In A Nutshell

• The recently-signed $70 billion FY2022 state budget leaves $5.7 billion in federal COVID-19 recovery funding unallocated
• Additionally, state revenue collections between May and August have greatly exceeded the May revenue estimates on which the FY2022 budget is based; a $5.3 billion state revenue surplus is likely when FY2022 is finished
• The $11 billion in combined resources is nearly equivalent to general fund/general purpose revenue for a full fiscal year

Yesterday, Governor Whitmer signed the final two pieces of what is now a $70 billion state budget for Fiscal Year (FY)2022.  Budget bills for general state department operations and for higher education cleared the legislature on September 22.  That was only nine days ahead of the start of the new fiscal year and a full 83 calendar days after the July 1 statutory deadline for submitting a final budget.  Only the School Aid budget was squeezed in ahead of the deadline. 

That makes the legislature 0-for-2 in terms of meeting the deadline since it was added to state law in late 2019.

While the FY2022 budget is now signed, both  Governor Whitmer and the legislature have acknowledged that more work remains to be done. Most notably, plans to use over $5.7 billion of federal recovery dollars designated to Michigan under the American Rescue Plan remain undeveloped. 

What has drawn less attention, however, is that state revenues for the last four months have come in significantly higher than the May projections upon which the FY2022 budget is based.  A review of those numbers suggests that the state is headed toward a combined revenue surplus in excess of $5 billion at the end of FY2022. That surplus is on top of the unallocated federal recovery funding.  In short, the state’s budget outlook is looking as plush as it has in many, many years.

Over $5B in Federal Recovery Funding Remains Unspent 

One reason offered by legislative leadership for missing the July 1 budget deadline was the complexity involved with designing a spending plan for the $6.5 billion in State Fiscal Recovery Fund (SFRF) proceeds that Michigan was allocated under the federal American Rescue Plan Act (ARPA) enacted in March of this year.

Congress approved massive amounts of ARPA funding for states and local units of government to help address pandemic-related needs, and funding must be allocated by the end of calendar year 2024. Congress designed the SFRF dollars to be used flexibly to combat the negative impacts of the pandemic on individuals and businesses; support wage premiums for essential frontline workers; and finance water, sewer, and broadband infrastructure projects. From a state budget perspective, ARPA also allows these funds to be used to offset revenue losses attributable to the pandemic, and as we’ve noted previously, U.S. Treasury guidance issued this summer on using SFRF funding for revenue backfill will provide Michigan a lot of discretion in using these funds.

After yesterday’s budget bill signings, however, only 12 percent of the state’s allocation has been obligated.  When the FY2022 School Aid budget was passed in June, $202 million from the SFRF was included to support enhanced state reimbursement for Great Start Readiness preschool programs for children in low-income families; infrastructure grants to school districts committing to operate under a year-round calendar; and for a high school engineering/manufacturing programs initiative. Then, a separate appropriations act in July authorized $260 million for enhanced reimbursement payments to Michigan hospitals and nursing facilities to recognize both increased costs and decreased revenues for these health care providers because of the pandemic.

Disposition of State Fiscal Recovery Fund Allocation

Source: House Fiscal Agency and Senate Fiscal Agency budget analyses

After missing the July 1 deadline and breaking for the summer to allow negotiations to continue, the budgets signed by the Governor yesterday only included another $311 million in SFRF appropriations to address negative COVID-related impacts, including a $150 million deposit into the Unemployment Insurance Trust Fund; $100 million for community revitalization/placemaking grants; $37.5 million for supplemental payments to nursing facilities; $20 million for the Pure Michigan tourism promotion program; and $4.4 million to multicultural services organizations that provide health services to ethnic populations disproportionately impacted by the pandemic.  That still leaves $5.7 billion in relatively flexible revenue still unallocated. 

State Revenue Surplus is Likely to Exceed $5B

Beyond the federal funding, state revenues also continue to grow at a surprisingly strong rate.  Much of the FY2022 budget was based on revenue projections from the May Consensus Revenue Estimating Conference (CREC). That forecast suggested combined general fund/general purpose (GF/GP) and School Aid Fund (SAF) revenue would increase by $3.5 billion, fueled in large part by the impact of several rounds of federal COVID relief.

However, in the four months that have followed the May CREC, state revenue collections have been even stronger than those already healthy projections.  In its most recent revenue update, the House Fiscal Agency reports that year-to-date GF/GP revenue collections for FY2021 have exceeded the CREC estimates by another $1.3 billion; likewise, SAF revenues have come in $530 higher than forecasts.  The Senate Fiscal Agency reports similar numbers with GF/GP revenue up $1.3 billion and SAF revenue up $768 million.

What does that mean for the state budget picture?  It means that an already sizable budget surplus will get even larger.  The table below provides a high-level overview of projected state revenues and state spending under the enacted budgets for FY2021 and FY2022.

Coming into FY2021, the state had a GF/GP balance of $2.4 billion and a SAF balance of $1.2 billion. Our analysis takes the May CREC revenue estimates for FY2021 and adds $1.3 billion to GF/GP revenue and $600 million to SAF revenue (conservatively splitting the difference between the two fiscal agency reports).  Adding these revenues to the beginning fund balances and subtracting current FY2021 appropriations results in a combined FY2021 year-end balance estimate of almost $6.0 billion across those two major funds.

Revenue, Spending and Fund Balance Projections

Source: May 2021 CREC Final Summary; “Adjusted May Revenues” and “Known Spending Pressures” adapted from Senate Fiscal Agency, Summary of FY 2021-22 Appropriations Conference Reports.  “Adjusted May Revenues” include CREC revenue estimates with certain accounting adjustments for revenue sharing and other balance sheet factors. “Additional Revenue” reflects Research Council approximations.

Going forward, a key question remains unanswered: how much of this added revenue is one-time in nature, and how much represents an ongoing growth trend that will carry into FY2022 and beyond?  Some of the unexpected revenue growth since May is likely attributed to factors unique to FY2021.  Strong sales and use tax growth, for instance, has been attributed to a shift in consumer purchasing during the pandemic from untaxed services to taxed tangible goods.

State economists will have their first chance to formally weigh in on that issue at the next CREC held in January. Until then, our analysis takes a conservative approach and assumes that only 25 percent of the added post-CREC revenue will be permanent and carry into FY2022.

Even with that conservative assumption, our analysis suggests that Michigan will exit FY2022 one year from now with a combined GF/GP and SAF year-end revenue balance of just over $5.3 billion.  Altogether, then, the state still has about $11 billion in unappropriated revenue at its disposal.  That’s virtually equivalent to a full year’s worth of GF/GP revenue collections.

So while the FY2022 budget has been formally enacted, budget writers in both the executive and legislative branches still have a mountain of work to do in negotiating a spending plan for these remaining dollars.  The good news: it’s a lot easier to spend $11 billion than it is to cut it from your budget.

Permission to reprint this blog post in whole or in part is hereby granted, provided that the Citizens Research Council of Michigan is properly cited.