• Governor Whitmer’s Fiscal Year 2021 budget proposal offers few major changes compared to last year’s, which had multiple hundred-million dollar proposals. 
• Natural growth in the cost drivers for General Fund programs have outpaced revenue growth, leading to a structural imbalance. 
• Future budgets will have to bring the General Fund back into balance, requiring either new revenue sources or spending cuts. 

On February 6, Governor Whitmer unveiled her Fiscal Year (FY)2021 Executive Budget – the governor’s proposal for how the state should spend state resources, her opening gambit in negotiations with the legislature for the next fiscal year. 

Last year, Governor Whitmer proposed a number of major tax and spending changes. These included a proposed 45-cent gas tax increase, changes to how retirement and S-corporation income is taxed, and an increase in the state’s earned income tax credit, along with increased spending for K-12 education and road and bridge repair and construction. Very few of the governor’s proposals were included in the final budget. 

This year, the budget blueprint includes new education, health, and environment programs. Yet, compared to last year’s, these proposals are relatively small. They include increasing the per-pupil foundation allowance by a minimum of $150, additional funding for the Healthy Moms, Healthy Babies program, dollars to incorporate social determinants of health into state public health strategies, and lead poisoning prevention. The majority have price tags below $100 million. There are no major tax/revenue changes proposed.

While there are few large new programs to focus on, the administration’s decisions related to General Fund spending are based on the most recent Consensus Revenue Estimating Conference that incorporates a number of General Fund commitments agreed to in prior years. 

Slow General Fund Growth

One of the most significant issues facing this year’s budgeting process is the slow growth of General Fund revenues. As the Citizens Research Council has talked about at great length, many past policies have put pressure on the state’s primary discretionary account. 

Some involve past policy decisions. This includes the Michigan Economic Growth Authority (MEGA) tax credits, which reduce business income tax revenues by more than $500 million per year. The exemption of some personal property from taxation and subsequent reimbursement for local governments, diverts more than $400 million of General Fund revenues to local governments and the School Aid Fund. 

Another major commitment, the 2015 transportation funding plan, will divert $600 million per year beginning in FY2021; while this money could be returned to the General Fund, it would exacerbate problems related to an existing shortfall in road funding dollars. 

In total, the combination of these diversions and a reduction in overall tax burden in Michigan have created a situation where General Fund resources have remained fairly close to levels at the start of the millennia. Based on projections from the January Consensus Revenue Estimating Conference, General Fund revenues for FY2021 will reach approximately $11 billion; only slightly above the $10.7 billion in revenue from FY2000. Once inflation is factored in, the General Fund is operating on even fewer resources than it did in FY2000.

Baseline Items Create More Pressure

While slow revenue growth limits the creation of new General Fund spending, existing program needs add pressure on the other side of the balanced budget equation. Changes in federal match rates for Medicaid and the Child Health Insurance Program (due to an increase in the state’s per-capita income level) and the Healthy Michigan Plan (a scheduled federal match reduction) will demand additional General Fund resources in FY2021, as will costs associated with increased healthcare costs and enrollment in Medicaid. 

Other issues that will draw additional General Fund resources include a need to supplement revenues dedicated to Department of Health and Human Services funding from lower than expected cigarette sales, expanded costs related to indigent defense rules, additional funding for state employee retirement, and other inflationary increases across the budget. Other baseline numbers are expected to continue to rise in FY2022.

In total, changes in ongoing appropriations will increase General Fund expenditures by more than $600 million, raising ongoing expenditures above ongoing revenues even after budget cuts (see Table 1). This balance does not include ongoing minimum support levels for the School Aid Fund, or potential external costs which could include paying back the federal government over a Medicaid ruling and funding settlements or judgments in lawsuits related to a number of pending issues like Flint water contamination or problems with the state unemployment insurance system. 

Table 1
FY2020, FY2021, FY2022 General Fund Executive Budget (millions)

Source: House Fiscal Agency and Citizens Research Council Calculations

The state is planning to use unspent General Fund resources from the current fiscal year and other one-time dollars to keep the General Fund balanced for FY2021. However, the problem is projected to continue into FY2022, and the existing surplus is insufficient to maintain that deficit for more than one year. 

Need for a Change

With ongoing General Fund spending outpacing revenues, the FY2021 budget is reliant on surpluses from the previous two Fiscal Years to remain in balance. However, this is only a one-time solution; the FY2021 budget is projected to leave the General Fund with a $2 million balance, and the House Fiscal Agency projects an overall General Fund shortfall after FY2022. 

While economists say a recession is not likely over the next few years, revenue growth is unlikely to resolve the General Fund’s woes. The state will need to address this imbalance, either through new revenues or spending cuts. Otherwise, the state could risk bringing financial troubles on itself as the current period of economic expansion reaches its twilight.