Dual Deficits and Federal Recovery Assistance

Dual Deficits and Federal Recovery Assistance: Prospects for State Budget Balance
April 2009
State Budget Note 2009-02

In Brief

Although the U.S. economy officially slipped into a recession in December 2007, Michigan’s economy has been under significant stress since the early part of the decade, losing nearly 750,000 jobs since peak employment levels were recorded in June 2000. State and local government finances have been directly affected by Michigan’s economic restructuring and the state’s nation-leading unemployment rate since the start of the last economic downturn in March 2001. The failure to adjust Michigan’s state budget to the new economic realities has resulted in on-going structural imbalance, characterized by on-going spending exceeding on-going revenues. Annual budget balance has been achieved through the use of over $8 billion in non-recurring resources over the past eight fiscal years.
The CRC documented the sizable and growing structural budget deficits in June of 2008 (See Michigan’s Fiscal Future, CRC Report #349), projecting problems for the foreseeable future. As a result of the current business cycle contraction, Michigan policymakers must now address a cyclical deficit in tandem with the on-going structural problem (See Michigan’s Weakened Financial Position and The Problem of Dual Deficits, CRC State Budget Note 2009-01).
At the national level, a massive recovery package was crafted to keep the recession from deepening and to minimize the effect the recession would have on a variety of public programs run by state and local governments. For most state governments, the stimulus package is the proper prescription for addressing the cyclical budget deficits caused by the economic downturn without raising taxes or slashing spending. In Michigan, however, the fiscal resources provided by the federal government:

• Will not be sufficient to prevent spending cuts.
• Will mask the size of the requisite cuts to deal with the structural budget problems.
• Will not be available long enough to see the state budget through the full period of reduced state tax revenues caused by the recession.
• Will cause a budgetary revenue “cliff” when the additional level of federal spending expires.

The Michigan Legislature’s immediate attention is focused on the development of the FY10 budget; however, the more pressing issue and difficult task is crafting a solution for the state budget that will take effect in 18 months, the FY11 budget. While the new federal money does not provide fiscal resources for addressing the structural deficit, it does provide policymakers with additional time to tackle the very difficult task of developing a menu of structural changes required to achieve on-going harmony between annual state spending and revenue.