Guy Gordon (00:01.261)
Hello and welcome to another facts matter podcast kind of a bluebird day here who would have thought that we finally have a budget. Here we are a week into October we’re going to be taking a look at it on this podcast both kind of from the 30,000 foot level is it sustainable in the long run also will fact check some of the claims that being made out of it we want to dig into some of the elements that haven’t received a lot of coverage here I’m joined by.

Bob Schneider, the senior research associate for state affairs here at the Citizens Research Council of Michigan. And Bob, I guess this is going to be remembered as the budget that was, yes, better late than never, but also it’s about potholes and pot.

Robert Schneider (00:40.682)
It is. Those were two big issues that helped put this budget to bed. So you’re right.

Guy Gordon (00:47.649)
And there has been a lot written about that. What hasn’t been written about it was the idea that we finally took the sales tax on gasoline, which doesn’t go to help the roads. It was something that was kind of demagogued and used to distort the road debate. Well, now that’s been cleaned up, which is a good thing. But the concern was how do you backfill the loss in revenue on the sales tax side that would go to K through 12 schools and other elements? So how did we do there? How were we able to backfill it? And how did we resolve that issue?

Robert Schneider (01:17.42)
Yeah, so that was resolved in the budget for our school aid fund. So just for background, the sales tax, whether it’s on motor fuel or anything else, if the sales tax is imposed, about 73 % of that revenue goes to our school aid fund that is the major supporter of public schools, the fund that our school revenues come from.

And also about 10 % of it goes to constitutional revenue sharing payments to cities, villages, and townships around the state, which is distributed on a per capita basis. So when you eliminate motor fuel from the sales tax, it hits both those earmarks. For the school aid fund, that meant a loss of about $680 million for revenue sharing for cities and

villages and townships, that meant the loss of about an aggregate $95 million to cities, villages and townships around the state. how did that, that’s always been the conundrum and trying to do this. We recommended a couple of years back that the state do this while we were sitting on billions of dollars in extra funds, which would have made it much easier to fill holes for revenue sharing schools and in other entities. But in this budget,

Guy Gordon (02:29.133)
Mm-hmm.

Robert Schneider (02:42.83)
for the schools. The school aid fund itself was held harmless. So there is legislation that says each year we have to do an estimate effectively of what the school aid fund would have received from the sales tax on motor fuel. And the general fund basically kicks that over to the school aid fund to keep them whole. So from that perspective,

K-12 groups who were worried about losing revenue to the school aid fund, totally backfilled and it will continue to be over time, held harmless from that cut. Now, what they’re less enamored about is another big item in the budget because while we held the school aid fund harmless, about $400 million of that school aid fund

Guy Gordon (03:18.477)
Held harmless.

Robert Schneider (03:37.301)
there was an additional shift into our public universities budget. And general fund, because since general fund was more scarce, they pulled general fund out of the university’s budget, replaced it with the school aid fund. So the school aid fund gets a 680 million, but the K-12 schools will lose about 400 of that. And so in terms of ongoing revenue that the budget sees going forward for

for the K-12 schools, it’s more like 200 million. So they took a little bit of a hit in that fund shift. For local governments, yeah, yeah, for local governments, there was no hold harmless. So the cities and villages and townships will take about a $93 million hit to their constitutional revenue sharing payments, which in total is about, still just above a billion dollars.

Guy Gordon (04:11.479)
Mm-hmm. What about the revenue sharing impact? Yeah.

Robert Schneider (04:33.29)
So it’s not a massive hit, but it’s not a small one.

Guy Gordon (04:37.645)
How does it come out? It’s about 5 % between 5 to 8 % of the revenue sharing. Yeah.

Robert Schneider (04:44.526)
Yeah, it’s probably five-ish of the whole revenue sharing. Constitutional is one part of revenue sharing. It’s probably closer to 10 % of the constitutional portion of the revenue sharing payment. But in terms of the total state dollars in revenue sharing going to local units, it’s in the 5 to 10 % range.

Guy Gordon (05:02.645)
and we do we know who will get the ziggie on that

Robert Schneider (05:06.976)
Sorry. Say, say again.

Guy Gordon (05:07.831)
Do know who will get the Ziggy on that? Who will pay? I mean, if you see a 5 % hit, do we know whether it’s going to be, what services will be most impacted? Or is it going to be arbitrary?

Robert Schneider (05:18.376)
yeah. That’s going to be city to city, township to township. It’s discretionary dollars that they receive. Townships fund different things than cities and villages, big cities and small cities and medium sized villages. They all have different breakups of their budget. So it’s not really feasible to say exactly where it will hit, only that in general,

municipal budgets, township budgets will take a hit and be squeezed a bit. I should say for townships in particular, revenue sharing probably is a bigger, it can make up a really large part of their budget too. What other revenues do they get? So even proportionally,

Guy Gordon (06:06.541)
Mm-hmm.

Robert Schneider (06:14.778)
a five or 10 % hit to revenue sharing to a township might be a bigger piece of their budget than in a big city, for instance. So it’s a little different there too. I should just note real quick, there was some new funds added that kind of help make up, were intended, I assume, to make up for this, but I see about $40 million, $42 million added to the budget for public safety grants to…

Guy Gordon (06:21.581)
Okay.

Guy Gordon (06:43.104)
Mm-hmm.

Robert Schneider (06:43.726)
to cities, villages, and townships that are strictly earmarked for police, public service operations, equipment, new vehicles and things. there are some training dollars. That doesn’t go right to the local governments, but there is some training dollars in there as well that could help serve them down the road. they…

Guy Gordon (06:54.999)
There’s also some training dollars in there and yeah.

Robert Schneider (07:13.186)
they’re gonna take that hit to constitutional revenue sharing, which will be a real cut for almost everybody.

Guy Gordon (07:21.963)
Let’s widen the lens a little bit. know when we were at this juncture a year ago, we had that huge surplus, much it was appropriated. There was a lot of concern that that would be unsustainable going forward when those COVID dollars dried up, that we could be facing a lot of little mini fiscal cliffs in the future. Given the look at this budget, has that come to pass or did the revenues more or less catch up with some of those things? Or will we see a sustainability issue down the

Robert Schneider (07:49.929)
I think one real positive, I don’t see a sustainability issue, especially on the general fund side of the budget. The state is, I think Michigan does a good job of when we put our budgets together, we isolate and designate appropriations that are intended to be one time, which is a good way to spend a big one-time revenue source, like a budget fund balance. We appropriate those as one time and then we expect them, well,

that’s not gonna be around in next year’s budget. I think that’s helped us. We really have avoided, I think, a lot of fiscal cliffs during this surge in revenue and now kind of coming back down to normal. So I don’t see a problem right now and that’s a real positive outcome.

Guy Gordon (08:37.953)
Well, the other positive that we’ve been hearing is that this is kind of a bit of a unicorn in that there are no budget gimmicks here. There were no pull-aheads. They didn’t kick the can down the road. That it’s a pretty honest budget in a traditional sense.

Robert Schneider (08:54.818)
Yeah, I think so. think we may talk in a minute about the size of the budget. the only gimmick that I see is maybe we misstated the size of this actual budget. Yes. But some might refer to the higher education fund shift as a gimmick. But it’s really just recognizing where you have revenue and where you don’t.

Guy Gordon (09:00.457)
Yeah, well I’ll get to that, yeah.

Guy Gordon (09:05.281)
how we’re talking about it. Yeah.

Robert Schneider (09:21.566)
And it’s sustainable, doesn’t cause a sustainability issue. Now we’re using more school aid fund dollars for the universities. yeah, it’s a clean budget and it’s one that doesn’t cause any real headaches down the road.

Guy Gordon (09:37.505)
I want to get your take on some of the big talking points that we’ve heard over the past few days about this budget once the agreement was reached. And that is one that this budget is quite an accomplishment because it’s $2 billion smaller than the budget that came before. Is that one of those things that is technically true, but not necessarily accurate or is it a mischaracterization?

Robert Schneider (10:01.23)
Yeah.

Robert Schneider (10:05.838)
I think it’s a mischaracterization. So if you look at, if you’re a budget analyst, I, know, budget wonky people, nerds like us, we dig into the numbers. Say the budgets have a whole bunch of line items and summaries, and you can see, here’s how much is in this department, here’s how much is appropriated to that department from what source. If you just looked at the numbers and didn’t know anything else was going on,

I mean, you add up the total size of this budget, the number I get is about $75 billion. That’s way smaller than last year’s budget, which was a little over 82 before they added some more money to it and a supplemental, but significantly smaller. The governor put out a release yesterday that I read that had that number at 81 billion.

When I add up the numbers, it’s $84 billion. And just a quick explanation, why? Why is that? So again, add up all the appropriations in the regular money part of the budget, and you get $75 billion. I don’t think that’s a fact. What happened was with all the discussion at the federal level from the One Big Beautiful Bill Act,

Guy Gordon (11:15.693)
Mm-hmm.

Robert Schneider (11:29.496)
There’s some concerns, legitimate ones, this year and ongoing down the road. The state may be constrained at using a Medicaid financing strategy that involves Medicaid provider taxes. So the state imposes taxes on nursing homes, hospitals, health insurers, ambulance providers. We collect revenue from those providers.

We use that revenue as part of our Medicaid program and leverage about two to one federal dollars for each of those dollars, a little more than that actually. And we use it to support our Medicaid program. Those providers receive enhanced reimbursement because of the tax. A lot of that money gets passed back to them. The federal government has said generally states need to, they’re gonna lower the limits in terms of how states can use those.

Guy Gordon (12:26.645)
Right.

Robert Schneider (12:27.214)
how much those taxes can be imposed, the size of them. And we have a special insurance provider assessment tax that may well have to go away because of some of the things that happened with the Big Beautiful Bill Act. This budget actually fixes the immediate problem with that insurance provider assessment, allows DHHS to

Guy Gordon (12:53.911)
Mm-hmm.

Robert Schneider (12:56.384)
adjust the tax so that it passes muster with the federal government. And so we should be able to keep it. The hospital tax will end up coming down over time. But the key thing to get back to our question, about $9 billion, a little more than $9 billion that has always been appropriated as part of the money part of the budget was pulled out of the money part and was just put as sort of, well, we have some language in there that says,

is as we get this money, we can spend it, but it’s not part of the money. So if you take that $9 billion out, you’re not comparing apples to apples anymore. The fairest comparison of last year’s budget to this year’s budget is to include that $9 billion because we expect to get it in full this year now with the budget fix. And that means the total budget is actually $84 billion, which is actually slightly bigger.

Guy Gordon (13:38.698)
Right.

Robert Schneider (13:54.242)
than the budget that was passed last year.

Guy Gordon (13:56.413)
Okay, so taking a victory lap for shaving two billion out of spending may be a bit premature once you add the Medicaid provider fee issue back so that it’s set as status quo.

Robert Schneider (14:03.502)
I think it is. So to be clear, they made cuts in this budget. There were cuts. There were difficult decisions in this budget. But in totality, the budget is bigger. And we added some money for roads. So that’s one of the reasons it’s bigger.

Guy Gordon (14:11.947)
Right.

Guy Gordon (14:21.419)
Right, up to 1.9 billion once we get a little further past year one. One of the arguments that has been going on for a while now is, it too big? Is our budget too bloated? Is it too big? And we know that with inflation, that’s had an impact on the size of the budget as well. You’ve tried, and by the way, you can see Bob’s full analysis written at crcmish.org.

You tried to kind of apply an index approach to this and saying, comparing to personal income, how is the size of this budget? It’s up $47 million from what, 2019?

Robert Schneider (15:02.03)
Yep. Yep, 2019 to 2023, the budget went up of 47%. Yeah.

Guy Gordon (15:06.739)
which would the arguments been made that that’s more than the rate of inflation and therefore this has been a you know an irresponsible administration in its six years the Whitmer administration in terms of its budgeting but if you look at this in more objective terms where are

Robert Schneider (15:22.734)
So, so.

Let’s go backwards. we go back to 2000 to 2019, the first couple decades of our new century, and you look at the total size of the state budget, and you look at that as a percentage of personal income, which is a very broad-based measure of our economic income in the state. It’s what we earn from work, but it’s also what we get from unemployment benefits.

Guy Gordon (15:48.545)
Mm-hmm.

Robert Schneider (15:51.087)
what we get from social security, what we get from interest and dividends, what we earn from business income perhaps, very broad measure of earnings and thus also our ability to spend in the size of our economy. So if you look at the budget as a percentage of personal income for the first couple decades of the century, it moved around from roughly between 12 and like 12 and a half percent. 2019 hits.

Guy Gordon (16:10.188)
Mm-hmm.

Robert Schneider (16:20.846)
guy you’re correct from 19 from fiscal year 19 to fiscal year 23 budget went up from I $58 billion to like $85 billion 47 % increase and what we saw is that number did spike it went up to about 14 % the only time during this period that we’d seen that happen was during the Great Recession when we got another big a big

Guy Gordon (16:43.818)
Right.

Robert Schneider (16:47.566)
know, surge of federal funding coming in to address the economic challenges then. So it went way up, but significantly, you know, we have, the budget has come down a little bit, even though it’s still 80, you know, it was 85 and in 23 now even counting everything, it’s 84. So, you know, a shrinkage in the budget or the past couple, the past couple years. And if you do that same math,

Guy Gordon (16:59.457)
Mm-hmm.

Robert Schneider (17:14.186)
Incomes have grown. Inflation drove up wages, drove up prices, drove up incomes. Not everybody’s been on the whole. And it’s back to 12 to 12.5%. So I would assert the budget is back to a normal size again. And as we’ve discussed, that doesn’t mean right size. If it’s always been too big, yeah, yeah.

Guy Gordon (17:18.561)
You’re right.

Guy Gordon (17:32.033)
Right, and normal being, exactly, we’re not making it, that’s a subjective judgment, right?

Robert Schneider (17:43.136)
If it’s always been too big, it’s still too big. If it’s always been too small, it’s still too small.

Guy Gordon (17:48.269)
But this definition of normal, this 12 to 13 % of personal income, that cuts across Democratic administrations, Republican administrations, heaven knows a Republican legislature over more than a decade there. So normal does kind of put it into context that this isn’t a hugely bloated thing. again, we’ll let others debate whether or not it’s too, whether it’s too big or too small. But in terms of where the benchmark has been going back two decades.

Robert Schneider (17:57.431)
It does.

Guy Gordon (18:16.607)
It’s back to where it’s been in the past.

Robert Schneider (18:19.086)
It is. think it’s very legitimate to say the budget was much bigger in 2022, 2023 relative to that historical trend. I don’t think that’s the case anymore in 2025 and especially now in 2026.

Guy Gordon (18:28.672)
Okay.

Guy Gordon (18:35.401)
If there is something that I think will be notable about this budget looking back, it will be that the last minute earmarks, the 11th hour purge or binge, I guess would be a better word that we have seen in the past didn’t happen here. That the House Republicans did put in some meaningful guard rails on that and also some forcing some disclosure about where it’s going and who

Who is writing the request?

Robert Schneider (19:07.692)
Yeah, I think that’s a great thing. We called that out back a few years ago when, again, when the state was sitting on a mountain of one-time money. And what’s an easy way to spend a mountain of one-time money? Well, we might as well do some earmarking to help certain lawmakers be able to write press releases. We brought home the bacon to our district. But you’re right.

We made some recommendations and I’m happy to say that the Republican plan looked like them. Let’s not wait, as you said, we called them 11th hour earmarks. These earmarks were showing up in the final budget, hadn’t been in the Senate budget, hadn’t been in the House budget, weren’t proposed by the governor and all of a sudden here’s $10 million, $1 million, $500,000 for this.

a pet project that somebody wanted in the budget. So now at least, doesn’t mean that they’re good necessarily, and I don’t think all earmarks are necessarily bad, but at least now, Yeah, well, the Senate didn’t go along with the House’s plan right away, although they did have a meeting that just went over their earmarks kind of one by one, which was interesting to watch. But we don’t, this time we had less,

Guy Gordon (20:13.067)
No, and they did exceed the self-imposed cap that’s there.

Robert Schneider (20:32.878)
At least when we were taking final votes, everyone that wanted to know had access to information on what they were, what the money was going towards, who was sponsoring it, and what it was going to do. And I think if both chambers follow that process in future years, and if future legislatures observe this new process, then you won’t have, you’ll still have earmarks. You’ll still have some bad earmarks maybe.

Guy Gordon (20:52.652)
Yeah.

Robert Schneider (21:02.146)
But at least you won’t have these 11th hour right out of the blue sky earmarks that nobody that’s voting on the budget really knows what they are.

Guy Gordon (21:12.941)
So we’re almost out of time, but there’s two other elements, though, that kind of fall under the rubric of transparency. One is the interval between the time that the document actually drops and that you got to vote on it was still pretty rapid.

Robert Schneider (21:27.662)
Yeah, it was very rapid. again, kudos for more earmarks transparency that was needed and was largely observed. But right, we still run into this process with a little bit of dysfunction in the process. think there were 1,000 page budget conference report, 500 page education conference report.

I think they were probably adopted in conference committee at 7, o’clock on a Thursday and passed in the early morning hours of Friday. So most budget stakeholders probably woke up Friday morning to figure out what was in the budget. And that’s not the normal. We at least have more time leading up to final budget passage for deliberations. And I know we’ve talked about it before too. The other thing we never got with this budget is a revenue number.

Guy Gordon (22:19.565)
Yeah.

Guy Gordon (22:23.467)
Right, and I was going to get to this, and this is significant.

Robert Schneider (22:26.73)
It is, to me, it’s very significant as a budget nerd. We had an editorial, an op-ed in the Detroit News in August saying, look, we know OBBA has changed the House Fiscal Agency, fortunately, because if they hadn’t, we wouldn’t even know about it. They put out a nice report estimating the impact of some of the OBBA tax relief, how it would trickle into state revenues. And we thought we were going to have about a 650s.

$700 million revenue hit. That was the time to have another conference so that the Senate, the House, fiscal agency, the Treasury could come together and come to an agreement. What are the numbers? That never happened openly. That never happened openly. I’m sure it happened behind closed doors. But for us trying to watch the process, even to today, there’s been no formal announcement of here is the revenue, we’re GF revenue, school aid fund revenue that we’re assuming

Guy Gordon (23:08.267)
consensus revenue estimate. Yeah.

Robert Schneider (23:26.264)
for this budget, even though the general fund revenue changed. We know that.

Guy Gordon (23:30.763)
Right, so you have no ability to make a reasonable analysis of whether this was a pie in the sky budget assumption when it comes to revenues or whether it was well-grounded.

Robert Schneider (23:43.212)
Yeah, so the House fiscal, the documents that finally came out from the House Fiscal Agency allowed us to back into those numbers. You could see, so here’s the effect they’re estimating for, we can get into them. But again, one of the great traits of our budget process is that consensus revenue estimating conference. It’s public.

Guy Gordon (23:56.715)
Okay.

Guy Gordon (24:08.109)
Well, it’s kind of Transparency 101. It’s the bedrock of the budget.

Robert Schneider (24:10.158)
It’s transparency 101, absolutely. And back in the 1980s, before we had the conference, and I was not involved at that time, but my understanding, the revenues might get negotiated. Well, we want to put a little more in this budget, so let’s just assume we’re going to have more revenue. That conference stops that. It has the experts determine the revenue estimates. And that’s very important.

Guy Gordon (24:29.579)
Okay. Back your way into it.

Guy Gordon (24:35.479)
Yeah.

Robert Schneider (24:39.756)
I think the experts still did. I believe the experts still did determine the revenue estimates, but that was never made public and it needs to be in the future.

Guy Gordon (24:46.829)
they didn’t share. Well, there’s a lot to chew over and in future episodes of Facts Matter Podcast, we’re going to have a little get together of our budget experts here at CRC. We’ll get the Fab Five together to talk about kind of have a little round table and chew the fat over some of the things as you pointed out with Oba that were addressed and those are significant. We’ll be doing that in a different podcast.

a little bit later on until then Bob Schneider thanks so much.

Robert Schneider (25:19.129)
Thanks, Guy.