Guy Gordon (00:00)
Hello, once again, friends, and welcome to a significant update to a podcast we brought you back in July on the state budget. back then we were kind of focusing on a lot of transparency issues, but we were also looking at what could have been a kind of a revenue cliff that was looming for the new legislature and the new governor when they take office, the the present occupants leaving them a bit of a a hole to fill.

Guy Gordon (00:21)
Bob Schneider’s been crunching some numbers as we receive some new data in, and our senior research associate for state affairs also

Guy Gordon (00:29)
Former staffer in the budget office and also with the House Fiscal Agencies, who he brings a lot of tools to this, has been crunching the numbers and brings us some updates. Bob, hello.

Bob Schneider (00:39)
Hey, good morning. Guy, how are you?

Guy Gordon (00:42)
Well, we we looked at this. I’m good. I think the the last time we talked, I think our discussion got a little bit that there’s this fiscal cliff, if you want to call it a cliff, maybe it was more of a bump, that that we were looking at in in the new budget year for 2028, what was kind of overshadowed by some of the other shenanigans that were going on. But you’ve had a chance. The House Fiscal Agency just dropped a new analysis for revenues.

Guy Gordon (01:08)
Is the challenge going to be as big as we thought it was going to be in July?

Bob Schneider (01:12)
It it well, it it could be on the on the budget side, on the appropriation side, it could be a little bigger. so in July,

Bob Schneider (01:19)
as you recall, we we suggested that you know that budget hole, that budget shortfall was gonna be in the range of five hundred but we had our number was five hundred and twenty-three million dollars. And this is our general fund. This is this the state’s discretionary general fund, general purpose revenue. When you look at that.

Bob Schneider (01:38)
critical discretionary budget budget grouping, we were gonna be in the whole over a half billion dollars. That was due to regular inflationary adjustments for Medicaid and state payroll costs. State employees have to get paid a little more under contracts. but a big a big big beautiful bill act provision related to food assistance or supplemental nutrition assistance program.

Bob Schneider (02:03)
states gonna need to take on three hundred and twenty million dollars in additional costs for those SNAP food assistance benefits for low income households. That when you add all that up, that’s where we were in in J July. we we were at about five hundred and five hundred and twenty three million dollar hole. The t to to pay for all the stuff that’s already in the budget plus inflation was going to be

Bob Schneider (02:28)
five hundred and twenty three million dollars more than the revenue we actually had to to

Guy Gordon (02:32)
Okay.

Bob Schneider (02:32)
fund those things and and that was the problem then.

Guy Gordon (02:36)
What’s changed?

Bob Schneider (02:36)
yeah. This new report we we dig into a couple new things. So there are two appropriations that have been l long standing for four or five budget cycles now, and have been ongoing.

Bob Schneider (02:51)
that are in this new budget for for fiscal year twenty seven are designated as one time appropriations. the first has to do with direct care workers. So direct care workers serve elderly disabled clients, maybe in ad assisted living, maybe in a nursing home, but maybe in a home too, and

Guy Gordon (03:12)
Right.

Bob Schneider (03:13)
provide, you know, care.

Bob Schneider (03:16)
We we’ve struggled to maintain a a workforce in that area and and in order

Guy Gordon (03:20)
Yeah.

Bob Schneider (03:20)
to try to address that there’s been a state funds appropriated for a wage increase, a wage uplift for that for those caregivers. so if you serve Medicaid clients, this budget supports a a wage uplift. it it it it supports some sick leave, mandated sick leave, the a new minimum wage increase is coming, all of that stuff is is paid for in the budget.

Bob Schneider (03:44)
But it’s paid for on a one time basis. Yes,

Guy Gordon (03:47)
Once. Yeah.

Bob Schneider (03:48)
it’s not it’s not in the ongoing part of the budget, which means that it’s not part of when we calculate that five hundred and twenty three million dollar hole, we’re not counting that. We’re assuming that goes away. and it’s not clear if the next governor, whoever it is, the next legislature, whatever party controls that legislature in the House and the Senate, will want to let go of that.

Bob Schneider (04:11)
that that direct care worker wage increase

Bob Schneider (04:13)
quite as easily given that it’s been an ongoing

Guy Gordon (04:14)
Well, nobody wants to go back

Guy Gordon (04:16)
to to what we were experiencing before, which was some significant direct care worker deficits in deserts, right? In in parts of our state.

Bob Schneider (04:22)
Yep. Yep. It and that that w

Bob Schneider (04:26)
we we the f the the research council put out a brief not not long ago. Carly Abramson put it out talking about that challenge and it with direct care workers. So correct. That’s that’s an issue that again, this legislature paid for it this year, but did not put it as part of their ongoing budget. so

Bob Schneider (04:45)
If the next legislature wants to appropriate it, it it needs to add it back and find the money. That’s that’s number one. And then this

Guy Gordon (04:52)
Yeah. Number two is mental health.

Bob Schneider (04:54)
yes, is a we have under a federal demonstration program for s for several years now, we have had certified community behavioral health clinics operating in the state. Those are basically safety net.

Bob Schneider (05:11)
clinics. Anyone who comes in who needs behavioral health, substance use disorder type services can come and receive them through these through these clinics. They’re broad based and the types of services they provide and and get care. and

Guy Gordon (05:27)
Yeah. And Michigan

Guy Gordon (05:28)
Sheriffs, Bob, will tell you that that’s what keeps these people out of their jails. Because too

Bob Schneider (05:34)
I I I think certainly that would be an argument that’s made. Yep.

Guy Gordon (05:38)
too often some of the big city sheriffs have said, Look, we we we are more of a mental health clinic than we are, you a a a jail anymore.

Bob Schneider (05:46)
Yep. And and and so the the the this expansion of the these community the you know these sort of safety net clinics in the budget, that that is also one twenty-five I should twenty-five percent of the funding that supports those clinics has been moved to one-time funding. So again, that’s that that’s another if if you add up both the general fund for direct care workers, the wages.

Bob Schneider (06:13)
And these community certified behavioral health clinics, it’s $165 million in general fund. Yes. Yeah. Fi $523

Guy Gordon (06:19)
So that takes us significantly above the five twenty three million that we had forecast before as being a whole.

Bob Schneider (06:25)
now becomes $688, $688 million, which is you know bumping up on a $700 million budget shortfall. so that was w this latest brief tried to elaborate on that. Is this budget shortfall could be even larger?

Bob Schneider (06:40)
if as would seem fairly likely that the the the the the next legislature’s gonna wanna look at these things and do we really want them to go away or be trimmed back significantly or do we wanna try to maintain that funding in the current budget, which has been

Guy Gordon (06:56)
Okay.

Bob Schneider (06:57)
ongoing several years.

Guy Gordon (06:59)
So looking forward to January, will there be, based on the House Fiscal Agency estimate that came out yesterday, is there going to be maybe some unanticipated revenues that will come to the rescue to

Bob Schneider (07:12)
Yeah.

Guy Gordon (07:12)
fill that hole?

Bob Schneider (07:13)
Yeah, i i it is possible. So and and this is where we have, as you said, guy, just we’re we’re we’re tape I’ll I’ll just throw the date out because it’s significant. We’re we’re taping this on Tuesday, it’s October thirteenth. yesterday on on Monday, the House Fiscal Agency put out a new revenue report and our brief talks about the revenue reports from from the the month of August that came out in September.

Guy Gordon (07:37)
Right.

Bob Schneider (07:39)
So it the picture looked different. The Senate fiscal agency did a did yeoman’s work in trying to we we talk about how these revenue reports have become very difficult to interpret for the fiscal agencies. just quickly, the roads plan that was passed throws a wrinkle into revenues. in order to pay for we don’t pay sales tax on gasoline at the pump anymore. Well that has ramifications.

Bob Schneider (08:05)
it would yeah. School schools don’t like that.

Guy Gordon (08:05)
Yeah, have to hold the schools harmless from that sales tax revenue loss.

Bob Schneider (08:09)
They would have lost millions of d hundreds of millions of dollars in revenue. The s the the the roads plan requires any revenue lost to the school aid fund has to come right out of the general fund. General purpose revenues not and it’s not specif not not necessarily from the income tax, from the sales tax, corporate just something has to

Bob Schneider (08:30)
pick up revenue from the general fund and take it and move it to the school aid fund. and it it it’s on the mag it’s over it was expected to be over six hundred million dollars. In all likelihood it’s gonna be much more now that gas prices are much higher than I think we were anticipating for a more extended period of time. So that made this revenue these revenue estimates unique uniquely hard for the fiscal agencies. When we were Yeah. Yeah.

Guy Gordon (08:53)
Right. And so there was kind of a divergence between

Guy Gordon (08:56)
House Fiscal Agency and Senate, right?

Bob Schneider (08:58)
the the I think

Bob Schneider (09:01)
There was a recognition that that there was that that the the numbers they were reporting, each month they report, look, here’s where revenues

Bob Schneider (09:08)
are, and here’s our estimate for in terms of the general fund, in terms of the school aid fund, do we seem to be ahead of where we were year to date from last for from or I’m sorry, from the May May forecasts? Or are we behind? So because of this wrinkle, both both the agencies were saying, We’re not exactly sure. We’re gonna report the numbers we see.

Bob Schneider (09:30)
But we haven’t controlled for the shift that’s coming. The Senate fiscal agency last month said we we’re gonna try to control for it now. We think we have a path to do that. And they were estimating that we were on the general fund side, which is this important shortfall we’re talking about, that we’re actually down by $150 million from our forecasted level in the May consensus revenue estimating conference.

Bob Schneider (09:55)
Our our interpretation as now we’re probably at best maybe we break even on the general fund and maybe there’s a downside risk. Well, yesterday the House Fiscal Agency, and I and I think I’ll say this out loud, I think the fiscal agencies, I think the Department of Treasury have been trying to talk and get it unwind from this nuance in the revenues. The the House Fiscal Agency put out its first report and it is showing that we are actually up

Bob Schneider (10:23)
by seven hundred and sixteen million dollars in the general fund now. and and that is two bits of good news. One, they untangled the the wrinkle and it seems like it’s much more beneficial to the general fund. But two, we had a huge month in September for revenues. revenues were up if you look at September twenty twenty six to September twenty twenty five.

Bob Schneider (10:49)
Revenues were up this year four hundred and twenty nine million dollars. that’s eleven and a half percent higher than last year. So we had a huge windfall in in in September that we just learned about. And it looks like everything is breaking better for the general fund. Both funds will be up, but the general fund is now up much more significantly. And

Guy Gordon (11:12)
Okay.

Bob Schneider (11:13)
now if I was a betting man, I thought, well

Bob Schneider (11:17)
General fund at best, maybe it’s even. Maybe we have a a a slight downward revision. Now this this brings up the possibility that general fund is going to be better than we thought. and maybe we you know the odds of an upward revision now increase significantly. Two two things, just two caveats. The these these monthly numbers jump around.

Bob Schneider (11:39)
you can have all of a sudden we get this big bump.

Bob Schneider (11:41)
Well, maybe that’s just recognizing revenue that normally we would have gotten next month. And and if that’s the case, this doesn’t mean this doesn’t mean

Guy Gordon (11:46)
Right, right, right. Did we pull it forward?

Bob Schneider (11:49)
much at all. Two, we don’t know. We’re talking now about revenue estimates for this fiscal year that just closed. the big question is what is w what happens in twenty seven? What happens in fiscal year twenty eight? Is this bump that we’re seeing to the extent that it’s that that that it comes to fruition, is that carrying forward?

Guy Gordon (12:09)
Right. So all eyes are on the January forecast.

Bob Schneider (12:10)
For the next two years? Yeah. Or

Bob Schneider (12:12)
yes. Or is it go, you know, is this something that’s temporary? Because there are big one-time adjustments and they don’t carry forward as much. This January for we’re about 90 days away from this new consensus fork revenue conference. And this will be very important for that for the for the budgeters, the new governor, the new legislature next year. Where do we really land?

Bob Schneider (12:37)
In twenty six now we’re probably gonna build up some money in the bank at least. But what a what looking forward, what is twenty seven, what is twenty eight revenue look like? the is this is this revenue bump, if it happens, going to mitigate a lot of this shortfall that we talked about, or are we gonna find you know, maybe not. Maybe maybe there’s some temporary

Guy Gordon (12:58)
Right.

Bob Schneider (12:59)
things happening this year and and we don’t have that kind of luck, I guess, for for twenty eight.

Guy Gordon (13:06)
So what what would you recommend putting your your your budget director’s hat on it come January? You’ve got these two significant programs that has pretty broad consensus that they should have sustainability and be extended, but in the budget at least, they’re one time expenditures. Should that be cleaned up in the new budget year to erase this question mark?

Bob Schneider (13:31)
It

Bob Schneider (13:32)
it should. So here here here is guy looking back to last year i in the in and what we didn’t know and what we found out after our report came out.

Bob Schneider (13:41)
There’s w there were one time fixes like that helped patch over a a shortfall last year. The SOAR fund, our our business attraction fund, work project lapses and things. That’s one time revenue patching over an ongoing problem. We still have an ongoing problem.

Bob Schneider (13:59)
So yes, optimally the the new leadership in the legislature, the new governor will fix the ongoing problem. They they may end up having some one time money again, but either they’re gonna need to make some cuts somewhere in the budget to make things balance again long term, or you’re gonna need to find some new revenue to afford what you want to spend. and that’s those are the only two fixes to this ongoing

Bob Schneider (14:27)
structural problem in the budget. one time revenue helps for one year, but it’s one

Guy Gordon (14:32)
Right.

Bob Schneider (14:32)
time and it doesn’t

Bob Schneider (14:33)
help the next year.

Guy Gordon (14:35)
So looking forward, if there’s a s this and this this gets into somewhat speculative, but if there should be a significant shift in the political dynamic in Lansing, and we’ve seen this this this data center anxiety really blossom. Not just anxiety, but in some cases hostility. One of the areas where they could try to recoup some money would be if they stripped

Guy Gordon (15:04)
the data center credit away that exists in in the state statute. Is that something that may come under attack in the new budget year? What other what other little bomblets or or landmines might there be for the new budget year that could become contentious?

Bob Schneider (15:21)
Yeah, th th th that certainly could could look to that. you know, data data center pr produces a lot of local re you know, local revenue too that would you know, that’s local and and not state revenue. But but the

Guy Gordon (15:31)
But it’s also subsidized by state.

Bob Schneider (15:33)
yeah,

Bob Schneider (15:33)
we we do we do have we do have state you know, state revenue subsidies to the data centers as well. and and recouping some of that could help. but yeah, I it

Bob Schneider (15:45)
It it’s gonna be a real challenge. We have you know, Republican candidates talking about tax, you know, tax reductions. and you know, that that and and and then you know, I don’t think any i if the democratic if we have a democratic governor, if we have democratic leadership and there is the a flip in in you know leadership

Bob Schneider (16:07)
r tax increases generally aren’t the first thing that’s that’s on your mind when you when you come into office either.

Guy Gordon (16:11)
Well no, and and not when

Guy Gordon (16:13)
we made eliminating the state income tax one of your you know, your

Bob Schneider (16:17)
Yep.

Guy Gordon (16:19)
the one of the the tent poles of your of your platform.

Bob Schneider (16:21)
Yeah, I I I I I think th they could get very fortunate, whoever’s in power, and you could see natural revenue growth all of a sudden bump up and help you get rid of some of this this deficit. But any one thing, even the data centers probably aren’t, you know, there’s no silver bullet to this. you you will you will need to look at broader tax increases or budget reductions.

Bob Schneider (16:48)
to solve what’s a structural whole. And at some point in time, w within this next two year term of a new legislature, a new house, the the governor taking on a a new term, that’s gonna have to be addressed, I think.

Guy Gordon (17:02)
All right. Anything else on your horizons as we await maybe what will be confirmation of the House Fiscal Agency numbers from the the Senate fiscal agency.

Bob Schneider (17:10)
Yeah. Yeah,

Bob Schneider (17:11)
I I’m looking forward to seeing the Senate fiscal numbers to see how close they are. I suspect they’ll be reasonably close given I I’m I’m assuming dialogue that’s been going on for a month between the key stakeholders and the revenue estimation process from Treasury and the fiscal agencies. And and then we’ll we’ll know even more about how much consensus there is right now.

Guy Gordon (17:31)
So they they have a an an a fiscal knot that they must unravel as as Act One when they begin the new budget process, but they may have some tools to unravel it that they didn’t have a few months ago.

Bob Schneider (17:42)
Yep. We’ll it in in so that we’ll we’ll see what January says. And then even more importantly, guy, regardless of what the January estimates are, we’ll see where the economy’s going also in the next year or two because those estimates may be wrong if we you know, if if the economy comes to a skid sometime during twenty seven or twenty eight. but

Guy Gordon (18:03)
Well, and it seems

Guy Gordon (18:03)
that this new Federal Reserve chairman is insistent on on making sure that they have a legitimate attack against inflation and

Bob Schneider (18:11)
Yeah.

Guy Gordon (18:11)
and that includes you know, how’s how much will they they’ve they’ve telegraphed that they may raise interest rates at least one more time. How much will that slow things down?

Bob Schneider (18:20)
Yeah, w it that’s always hard to tell. but it’s not it’s not good for the economy

Guy Gordon (18:24)
Yeah.

Bob Schneider (18:24)
when when we’re when we’re raising interest rates to try to fend off inflation. I do think that’s probably the wise course, even though it comes with some austerity pain. But you know, at some point you do need to to tame the inflation in order to keep from having an even worse issue.

Bob Schneider (18:43)
later in the road. The early nineteen eighties, for instance, we had a horrible bout of inflation. We went through a very severe recession eventually in order to get that under control. so yeah.

Guy Gordon (18:53)
Well, and also

Guy Gordon (18:53)
we have the effect of the Canadian tariffs or the tariffs

Bob Schneider (18:56)
Yep. Yep.

Guy Gordon (18:58)
on Canada here, but Michiganers paying higher prices for something, some revenue drops because we’re not seeing the tourism we used to see. All of it, something that hopefully can be addressed and reconciled in in the new year, or at least on the other side of the November third elections.

Bob Schneider (19:12)
Yes indeed.

Guy Gordon (19:14)
All right, Bob. Thanks very much for that update. We sure appreciate it.

Bob Schneider (19:17)
Yep. Thank you, guy. good to be here again.

Guy Gordon (19:18)
And as

Guy Gordon (19:19)
and as always on the Facts Matter Podcast, if you enjoy and find our approach useful, this very objective, nonpartisan approach and analysis to our state budget and other issues confronting Michiganders, we invite you to go to the CRCMish dot org website and make a small donation, as we say around here, a fact what is it? A a think fact tank can’t run on fumes.

Bob Schneider (19:42)
Faint fac fact

Bob Schneider (19:44)
fact tank can’t run on fumes, right?

Guy Gordon (19:47)
It’s

Guy Gordon (19:47)
not easy. Sounds too much like fat tank, and that hits too close to home for me. Bob, thanks so much. Take care.

Bob Schneider (19:53)
Thank you.

Guy Gordon (19:53)
Until next time, I’m Guy Gordon. We’ll see you soon.