Guy Gordon (00:02.075)
Hello and welcome to our Facts Matter podcast. I’m Guy Gordon. This is a production of the Citizens Research Council of Michigan. And this is our opening salvo as we cover the 2027 fiscal year budget. Governor Gretchen Whitmer has already made her opening bid and that’s what we’ll be dissecting today. And who better to join us than Craig Thiel, real search director for Citizens Research Council. Also someone who has years of experience with the House and Senate fiscal agencies. Craig, welcome.

Craig Thiel (00:32.728)
glad to be here, guy.

Guy Gordon (00:34.501)
And also Bob Schneider, our Senior Research Associate for State Affairs, also someone who has experience in the state budget office and at House Fiscal as well. And Bob, welcome to you.

Bob Schneider (00:47.066)
Thanks for having me on.

Guy Gordon (00:48.529)
So this is a little bit like eating an elephant. We’re going to do it one bite at a time. And we’re going to start with Bob, who’s going to focus on the general fund. Craig is going to be looking at the school aid fund, both of which have had some consequential changes, some interesting things happening with their surplus. If this budget year is notable for no other reason, then this is Gretchen Whitmer’s last and in year eight, she’s discovered some new priorities. We’ll talk about that.

as well but for the 30,000 foot overview. So as we look ahead to fiscal year 2027 beginning October 1st, Bob, we even if we keep appropriations at the same level, we’re in a hole.

Bob Schneider (06:46.99)
We are and you know, that’s largely due to things that happened last October. We have a road funding package that eliminated the sales tax on motor fuel that’s hitting our revenues. We have the one big beautiful bill act. We have some new tax relief that’s hitting those general fund revenues. you know, that’s most of our, most of the adjustments that were just

that were just agreed on in our revenues. I really do to that stuff, a much smaller part was kind of hit us by surprise.

Guy Gordon (07:26.937)
Right, a smaller revenue estimate. under normal circumstances, when we would look at that, and by the way, we covered this extensively in our Facts Matter podcast throughout 2025, as soon as OBMA was passed. So it’s not like we didn’t see this train coming down the track. Under normal circumstances, that would initiate belt tightening. Do we see that in this budget?

Bob Schneider (07:49.547)
We don’t. this budget is pretty light on cuts. Instead, it leans into new revenues and fund shifts. More school aid fund for the universities, which saves this general fund that would otherwise go to universities. Tax proposals, a whole bunch of tax proposals that will help offset general fund that would have been needed in the budget.

Rather than reductions in belt tightening, you said, Guy, the governors leaned on other revenue enhancements to sort of make the hole go away.

Guy Gordon (08:27.813)
And let’s talk about that because there’s one that she’s leaned on, which raised some eyebrows and that is a $400 million dip into the rainy day fund. This is not a classic rainy day scenario. We are not in a recession or as Michigan so often finds itself in, know, where we have the flu when everybody else is sneezing. Craig, Bob, do you guys see this as fitting what would be a justifiable rainy day fund access?

Bob Schneider (08:36.088)
Yeah. Yep.

Bob Schneider (08:55.614)
You know, it’s not, we’re not in a recession. the, yeah, yeah, just a very small one, which is what can trigger a statutory withdrawal from the rainy day fund, or at least allow you that option. And importantly, we’re using, the rainy day fund is a one-time resource. When we have a recession, revenue goes down

Guy Gordon (09:03.557)
We haven’t seen a precipitous drop in personal incomes.

Bob Schneider (09:25.582)
for a short time and then rebounds, but we’re not in a recession. And really this use of the rainy day fund is to sort of push off, in my mind, is really to push off cuts that would otherwise be necessary to make the budget balance. And that’s where it feels a little, maybe a little untoward, right? And not the best use, especially since we really ought to be

increasing that rainy day fund more before we should feel real comfortable that we’re ready for the next recession.

Guy Gordon (10:02.001)
Greg, your thoughts on this as well?

Craig Thiel (10:04.25)
Yeah, Bob and I have lived through the rainy day fund being drained back in the single state recession of the early aughts. that was a transformation of the state’s economy. The budget was being reformatted, and the rainy day fund got drained.

Guy Gordon (10:11.024)
Right.

Craig Thiel (10:31.164)
for economic reasons and budgetary reasons. This time around, it doesn’t appear that there are economic reasons to be draining the rainy day fund. And the budget reasons are really kind of a short-term solution, as Bob had suggested. You can only use $400 million one time. Then you have to go and grab another $400 million. So as Bob pointed out, it’ll probably put

push off the reckoning with the spending side of the budget. Bob talked about the general fund side of the budget and the revenues being down and the impacts from OBA. The school aid fund side of the budget has been holding its own. In fact, it’s growing healthy.

largely because it’s been protected from some of the decisions that lawmakers have made to fund roads out of existing state dollars, mainly the general fund, as well as going back to some other tax policy changes. We passed a few years back a sales tax exemption for the purchase of data center equipment.

Guy Gordon (11:29.275)
Right.

Craig Thiel (11:51.076)
because the vast majority of our sales tax revenue goes to the school aid fund, that would have automatically triggered a ding to the school aid fund and the amount of money that’s available to schools. But lawmakers wanted to protect school funding and pushed all of the tax relief from the data center exemption onto the general fund. the general fund is kind of dealing with

a series of impacts right now that are not the same that the school aid fund is experiencing.

Guy Gordon (12:26.351)
No, but you brought something up in our discussions earlier, which is the school aid fund has had a sizable surplus, but we are winnowing that down as well.

Craig Thiel (12:38.684)
Yeah, in fact, our presentation on our budget webinar showed that the state had, I don’t know if I’m able to show this with the viewers or not.

Guy Gordon (13:11.111)
There we go.

Craig Thiel (13:11.93)
Yeah, so just as early as 2022, the school aid fund was sitting on about a $4.5 billion surplus. Some of that was one time in nature. These would have been from things that were not baked into the ongoing revenue estimates, but are one time. But a good portion of this, close to

$2 billion was ongoing surplus. And slowly, we’ve been eating into that over the last three fiscal years. And notably, by the end of the 27 budget year, if the governor’s proposal goes forward as it’s written, it’ll be zeroed out. So we would have burned through close to, on average, a little less than a billion dollars a year of surplus funds.

over and above what the school aid funds all generating on an annual basis. So spending on schools has really been on an upward trajectory in the state as as

Guy Gordon (14:24.987)
Well, and let me ask you about that. It’s because this is what I hear from taxpayers all the time in coffee shops and elsewhere. They will say, OK, guy, how is it that we’re spending billions more in the school aid fund for schools, but we’ve had this huge enrollment shrinkage? At what point do we see the actual cost of education decline? Is the demand for it declines?

Craig Thiel (14:41.552)
Yeah, yeah.

Craig Thiel (14:49.028)
Yeah, yeah. Well, you touched on another dynamic that’s happening at the same time, which is this declining enrollment. And obviously, that is a function of a number of factors, demographic. People are deciding to have fewer children. People are migrating out of the state. But Michigan’s been dealing with declining student enrollment for over two decades now. And what that means is if the

amount of money going in the school aid fund is increasing and there’s fewer students, there’s more money per pupil going to schools and that’s exactly what’s been happening. Some of that money’s been eaten up with inflation, wage inflation, healthcare inflation, these are costs that school districts have to… Right, and this has been a sore point for Michigan because states that…

Guy Gordon (15:37.573)
And yet our outcomes have been worse, not better.

Craig Thiel (15:47.004)
generally are flagging in terms of academic performance, there might be, you know, kind of flat funding. Michigan is just the opposite. We’ve seen increased funding. Now, a lot of that funding has gone into things that aren’t directly related to the classroom. We had a huge underfunding of our state pension system. So we’re now putting $2 billion of state dollars into our pension system to catch up on.

liabilities that went unpaid for a number of years. there are some non-classroom spending that’s factored into this. But the foundation allowance is up 30 % over the last seven years. That’s in excess of inflation. Funding for low-income students is up over 150%.

Guy Gordon (16:31.131)
Mm-hmm.

Guy Gordon (16:39.771)
Well, and there’s some very specific things that the governor put into this budget that I want to get to in a moment when we get into a bit of a deeper dive here. So hold that thought for a moment. Bob, I want to get back to you on the general fund. We talked about the impact of OBBA. We never discussed why there is this need to dip into the $400 million rainy day, make the $400 million dip in the rainy day fund. It’s because of the impact on Medicaid, isn’t it?

Bob Schneider (17:03.47)
Actually, not yet. Part of the pressures in this budget are related to our food assistance program. all have SNAP, the Supplemental Nutrition Assistance Program. Yep. Yep. So that’s hitting us in 27. More will be coming with Medicaid.

Guy Gordon (17:12.625)
Snap. Okay.

Guy Gordon (17:16.817)
That’s a $94 million hit with the cost shift from feds to state.

Bob Schneider (17:28.262)
We have a provider tax for hospitals that’s going to have to be trimmed down. That’s going to mean more of the state’s own dollars are going to need to be put towards Medicaid. we haven’t hit the, you know, we haven’t hit the peak of that yet. That’s still coming, which is another reason why this is scary. You know, we’re using budget stabilization fund revenue now. And we may need access to some of it later when some of these things start to creep into the budget even more.

Guy Gordon (17:43.044)
No, but we do have, for instance-

Guy Gordon (17:57.265)
But there is a significant cost to the eligibility requirements, to the oversight of that. I know the governor wants to try to help people become work eligible and to satisfy that requirement. There’s a cost involved in that upfront.

Bob Schneider (18:15.96)
Yes, is. that is hitting this year’s budget is some of the, and I would call them early still, early cost of administering some of the big, beautiful bill act funding. So I think DHHS, the proposal has 589 new workers and other oversight and outreach activities that are gonna hit us. think the Department of Labor and Economic Opportunity

And the Michigan Works agencies around the state are going to need to help people who are trying to navigate those requirements get employment. And there’s some additional funding, all total, I it’s about $100 million in general fund to do those types of administrative work to help make those eligibility determinations and help those who need to find employment and work.

Guy Gordon (19:11.376)
right.

Bob Schneider (19:13.966)
meet those work requirements to have the opportunity to do it.

Guy Gordon (19:17.731)
Now is there though also going to be some shrinkage in the SNAP load and the Medicaid load as a result of these new work requirements that either some folks will be rendered ineligible or because they get work training go back to work maybe they will grow out of Medicaid eligibility so there’s some associated savings there as well.

Bob Schneider (19:39.707)
There is on the snap side right now it’s it’s in it and even in the future, it’ll be almost all federal. But on the Medicaid side, to the extent that we see, you know, there’s there’s two concerns is you lose, you lose people off of the Medicaid case roads. The good thing would be if they found jobs and earn their way off. The worst part would be if they are they can’t navigate the new the new hoops and and

Guy Gordon (19:58.792)
Exactly.

Bob Schneider (20:09.624)
They’re still poor, they miss a step and all of sudden they’re ineligible even temporarily and are without healthcare. That’s part of what the state, what some of the new workers and oversight and outreach is, is to try to minimize that from happening and to make sure that folks can find work support when they need it to stay eligible.

Guy Gordon (20:31.12)
Right.

Guy Gordon (20:38.395)
This budget, gentlemen, also has a rather healthy load of sin taxes, a 50 % increase in the cigarette tax per pack. The tipping fees for garbage would go up from 36 cents per ton to five bucks per ton. I think that’s about a 14 to 15 times increase. Things we’ve heard and seen her propose before, notable in reliance on that and

Do those tend to deliver as much revenue as advertised when they’re proposed?

Bob Schneider (21:15.182)
I think in these cases, I mean, there’s some that I have to be a little speculative, but I think there’s a digital advertising tax that I don’t think will really know what we’re going to get until it’s in place. It’s interesting. The governor has made a lot, as you said, made a lot of new tax proposals really in order to generate revenue.

to fund a lot of increases that she’s included in her budget. I think the governor probably realizes that politically, some of these are gonna be difficult to get agreement with at a minimum, the Republican-led House. We’ll see where these go. I think a lot of these aren’t gonna politically make it.

Guy Gordon (21:47.175)
Mm-hmm.

Guy Gordon (22:00.97)
huh.

Bob Schneider (22:12.59)
But perhaps there’s some strategy to this too. Perhaps the governor’s, you know what? This is my plan. If you don’t want to raise these taxes, then you identify the cuts before the election and we’ll see where we go.

Guy Gordon (22:24.123)
And that may be a caution flag, and we’ll be getting, there’s a few others in this budget as well. Finally, on the general fund side, we are seeing some pretty dramatic expanded priorities when it comes to health and human services,

Bob Schneider (22:39.975)
Yeah, there’s a new psychiatric hospital that I think you can argue is probably a needed investment for the state at some point in time.

Guy Gordon (22:48.603)
And by the way, there’s going to be a special wing there just for people that go through these budgets with a fine tooth comb, just so you know.

Bob Schneider (22:54.378)
Yeah!

Craig Thiel (22:54.828)
Hahaha.

Bob Schneider (22:57.548)
Yeah, yes, indeed. So yeah, that’s some programs to help our direct care workforce that often has a difficult job. And we’re trying to make sure they’re paid a wage that will keep them doing the work that they do. yes. And as you said, as we talked about at the beginning, guy

there wasn’t room in the budget for these things. So the governor made room by doing the BSF withdrawal, by proposing all of these tax increases to really pay for not only HR1, not only some of the Medicaid pressures, but the psych hospital, the direct care worker enhancements. those things can’t happen without either

new revenue or alternative cuts. And she decided she was going to propose new revenue and not the belt tightening cuts.

Guy Gordon (24:05.169)
Craig, you talked about the 2.5 % increase in the foundation grant for the average student here, and that there are some dramatic increases in spending here. But one of the things that is built into this as well is some significant programs for at-risk students and especially targeting literacy, as we now have the sad distinction of having the worst third grade reading scores in America.

Craig Thiel (24:32.954)
Yeah, yeah, the governor signaled that this was going to be a priority for her last year in office, late last year when she met with the education community. We were waiting for this budget to see if she was going to put some money behind the talking points. And she has in this budget. She’s included money for expanded tutoring services.

in districts, extra money for high quality curriculum. Michigan school districts were using over 400 different early learning curricula, literacy curricula. The state put together a commission and they came up with a much

Guy Gordon (25:11.078)
Mm-hmm.

Guy Gordon (25:16.007)
you

Craig Thiel (25:27.384)
more narrowed down focus. And so now the governor is saying, hey, we’ve done the work to vet the curricula. Now here’s some money for you school districts to go out and buy that curricula. If you buy the program that’s not working, don’t expect us to pay for it. So there’s dollars in the budget for that. There’s some dollars for some before or after school programming, which loosely

helps in the classroom. It’s not entirely all for academics, but it will help with some of the learning loss that happens, you know, in the summer months when kids are not in the class. So these summer programs will address that. So about $600 million between direct and indirect investments in this budget for early literacy. And then you mentioned

Guy Gordon (26:18.863)
Mm-hmm.

Craig Thiel (26:23.76)
guide, there’s been a focus on funding for low income students. The governor will have seen an increase of about 150 % since the time she took office in the per pupil allocation for low income students. And this is a recognition that all kids, not all kids start their K-12 journey at the same point. Some don’t have the same exposure early on in life to learning that others do. So

Guy Gordon (26:45.031)
Right.

Craig Thiel (26:53.328)
those resources will make a difference.

Guy Gordon (26:56.099)
There’s also some significant funding for mental health in K through 12, which we hear a lot about in the aftermath of some of these mass casualty events that we’ve unfortunately experienced in Michigan. That certainly would seem to be a good thing. Let’s look ahead to fiscal year 28. Where are we on the revenue spectrum, Bob? When it comes to that year, we will see some revenue rebounds, but it won’t necessarily be a net gain. We’re going to be a

about where we were in 2025, right?

you’re muted, sir.

Guy Gordon (27:33.66)
There we go.

Bob Schneider (27:35.723)
Yeah, yeah, you know, we go into the road package, some of the adjustments that were made, put us in a hole. We will rebound from that. But as you said, not till 2028. It’ll be three years, we’ll get back up to the same level of general fund. And then when we look at that budget that’s going to be introduced about a year from now, we’ll basically be in the, general fund side again, we’ll basically be in the same place.

in a little bit of a hole and we know we have to pay state employees more. We know Medicaid is going to grow in cost. We know other things are going to push costs up a little bit. The House Fiscal Agency just did a presentation last week and they projected we’d have about a $450 million budget deficit on the general fund side when you compare costs versus the revenues that we have, which is basically where we were at.

Guy Gordon (28:28.103)
Okay.

Bob Schneider (28:32.622)
where we were at this year.

Guy Gordon (28:35.015)
And in terms of fund balances at the end of 27, where will we be? Especially, especially given the fact that there was a $12 billion fund balance, how long ago? Two, three years ago?

Bob Schneider (28:40.888)
zero.

Bob Schneider (28:45.902)
Yeah. Yeah, about 2022, I think is when it peaked. School AideSide 2 on Craig’s, both will largely be depleted. Yeah. So we had plush revenues too driving those for a lot of years. those are just, those are gone. We’re kind of back to normal. spent down those, we’ve spent down those fund balances and now

Guy Gordon (28:55.953)
Time flies when you’re spending billions, you know? I mean…

Bob Schneider (29:14.73)
you know, the school aid side’s doing okay, but general fund, it’s going to be tight for a number of years, I think, now.

Guy Gordon (29:22.425)
Let’s look at some of the flashing yellow lights that as we head into what has traditionally been, especially with the House and Senate held by different parties, a contentious process. Number one would be the idea of dipping into the rainy day fund. We’re already hearing some Democrats, think, noticeably, notably Representative Susan Anthony, who said, you know, I’m not necessarily comfortable with that. Is that going to be one of the thornier parts of this budget? Do you think, gentlemen?

Bob Schneider (29:51.971)
I do, but everyone will need to realize they got to have a balanced budget. So you either have to do without the new stuff, psych hospitals, some of those enhancements or find the revenue or cut. And the governor so far has said, I don’t want to propose cuts. I expected to see some cuts, significant reductions in this budget that

Guy Gordon (29:59.185)
Right?

Guy Gordon (30:10.79)
Mm-hmm.

Bob Schneider (30:21.472)
And that’s the governor’s prerogative to propose that. right, the rainy day fund withdrawal, when you’re covering a this year that’s still going to be there next year gets again to the covering, you know, using one-time revenue to just sort of put, fill a hole during a recession, but just push off a hole until next year. I would agree with the senator that,

Guy Gordon (30:49.401)
Okay.

Bob Schneider (30:51.618)
That’s a tough pill to swallow.

Guy Gordon (30:53.479)
And Craig, one of the other items that may draw some fire is this shift of school aid fund money into higher education. This is something that Gretchen Whitmer was dead set against before she was governor. She’s even paid lip service to not being great with it in her first term. That’s going to be causing some heartburn for some people too. And higher learning spending is about flat in this budget.

Craig Thiel (31:18.129)
A D-

Oh yeah, ed learning or higher ed spending is flat. In fact, community colleges and the public universities have kind of been living on the 2025 base funding level for the last two years. They have gotten kind of one time discretionary funds from the state, but you know, I’m sure the institutions are hesitant about programming that.

into their long-term fiscal plans because the state hasn’t committed to doing that. yes, the school aid fund switch into the higher ed will jump under the governor’s budget from about 1.3 billion in total to 1.8 billion. This isn’t gonna make the K-12 community very happy because that money traditionally has gone to public

Guy Gordon (32:05.788)
Mm-hmm.

Craig Thiel (32:17.946)
local public school districts and charters. And now it’s going to post-secondary education. But it has become part in the fabric of the state budget now. I acknowledge, and the governor probably acknowledges, that she stood firmly against that. her last budgets have increased that.

shift of money. So that’s probably acknowledging some of the challenges that are on the other side of the the general fund side of the budget.

Guy Gordon (32:51.823)
And yet everybody agrees that we need to invest in higher learning if we’re going to maintain our competitiveness in business and elsewhere. We mentioned the sin taxes and tipping fees. Those are things that may get traded away in the process. And maybe that’s why they’re in there in the first place. The school aid fund, though, even though the surplus is shrinking, still has a sizable amount in it.

Will, is there a concern out there that there could be some raids on that, especially if we choose not to go into the rainy day fund?

Craig Thiel (33:25.084)
Possibly. We noted that the school aid fund will spend all the money that’s available by the end of the 27 fiscal year. part of that $4 billion school aid surplus back in 2022, part of that was used to move into some

off-budget reserve funds and there’s about a billion dollars in there including a school aid rainy day fund which is designed to if the state has to start cutting education appropriations to backfill that and so we haven’t talked about any cutting of school aid appropriations so that money hasn’t been needed but there will be pressures to

Guy Gordon (33:59.334)
Mm-hmm.

Craig Thiel (34:13.062)
free up those dollars, whether it’s for the current school aid budget or for something in the general fund, as we talked about here, higher ed needs or what have you.

Guy Gordon (34:25.733)
All right, Bob Schneider, final thoughts?

Bob Schneider (34:30.062)
It’s going to be a really interesting budget cycle. And in an election year, you’re usually always done by July 1st, but I’m not so sure that’s going to happen this year.

Guy Gordon (34:40.279)
Right. And we remember very well, I mean, the whole school lunch debacle this last time around that we had school superintendents at the beginning of the school year that couldn’t set their budget because they didn’t have any signals from Lansing on where the budget was going to land.

Craig Thiel (34:56.208)
Yeah, yeah. you know, local governments, schools all have different fiscal years that their planning is going on right now because their budgets in some cases start on July 1st. So if July 1st is the end date for the state to get its act in order, that may not be soon enough for schools that are looking to have their budgets in place by January or by July 1st.

Guy Gordon (35:25.603)
All right, gentlemen, thank you so much for your insights. It is you say it is going to be interesting to to have a front row seat to this. And we will be here on the Facts Matter podcast to break down the changes in the negotiated settlements when they come through. Craig Thiel, Bob Schneider, thanks very much. And we want to remind you that if you to believe that facts matter and that facts should be driving public policy, not politics, perhaps you’d consider funding and helping to support.

Bob Schneider (35:41.432)
Thanks, Guy.

Guy Gordon (35:54.213)
the Citizens Research Council of Michigan, you can do that by going to crcmich.org and making a donation and thanks in advance. Until next time, I’m Guy Gordon for the Facts Matter Podcast and the Citizens Research Council. Thank you.