• State Budget Reports uses economic measures and surveys of state budget officers to assess state economic momentum and fiscal stress.
• Michigan scores poorly on the Index of State Economic Momentum with average personal income growth but below average employment and population growth.
• Michigan showed some signs of fiscal stress in Fiscal Year (FY) 2020 because of the budget cuts caused by decreased tax revenues. Its use of rainy day fund resources was not sufficient to reflect higher levels of stress.

Michigan’s economic activity is lagging that of most other states, but the state government has been able to manage its finances, balance its budget, and minimize fiscal stress. This is the finding of a recent publication of State Policy Reports (subscription required), a publication of the not-for-profit Federal Funds Information for States. The December 2020 edition provides  an update to the Index of State Economic Momentum and Continuum of State Fiscal Stress, two broad measures of economic growth and state fiscal stability, respectively.

Index of State Economic Momentum

The Index of State Economic Momentum (Index) ranks states based on their most recent performance in three key measures of economic vitality: personal income growth, employment growth, and population growth. Measures of the three components are averaged, and the national average is set at zero. Each state’s score is then expressed as a percentage above or below the national average.

Michigan’s Index score ranked it 47^th of the 50 states and District of Columbia with a score 1.35 percent below the national average. The four states below Michigan include Wyoming and North Dakota, both economically damaged by the decline in oil prices at the beginning of the pandemic. Also below Michigan, New York and Hawaii have been severely impacted by the decline in travel and leisure spending.

Michigan’s personal income grew by 7.2 percent over a year, just above the national average of 7.1 percent. State personal income is the income received by all persons in a state from all sources, including net earnings by place of residence, rental income, dividends, interest, and transfer payments.

Clearly people’s paychecks were impacted by job losses and diminished economic activity, but the federal cash infusion provided in the many stimulus bills enacted since the spring helped to grow personal income. This includes direct payments to individuals, unemployment bonus payments, and additional Medicaid dollars. Arizona (9.7 percent), Georgia, Massachusetts, and Pennsylvania (9.6 percent) experienced the most growth. Wyoming (1.2 percent), North Dakota (2.0 percent), Kansas, and Colorado (3.9 percent) experienced the least growth.

Every state except Idaho (0.5 percent) and Utah (0.0 percent) experienced declining employment from the 3^rd quarter of 2019 to the same period in 2020. Michigan (-9.4 percent) experienced the 3^rd greatest job loss, better than only New York (-10.0 percent) and Hawaii (-15.2 percent). The national average was 5.8 percent job loss over this period.

Finally, the index looks at population change (as estimated by the Census Bureau from July 1, 2019 to July 1, 2020). Michigan (-0.2 percent) experienced the 43^rd most growth over this period. The nation grew at 0.4 percent, with 34 states and D.C. experiencing positive growth and 16 states losing population. West Virginia, Hawaii, Illinois, and New York all lost 0.6 percent of their populations in that period.

Continuum of State Fiscal Stress

The Continuum of State Fiscal Stress provides an indicator of state fiscal challenges  using data reported by the National Association of State Budget Officers (NASBO) in its Fiscal Survey of States. as. It simply identifies the states that meet certain conditions as indicators of stress and tallies up the indicators for each state for a compiled score of 0 through four. Those indicators are:

1. Did states reduce their enacted FY 2020 budgets at mid-year?

Although the state ended the year with total appropriations greater than what was budgeted, much of this was enabled by the influx of federal funds from the CARES Act and other pandemic relief measures. Those federal dollars had restrictions on their use and could not completely back-fill appropriations budgeted to be funded with General Fund or restricted revenue sources. As a result, the state did reduce its enacted FY 2020 budget.

Michigan was one of 19 states that acted to reduce their FY 2020 budgets. It should be noted that 46 states have July 1 to June 30 fiscal years, so the use of rainy day funds or other mechanisms could have been used by most states to get them from the beginning of the pandemic in mid-March to the end of June. Michigan was six months away from the end of its fiscal year at that point, necessitating more significant budget adjustments than most other states in the 2020 fiscal year to avoid ending the year in deficit.

2. Did FY 2020 tax collections meet or exceed expectations?

Even with the budget adjustments, Michigan was one of 35 states for which tax collections failed to meet or exceed expectations.

3. Did states end FY 2020 with balances equal to or greater than 5 percent of general fund expenditures?

4. Did total balances as a percent of general fund spending decline between FY 2019 and FY 2020?

Michigan did not take hits for either of these indicators. In July of 2020, Michigan both drew $350 million from the rainy day fund and made $483 million in hard cuts to keep the FY 2020 budget balanced in light of the revenue reductions and new spending pressures caused by the pandemic. Because the state had a relatively healthy balance heading into the pandemic, and these actions affected both the numerator and denominator of the equation, it was possible for the rainy day fund balance to remain above 5 percent of general fund expenditures.

State scores revealed from the NASBO survey showed Kentucky, Montana, Nebraska, New Mexico, New York, and Wisconsin all had scores of 0, indicating that they did not have signs of fiscal stress. Arkansas, New Jersey, and Pennsylvania had scores of 4, indicating high levels of fiscal stress. Michigan was one of 16 states that scored a 2, indicating moderate levels of fiscal stress.

The pandemic continues to impact broad measures of the state’s economy. As of this writing, however, these impacts have not been felt as much in the state’s spending plans (thanks to massive infusions of federal relief aid) and its overall level of fiscal stress. With restaurants and other venues closed to comply with public health orders, unemployment remains a problem. Hope is on the horizon with vaccines rolling out, but it will take some time for sufficient portions of the population to be vaccinated so that economic activity can return to normalcy. As long as the economy is threatened, we need to remain aware of fiscal stress.