP recommended appropriation for the Attorney General is $27.3 million, an increase of 6.2 percent. The figure includes $845,000 to replace revenue from the Michigan Strategic Fund, which “sunsets” in 1994, and $646,000 for economic increases.

The total budget recommendation is $43.9 million, down 3.8 percent from current year funding, due in large part to the elimination of $2.6 million for 25 attorneys providing legal service to the Accident Fund of Michigan, which is being sold to the private sector.

The Department of Civil Rights GF/​GP budget for FY 1994 – 95 is recommended at $11.9 million, a 5.6 percent increase. The budget includes $0.2 million for relocation and conversion of the department’s Detroit office and $0.4 million for economic increases.

The FY 1994 – 95 GF/​GP appropriation for the Department of Civil Service is $11.6 million, a 6.2 percent increase. The budget includes a $0.7 million increase for economic adjustments.

The FY 1994 – 95 GF/​GP appropriation for the judiciary is recommended at $128.8 million, 5.3 percent above FY 1993 – 94 appropriations. This is 15.1 percent above FY 1989 – 90 expenditures and reflects expanding court caseloads in recent years.

The recommendations for FY 1994 – 95 include $1.4 million to support four new judges and one new district office for the court of appeals; $0.9 million to enable 14 part‐​time probate court judges to convert to full time; $0.9 million for judicial salary increases; and $3.1 million for economic increases. The total appropriation is $209.8 million, up 3.8 percent from FY 1993 – 94.

The governor’s GF/​GP budget recommendations for FY 1994 – 95 propose no changes from FY 1993 – 94 levels for the legislature or the Executive Office ($91.3 million and $4.3 million, respectively).


The Department of Transportation receives no GF/​GP monies; it is funded by restricted revenue, mainly gas and weight (registration) taxes and fees as well as federal aid. The recommended appropriation for FY 1994 – 95 is $2.52 billion, a 2 percent increase. The adjusted total appropriation (excluding intrafund transfers) is $1.82 billion, up 0.7 percent

The FY 1994 – 95 GF/​GP recommendation for capital outlay is $169 million, down 0.9 percent from the FY 1993 – 94 appropriation. The total appropriation is $308.6 million, down 4.2 percent.

The recommended GF/​GP appropriation for debt service for FY 1994 – 95 is $42.3 million, an $0.8 million increase. The budget includes $1.5 million for Quality of Life bond service requirements; these bonds pay for investment in environmental cleanup, pollution prevention, and recreation development.

The governor’s budget for the next fiscal year depends in part on adjustments that must be made to the budget for the current year, which is not yet over. His FY 1994 – 95 budget assumes no withdrawal from or payment to the Budget Stabilization Fund (BSF) after the end of the current fiscal year, but the Senate Fiscal Agency estimates that the formula that triggers payments and withdrawals will necessitate a payment from FY 1994 – 95 funds of $99 million.

Our view is that a payment of between $50 million and $100 million will be required. Public Act 191 of 1993 requires any FY 1992 – 93 surplus in excess of $26 million be transferred to the BSF, and the amount of the transfer will be about $286.4 million. This will increase the fund balance, which currently is low — $20.2 million — to more than $310 million (including interest earnings) at the end of FY 1993 – 94.

Article IX, Section 30 of the Michigan Constitution requires that 41.6 percent of state spending (excluding federal aid) be allocated to local units of government, but this requirement soon will become academic because of school finance reform. This is good news for the state: The huge increase in state payments to schools under the new system will count as payments to locals, increasing state payments to more than 60 percent and making it unlikely that the state ever again will have to worry about this provision. It could be bad news for local governments, however: It now will be much easier for the state to reduce other payments to local governments.

Article IX, Section 26 (state tax limit) of the state constitution restricts the amount of money the state may collect in any fiscal year to 9.49 percent of Michigan personal income. The limit for FY 1994 – 95 is an estimated $18.5 billion, and for the first time since FY 1984 – 85 state revenue will come close to the limit, again because of the new school finance system. State revenues must be increased so that local school property taxes can be replaced.

How close the state will come to the limit in the next fiscal year will depend on which proposal takes effect. Under the ballot proposal the state will fall only $40 million below the limit. Under the statutory limit the state will fall about $435 million short of the limit.


The FY 1994 – 95 budget is the first in several years in which no significant reductions are recommended. Most departments are slated to receive increases equal to or above the rate of inflation (estimated at about 3 percent), and for the first time in three years there will be increases for colleges and universities. This pleasant turn of events is due to the budget cuts of the past few years and a rapidly improving economy.

Because of school finance reform, however, the FY 1994 – 95 budget still will be tight. The numerous changes in school financing (regardless of which plan goes into effect) will reduce GF/​GP revenue and increase expenditures. The expenditure increase will be about $600 million if the ballot plan is approved and $350 million if the statutory plan takes effect. The majority of this additional amount will be covered by revenue growth that is well in excess of the estimates on which the FY 1993 – 94 and FY 1994 – 95 budgets were based.

We project a shortfall of about $130 million, however, if the ballot plan passes; such a problem is small enough to be solved with funding shifts or accounting adjustments and is not likely to require significant budget reductions. There will be a large surplus in the school aid fund in FY 1994 – 95, a portion of which could be transferred by the legislature to cover a GF/​GP shortfall. If the statutory plan takes effect, we project a GF/​GP surplus of about $125 million.

Whichever school finance plan is adopted, there will be some uncertainty in state budgeting in the future. Shortfalls in school aid fund revenue likely will create pressure to transfer monies to it from the general fund. Such shortfalls could occur periodically when the economy slows, because the replacement revenues are not as stable as the property tax. In addition, the legislation passed to increase classroom instruction from five to six hours a day by 2000 could add unanticipated costs, as could other school reforms.

Copyright © 1994