The FY2011 Executive Budget: “Déjà Vu All Over Again”
State Budget Note 2010-01
Michigan’s near decade-long economic slide provides a backdrop to the Governor’s Fiscal Year 2010-11 (FY2011) budget recommendation. Both the fiscal problem and a number of the solutions offered to address it share similarities with past executive budgets. FY2011 is the second year in a row in which the two major budgets (General Fund and School Aid Fund) face a combined shortfall in excess of $1 billion (this has been the case in three of the last four years). While the specifics of the Governor’s recommendations receive the most public attention, the underlying problem that affects the FY2011 budget garners much less attention. Ironically, observers of the Governor’s budget recommendations are quick to point out the similarities to past proposals which are being offered anew, but largely ignore the fact that state government has failed over most of the last ten years to correct the same enduring problem: the state’s structural deficit. In many respects, from the problem it attempts to address to the proposals it embodies, the Governor’s FY2011 budget can be accurately described as “déjà vu all over again”, to borrow a malapropism from baseball hall of famer Lawrence “Yogi” Berra.
The Governor’s executive budget is the first step in the constitutionally-prescribed budget process. Some of the Governor’s proposals, both old and new, grapple with aspects of the structural deficit problem, while others are instead aimed at short-term balance. Sooner or later, the Governor and the Michigan Legislature have to adopt a strategic approach to bring baseline revenues and spending back into balance and eliminate the structural deficit. For too long, state officials have relied upon a combination of one-time sources of expenditure reductions, non-recurring revenue sources, and temporary tax increases to achieve annual budget balance, while in turn largely ignoring the structural problems.
Structural Challenges Persist
Public attention to the state’s long-term structural deficits affecting the General and School Aid Fund budgets declined somewhat over the past two fiscal years as a severe national recession and the near-collapse of Michigan’s auto sector created near-term fiscal problems associated with massive job losses, a slowdown in consumption growth, and declines in personal income. These economic factors resulted in dramatic annual drops in combined General Fund and School Aid Fund tax revenue collections in FY2009 and FY2010, -12.4 percent and -5.1 percent, respectively. Such unprecedented revenue declines and the attendant budget shortfalls they caused, directed policymakers’ focus away from the on-going structural problem. The Michigan economy appears to have stabilized somewhat, albeit at lower rates of employment, property valuation, and other key indices. This economic situation demands state policymakers again turn their attention to the structural problems impacting the General Fund and School Aid Fund budgets.
In May 2008, the Citizens Research Council of Michigan (CRC) identified the components of the state’s structural deficits and projected the size of these deficits over the subsequent 10 years.1 Despite the fact that these projections were made against an economic landscape much different than the one estimated for 2010 and 2011, the average annual General Fund and School Aid Fund budget deficits were sizeable, $539 million and $308 million, respectively. The conclusion was that even in a moderately-improving economic environment, Michigan was not likely to grow its way out of these structural deficits. Given the impacts that the national recession and auto-sector restructuring have had on the state’s economic base, the current-year General Fund and School Aid Fund deficit estimates are much larger.