With a recession imminent – and now, with a tsunami of closed businesses and laid-off workers growing, a recession is a certainty – it is vitally important that the state put tax dollars to wise use.
Last week the Michigan Legislature passed a $312 million supplemental spending bill, sending it to Governor Whitmer where it now awaits her signature. Contained within the multi-departmental bill is $25 million in state appropriations to address the health and economic consequences of the coronavirus pandemic. Another $125 million in spending for coronavirus response was approved by the legislature this week. These are likely the first of many virus-related state appropriations to come as state and local health officials engage in efforts to mitigate the spread and “flatten the curve.”
Also buried in the $312 million spending bill is $37 million for 85 “enhancement grants” (see page 5) that are referred to as “pork” — pet projects that only benefit specific constituencies to win political favor. Given future uncertainties related to state funding demands to tackle the new virus and the likelihood that state tax revenues will miss their mark with the current economic slowdown, budget makers should have better scrutinized every dollar allocated in the supplemental. But they failed to do so. Now, with the spending bill on Governor Whitmer’s desk, serious consideration should be given to using her line-item veto pen to cancel the spending and direct these resources to the state’s rainy day fund in preparation for the impending recession.
The timing of recessions are such that economists are not able to date their official start until the economy is already knee-deep in one. Given the global nature of the current pandemic and its widespread economic effects thus far in China and Europe, it is not a question of whether but when a recession hits the U.S. economy. Some economists have already declared that the global economy is in recession.
Michigan, with its strong international business ties through the automotive industry, is already feeling the effects of the global slowdown, much sooner than other states. Detroit automakers’ European operations have halted production of new vehicles. As the economic contagion migrates to the U.S., slowdowns in domestic auto production in the state have begun. Adding in the closing of retail and commercial businesses across the state, plus the reduction in worker productivity from sick workers and social distancing, will reduce economic activity across the board in almost every sector.
The sales, job, and wage losses that will accompany the impending recession are expected to cause a major hit to state tax collections. How much, and for how long, is difficult to project, however. The global financial crisis that birthed the Great Recession caused state General Fund revenues to fall by $2.7 billion over two years, an annual decline of 20 percent in FY2010 and another seven percent in FY2011. State General Fund appropriations were reduced by $1.5 billion over the two-year period to match the amount of available revenue.
During economic contractions, governments often dip into their rainy day funds to maintain support for critical programs and projects. During the Great Recession, the state’s rainy day fund was empty and provided little relief to budget writers. Since then, the state has built up reserves totaling $1.2 billion in preparation for the next downturn. This amounts to less than one half of the General Fund revenue decline caused by the Great Recession.
It’s true that $37 million allocated for pet projects in the supplemental spending bill barely amounts to a rounding error for the $1.2 billion rainy day fund. But given the revenue declines of the last recession and the limited ability of the reserves to meet current spending priorities, Michigan policymakers should be conserving all available resources in preparation for the fiscal realities of the imminent recession and the added resource demands of the state’s response to the economic and health consequences of pandemic.
A good first step would be for Governor Whitmer to veto the $37 million in enhancement grant spending and redirect those resources to the rainy day fund.