Now the Real Work Can Start on the FY2012 State Budget
State Budget Note 2011-01
Recently, and much earlier than years past, the framework for the upcoming state budget began to take shape when both chambers of the Michigan legislature passed their respective spending plans. The Senate was the first chamber to complete its work on the Fiscal Year 2012 (FY2012) state budget when, in late April, it approved all operating appropriation bills financed by the General and School Aid Funds, the state’s two major funds. This action was closely followed by the House of Representative’s approval of all appropriations bills in early May. Both chambers incorporate many of the recommendations made by Governor Snyder in his proposal, but the plans also deviate in significant ways from the Executive Budget. The two plans for the General Fund share some key similarities; however, the Senate’s plan spends $179 million, or 2 percent, more than the House’s budget and the two recommendations differ in other substantial and material ways. The legislature has cleared a major hurdle in the budget process, but much detailed work remains if the budget is to be completed by May 31 as requested by the governor.
Governor Snyder’s FY2012 proposed spending plans for the General and School Aid Funds were balanced against the January consensus revenue estimate, adjusted for his tax restructuring proposal involving business and individual income taxes, which he presented with his budget. The net effect of the tax changes on the budget would be revenue neutral when fully phased in, but they would result in a net tax cut in the first fiscal year. The Executive Budget used nearly all the projected FY2011 $500 million School Aid Fund year-end surplus to finance appropriations in FY2012, but it reserved the projected year-end General Fund balance ($300 million) as a hedge against a host of current-year budget risks.
In mid-April Governor Snyder and the legislative leadership of the majority party in each chamber agreed to modify the original tax plan, retaining the business tax components but changing the income tax pieces significantly. The re-worked plan, which the House passed in late April and the Senate is expected to pass in early May, provides a larger net tax cut because it raises $183 million less in income taxes than the governor’s original proposal. Furthermore, the changes affect the General and School Aid Funds differently.
While neither chamber has released publicly its updated balance sheet for either major fund since completing budget action, each body is working from the January revenue estimate adjusted for the revenue effects of the compromise tax plan. Similar to the Executive Budget, both chambers achieve balance by using nearly all the projected FY2011 School Aid Fund surplus to finance appropriations in FY2012. It appears that the Senate General Fund budget may rely on a portion of the FY2011 year-end balance to achieve budget balance given the slightly higher spending amount in FY2012 compared to the House budget. Against the Executive Budget, both chambers cut the overall appropriation amount to reflect the lower revenue figure from tax restructuring.