On May 17, key officials from the House Fiscal Agency, Senate Fiscal Agency, and the Michigan Department of Treasury met for the May 2017 Consensus Revenue Estimating Conference; the latter of two yearly meetings to estimate the state’s economic outlook over the next three years, and determine how those estimations impact revenue for the School Aid Fund and the General Fund. These projections are used for any mid-year budget corrections and provide the basis for the upcoming year’s budget. The May conference is used to fine-tune the estimates from the January conference, as data from the first few months of this year’s income tax withholdings and sales tax collections has been collected, and because additional information regarding state and national economic trends is available. Thus the second conference provides some insight to how the first few months of the calendar year aligned with what the agencies projected in January.
The Consensus Revenue Agreement from the May conference reveals a couple of potentially important trends for state revenues. As the table above shows, the new consensus estimate for FY2017 General Fund/General Purpose (GF/GP) revenue and the School Aid Fund (SAF) revenue was reduced by about $26 million from the January estimate, with increases of $73 million and $99 million in the consensus estimates for FY2018 and FY2019 respectively. While the overall projection of revenue for FY2017 was reduced, the estimate still shows a 2.6 percent growth in the combined collections this year, and an average growth rate of about 2.5 percent over the next three years compared to earlier projections that estimated 2.8 percent growth this year and an average of about 2.4 percent over the next three years. In total, revenue for these two funds is expected to increase by about $1.7 billion over the next three years.
While the net change in the revenue estimates is relatively small, a divergence in the growth paths of the GF/GP and SAF revenue projections is a significant development. The General Fund is expected to grow at a much lower rate in FY2017 than predicted in January, moving from a projected 2.7% growth to a 0.9 percent growth, due to a lower than expected growth rate in income tax withholdings for the first portion of the year. While the agencies expect GF/GP growth to rebound, with increased estimates for both FY2018 and FY2019, the drop-off in the FY2017 growth rate means that the net revenue projections for FY2018 and FY2019 are lower than they were at the January conference. Projected GF/GP revenue for FY2018 was lowered by $114 million from the January estimate, while the FY2019 estimate was lowered $100 million.
With inflation expected to average about two percent over the next three years, this level of growth is not sufficient to see real increases, or increases indexed to inflation, in GF/GP revenue. The low growth of revenues in the GF/GP budget is exacerbated by a few new diversions of revenue away from the General Fund, including a program to replace local funds lost to the phase out of the Personal Property Tax and new spending from the highway infrastructure bill passed in 2015, which will start to take effect in 2019. With no significant increases in revenue for the General Fund, it is unsurprising to see that projections for inflation-adjusted growth in resources for the GF/GP budget is expected to remain close to zero.
Conversely, the School Aid Fund is expected to grow at a faster rate in FY2017 than initially projected; now at 4.1 percent compared to 2.8 percent projected in January. This is primarily driven by an increase in sales tax revenue, propelled by a growth in retail sales. The year-over-year growth in retail sales in the state was at 4.5 percent last month, the highest rate seen since 2012. While the agencies do not expect retail sales to continue to grow at that rate, they do project retail growth to continue at stronger levels than in the past few years. Because of this, May’s projections for the SAF over the next three years were more optimistic than January’s, with the growth rate jumping to 4.1 percent this year, and tapering to 2.9 percent and 2.8 percent for FY2018 and FY2019, respectively. In sum, this amounts to about a $540 million increase in revenue over the next three years compared to the January estimate, and an increase in projected SAF revenue of $1.2 billion from FY2016 levels.
Ultimately, these changes reflect relatively good news for the School Aid Fund and potentially troubling news for the General Fund. With significant expenditures in the Personal Property Tax and the highway funding bill already straining the budget, among other issues, the lowered revenue projections for the next three years adds more pressure to the General Fund. With the final revenue estimate for the year set, it is time for decisions to be made to reconcile the budget with the projected revenue.