In a nutshell:

  • Slow growth is the new normal
  • Stronger economy = more sales tax revenue = more money for schools
  • Some fresh cash for road repairs, but at the General Fund’s expense

Governor Rick Snyder officially kicked off the state budget process by presenting his spending recommendations for Fiscal Year (FY) 2019 to the Michigan Legislature. This is his last budget before leaving office at the end of this year. It is now the role of the House and Senate appropriations committees to craft the state spending plan (in accordance with the governor’s recommendations or otherwise) and submit it for the governor’s signature. The process is expected to be finalized sometime in June before legislators hit the summer campaign trail. While there is much to digest in the governor’s $57 billion budget proposal, here are three quick takeaways.

Flat General Fund budget

The governor’s all funds $56.8 billion budget proposal is up less than one percent from the current year budget. This compares to a projected 1.9 percent rise in general prices (inflation) for 2019.

While the total budget is up slightly, proposed spending in the discretionary General Fund is flat at $10 billion, representing a “hold-the-line” recommendation from the governor. Total General Fund operating appropriations have been at this level for a few years now, but are up from $8.4 billion (20.4 percent) since Snyder’s first budget in FY2012. Inflation during this period rose 8.3 percent.

The scant growth in recent years comes as little surprise to budget watchers and may represent a “new normal” going forward. Current revenue projections show growth for each of the next two years at 0.3 percent and 0.7 percent. This is because of a number of existing tax obligations (e.g., MEGA tax credits and personal property tax reimbursements), new tax changes (e.g., expansion of homestead property tax credit), and other revenue diversions (e.g., highway funding) will constrain net General Fund receipts, which directly affects the budget.

Focus on education

The School Aid Fund, the state’s other primary fund, has been shielded from major revenue effects associated with the recent tax changes and revenue diversions hitting the General Fund. As such, the steadily improving economy will aid revenue growth to the education-focused fund.  The fund is looking at annual growth of just under 3.0 percent for FY2019 and the next three years. This provides the governor with the resources to propose increases in education appropriations.

The headline recommendation is the $240 per-pupil increase in the state’s minimum per-pupil foundation allowance, the primary funding source for K-12 public education operations.  The allowance will rise to $7,871 per pupil for the 2018-19 school year from $7,631 this year, the largest annual bump since the 2001-02 school year. School districts that currently receive a foundation allowance greater than the minimum will receive a smaller bump, with districts at the top of the scale (above $8,289 per pupil) receiving a $120 per-pupil increase.

These proposed increases would further reduce the funding gap between the minimum and maximum allowances, a goal of the Proposal A school funding reforms. The gap was $1,173 per pupil in the 2011-12 school year and would be reduced to $578 per pupil in 2018-19; nearly halved during Snyder’s time in office.

The governor’s proposal also provides an inflationary increase (2 percent) for public universities. This bump will restore the funding cuts to higher education under Snyder’s first budget in FY2012, restoring the aggregate appropriation to above the FY2011 amount. The state’s 28 community colleges are not slated to see an increase in the FY2019 budget; however, their total appropriation is 36 percent above the FY2011 level.

Speed up highway funding

The 2015 highway funding package called for a gradual phase-in of income tax revenue (General Fund) being allocated to road and bridge projects. For FY2019, the amount is $150 million, growing to $325 million in FY2020, and $600 million thereafter. To speed up the phase-in, Snyder recommends using $175 million from the General Fund surplus of last year to bring the total to $325 million next year.

The Snyder era

Governor Snyder’s final budget offering looks very different from his first one in FY2012.  In developing the earlier one, the governor had to confront a nearly $1.5 billion structural General Fund budget deficit, largely the result of previous policymakers’ failing to align the state’s on-going receipts with its on-going spending commitments. To address that deficit, the governor’s first budget included major appropriation reductions in local government revenue sharing, higher education appropriations, and other areas. Additionally, the governor shifted much of the funding responsibility for higher education from the General Fund account to the School Aid Fund account. Further, the FY2012 spending plan had to accommodate a tax restructuring scheme the governor proposed as a candidate; a shift in tax burden from business taxes to individual income taxes.

In terms of changes, the governor’s current budget recommendation is mild by comparison. It lacks the massive spending reductions, tax restructuring, and fund shifts of the earlier one. However, what the proposed FY2019 spending plan does share with the FY2012 plan is a focus on structural budget balance, paying down state debts, and the use of performance metrics in resource allocation (e.g., higher education). While these things may not make headlines, they are largely viewed as positives by fiscal managers and budget watchdogs.

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