Governor Gretchen Whitmer released her proposed Fiscal Year (FY)2025 state budget two weeks ago. As is our annual tradition, we presented an in-depth examination and neutral assessment of the recommended $81 billion spending plan during a one-hour webinar on Tuesday, February 19. 

If you missed the live webinar, no worries. The materials from the presentation are available for download. And as a bonus, the webinar was recorded and is available to view on demand. 

Still limited for time? Until you can review the materials or view the recording, here are the key takeaways from our webinar.

Surplus gone. A once-massive combined $12.1 billion budget surplus (General Fund and School Aid Fund) will be reduced to just $1.7 billion at the end of the current fiscal year and completely exhausted under the Governor’s proposal. The availability of the one-time federal dollars and booming state revenue drove the state budget to new heights in recent years, but those resources are now gone.

Little growth in the overall budget, but the mix of one-time and ongoing appropriations changes. The total budget barely grows year-over-year and remains at $81 billion (all funds), but the mix of recommended one-time and ongoing appropriations across various state-funded programs and services changes. Most notably, the proposed spending plan consists of far fewer one-time appropriations supported by surplus dollars and temporary federal aid. It is made up of a larger share of appropriations funded by ongoing General Fund and School Aid Fund revenues.

Long-term budget growth back to “trend.” Fueled by an influx of one-time federal revenue to address the COVID-19 pandemic, the state budget ballooned from $58 billion in FY2019 to $85 billion in FY2023.  But with most of those federal revenues exhausted, total proposed appropriations for FY2025 are again back on a very consistent inflation-adjusted growth trend that was experienced in the decade before the pandemic. In short, growth between FY2019 and the proposed FY2025 budget reflects the spike in inflation the economy experienced post-COVID.

Several K-12 spending items hinge on a law change. The proposed School Aid budget assumes the legislature will approve a change to the “funding floor” provision of the public school employee retirement statute; the proposed law change effectively frees up $670 million in appropriations currently dedicated to funding retiree health unfunded liabilities. With those liabilities projected to be fully funded by next year, the Governor proposes to redirect the retirement funding to invest in new K-12 programs, expand existing programs, and convert one-time appropriations to ongoing ones.

A court decision regarding the income tax rate could upend the budget. A major uncertainty facing the proposed budget is a pending lawsuit against the state concerning the implementation of the statutory trigger that reduced the income tax rate for 2023. While the Whitmer administration and Attorney General Nessel have opined that the rate reduction should be temporary, those suing assert that the law requires the 2023 rate cut to be permanent. While the state’s position has so far been upheld in the Court of Claims, if higher courts rule that the rate cut should be extended under the law, state General Fund revenue would decline by $530 million in FY2024 and by $760 million in the years thereafter. This would necessitate significant revisions to the Governor’s proposal to bring appropriations in line with those lower revenues.

The presentation of the Executive Budget is just the first step in the annual state budget process, as the proposed spending plan now moves to the House of Representatives and Senate for consideration and modification. After the Legislature finishes its work later this year, the budget and any legislation required to implement components of the spending plan will return to the Governor’s desk for her consideration and final approval before the new fiscal year begins on October 1.

Rest assured, as the state budget advances through the Legislature, the Research Council will pay close attention. Until its final adoption sometime in early summer, we will examine competing spending proposals and provide our uniquely fact-based and objective analyses to keep you informed.