In a Nutshell

• State revenue projections are up by $3.5 billion for FY2021 and FY2022 after last Friday’s Consensus Revenue Estimating Conference
• The large upward revision is largely the product of unprecedented federal stimulus propping up consumer spending even in the wake of employment declines
• Even with the added revenue and last week’s deal on a framework for budget negotiations, there will be many issues to resolve before the July 1 statutory deadline for completing the state budget

Michigan’s budget picture just got a lot rosier after state economists met for last Friday’s Consensus Revenue Estimating Conference. General Fund and School Aid Fund revenue projections rose by a combined $3.5 billion for FY2021 and FY2022; a seven percent increase over the estimates from just four months ago. That is a huge influx of money available to support legislative and administration budget priorities as the two branches begin negotiations to meet a self-imposed July 1 statutory deadline for wrapping up the FY2022 state budget. The forecasts were also extremely good for FY2023, with combined revenues expected to increase by $1.8 billion for next year’s budget process.

Federal Stimulus Drives Revenue Growth

Forecasters point to the impact of unprecedented federal stimulus provisions as the key driver behind strong consumer spending that is expected to fuel the significant revenue growth. Last Friday’s conference was notably the first to factor in the impact of March’s federal $1.9 trillion American Rescue Plan Act (ARPA), which, among other things, provided for $1,400 stimulus checks; the exclusion of of most unemployment benefits from 2020 income taxes; and temporary expansions to the the Child Tax Credit and Earned Income Tax Credit for 2021. APRA, of course, builds on the stimulus checks and enhanced unemployment benefits approved in prior rounds of federal stimulus in 2020.

For perspective, Michigan shed 409,000 jobs during the pandemic’s peak in 2020 – a decrease of over 9 percent from 2019. Last Friday’s economic forecast suggests Michigan will recover only 35 percent of those lost jobs for 2021, resulting in a 2.7 percent decline in inflation-adjusted wage compensation from 2019 to 2021. Yet, federal transfer payments – led by enhanced unemployment benefits scheduled to continue until Labor Day – are expected to help increase inflation-adjusted personal income by 3.9 percent across the same two years.

That huge injection of disposable income is at the core of the revenue revisions. An illuminating slide from Friday’s forecast presentation shows that federal transfer payments as a percentage of personal income reached 22.9 percent across 2020 and 2021 due to COVID-19 stimulus legislation.  That greatly exceeds the same percentages seen at the heart of the New Deal in 1933 (12.6 percent) and the American Recovery and Reinvestment Act during the Great Recession in 2009 (5.8 percent).

The U.S. Treasury further sweetened the pot for Michigan last week when it released its final allocations for $350 billion in state and local stimulus dollars under the American Rescue Plan Act.  By weighting the number of unemployed more heavily in the formula, Michigan’s allocation increased from the original estimate of $5.7 billion to $6.5 billion. While there are some restrictions on spending the new federal dollars, states will have wide latitude on their spending plans.

Prospects for a Budget Deal

Psychologists suggest that win-win conflict resolutions are often the easiest to reach, and new revenue brings a lot of potential wins for both the legislature and Governor.  But the state budget process is a unique animal, especially in an environment where relationships and trust between the executive and legislative branches have been sour.  So now, the hard work begins.  Let’s look at three key budget conflicts that will need to be resolved in the 38 days that remain before July 1.

The first challenge will be allocating out the wins.  Revenue is way up, but it is not unlimited. The House and Senate have now passed their own versions of all departmental budgets, and as would be expected, there are conflicting priorities.  Key elements of the Executive Budget proposal are left out of the budgets in both chambers, including $165 million in General Fund for the Michigan Reconnect and Futures for Frontliners job training programs.  Within the K-12 budget, both chambers also rejected the Governor’s proposal for $200 in enhanced payments to districts struggling with declining enrollment coming out of the pandemic.

Naturally, the legislature has its own priorities.  The House-passed Transportation budget includes $374 million in General Fund proceeds for a bond repayment sinking fund tied to legislation that would limit the Governor’s ability to move forward with her $3.5 million road bonding plan, proposed in January after she and the legislature failed to reach a deal on more permanent road funding.  The Senate proposes a new $50 million grant program for municipalities with large unfunded pension liabilities, and the two chambers put themselves on opposite sides of the Governor on maintaining a $2 per hour wage increase for direct care workers within the Medicaid system; the House did not include funding for the ongoing wage increase, while the Senate added funding to further boost the increase to $2.35 per hour. These and other high-dollar points of difference will need to be resolved during final budget negotiations.

A second decision point is what to do with the new federal stimulus dollars.  States have until 2024 to spend the money, so there is no strict deadline for appropriating the dollars.  Already, though, the two sides have staked out different priorities. 

The House passed a FY2021 supplemental budget bill implementing elements of its own plan for these dollars; one that includes a $550 million deposit to shore up the state’s Unemployment Trust Fund balance; $220 million for behavioral health initiatives; $250 million for grants to support local water and sewer replacement projects; $150 million to implement the now-vetoed Broadband Expansion Act; and $50 million to support costs related to the sale or demolition of state-owned buildings and to provide “right-sizing” incentives for state workers to leave state employment.  The House also uses the federal funding in place of General Fund dollars to pay for frontline workers, saving $777 million in both FY2021 and FY2022, and both chambers have tapped the stimulus money to support supplemental payments to hospitals and nursing homes.

The Governor has yet to detail a specific plan for the new stimulus money, but last month the administration announced some broad goals for the dollars which included business supports; new technologies to support business attraction; investments in infrastructure and public health capacity, as well as preschool, child care, and programs to address pandemic learning loss in children.  While some common ground exists, working out an agreement on these federal dollars will be just as challenging as finalizing a deal on the broader state budget.

Finally, the legislature and Governor will need to find a way to iron out their disagreements on the executive-legislative balance of power – conflicts arising from both COVID-19 restrictions and recent state budget actions.  The announcement last Thursday that a deal had been reached on a framework for formal budget negotiations in exchange for greater legislative involvement with pandemic orders could be a very positive sign going forward; but establishing a framework for negotiations is only a preliminary step to working out all the numbers.

And budgets passed by the legislature do contain some politically-contentious provisions. For example, the House-passed supplemental provides $83 million for frontline state employees, but conditions the funding on the enactment of separate legislation limiting the governor’s ability to use the State Administrative Board as vehicle to transfer funding between budget line items.  That rarely-used process was employed during the 2019 budget stalemate to effectively re-write large portions of the state budget without consultation with the legislature, drawing the ire of legislative leadership ever since.

The House has also pursued the unorthodox and ill-conceived process of passing annual budget bills for selected departments containing only three months of funding, with the stated goal of coming back later to add funding after more intensive review.  But as discussed here previously, that approach hardly provides the budget certainty needed to properly manage state programs.

Win-wins are now available to all sides in the budget negotiations, but good-faith negotiations and a mutual respect for the proper checks and balances set forth in the State Constitution will be needed to finalize any budget deal.  June budget negotiations should provide us with a signal as to whether the governor and legislature can find a path to get along enough to share them.