The State of Michigan’s New Fiscal Plan
State Budget Note 2011-02
The recently enacted Fiscal Year 2012 (FY2012) state budget provides a marked change from the fiscal plans of recent years. The FY2012 budget does not rely on non-recurring revenue sources or delaying expenditures to achieve balance. Instead, it enacts significant appropriation reductions to bring ongoing expenditures in line with ongoing revenues. It begins to rebuild the state’s long-depleted cash reserves. The state’s new fiscal plan takes aim at growing long-term obligations by putting funding aside to pay for state retiree liabilities. The plan makes significant tax changes by lowering and simplifying business taxes and increasing individual income taxes. Finally, with the concentration of political power across the executive and legislative branches of state government, the budget was adopted in May and much earlier than in recent years. Entities that rely on state appropriations were given more time to plan for enactment of their own budgets.
State policymakers began work on the FY2012 state budget in February. At that time, the General Fund portion of the budget faced an estimated $1.4 billion deficit largely created by the exhaustion of significant amounts of temporary budget resources. In addition to the budget problem, the state faced a sizeable major funds cash deficit created by years of over-spending available resources. Furthermore, the state had amassed significant long-term obligations, primarily unfunded retirement liabilities, because it failed to set aside the necessary resources when the obligations were incurred.
Against a backdrop of an improving state economy, the Governor and legislative leaders enacted a financial plan for the State of Michigan consisting of: 1) a revamped state tax structure, 2) a state budget that balances ongoing expenditures and resources mainly through appropriation reductions; 3) a down payment on future long-term obligations; and 4) a deposit in the state’s rainy day fund. The plan contains significant elements of the Governor’s proposed budget and tax proposals, but also incorporates features of legislative priorities. An improving outlook for state revenues released in May helped address the projected General Fund deficit identified in January and finance the net tax cut of the restructured tax plan.
Tax Changes Establish a Smaller Financial Base
The combination of business tax restructuring and individual income tax changes will create a new financial base for the state budget; one which will generate less revenue compared to current tax policy and one which shifts a greater portion of the overall state tax burden from those paying business taxes onto those paying the individual income tax. The budget will have to accommodate net tax cuts in FY2012 and FY2013, although an improving economic climate and the attendant state revenue growth will partially finance the tax cuts. The tax changes affect the General and School Aid Funds differently, which creates the need to make other budgetary adjustments to balance spending from these funds with available revenues.