Good afternoon and welcome to Facts Matter, a podcast of the Citizens Research Council of Michigan. I'm Craig Thiel, I'm the research director at the CRC. And joining me today is Robert Schneider. Bob is our resident state budget, state finance guru expert. And he's joined me today just in the wake of the

May State Revenue Conference. He attended that gathering this morning where state economists, personnel from the state budget office and the fiscal agencies, as well as the state treasurer, gathered to come to some degree of consensus around where the economy is, how that assessment

plays into state revenues and what those revenues portend for the budget. Bob, welcome.

Thank you, good to be back.

I know this may be somewhat... Happy crack day, yes. I know this may be somewhat reductive, but if you had one word to describe the feeling, the mood, the sense coming out of the, going into the crack, coming during the crack and coming out of the crack, what would that word be?

Bob Schneider (01:11.822)
The budget.

Bob Schneider (01:32.398)
I think it's the word that was probably most used today, which would be sort of uncertainty and variability between the federal tariff policy, between what's going to happen at the federal level with their budget and how they're going to, the budget reductions, what's going to happen with tax policy, a lot of uncertainty on the upside and the downside. I think it was acknowledged that

It's interesting because we talked about this in January, Craig, that it was a crack that had more uncertainty than usual. And then that uncertainty, I think, is multiplied a few times. That was an easy one. Yeah.

Yeah, that was an easy one. the uncertainty we talked about three, four months ago has not resolved. If anything, it may have become even greater. So that's got to make the task for the fiscal gurus of the state a little more challenging. What were the headlines specifically about the national economy and the impacts of some of the

national challenges and coming out of the current administration and its impacts on Michigan economy. I heard high level that tariffs will have some dampening effect on job growth here in the state. Maybe you can share where those impacts might be felt and how those flow through the economy in Michigan.

Yeah, think big, big picture. I think the forecast, the economic forecast today was slower growth, not negative growth necessarily, but slower growth. If you look at real GDP, which is the common assessment at the national level of economic activity, it's still positive growth, but it's about half.

Bob Schneider (03:36.238)
Half of what was forecast in January, I think the 2 % growth in 2025, 2026 was sort of the projection back in January. It's a little over 1 % now. So not quite half, but a downgrading of that GDP forecast. Employment also still growing, but slower. And there you mentioned Michigan, there was a lot of discussion of

What do tariffs mean for Michigan? There's an upside to our, we're still an auto state, less so than maybe 20 years ago, but it's a key industry in our state. There's upside from tariffs to the auto industry and there's downsides to tariffs to the auto industry. I think the discussion today was in the best projections of the U of forecasters that participate, they forecast a

a net drop in the auto sector of about 3,300 jobs. And then of course, those 3,300 jobs have a ripple effect, an economic ripple effect. they said that the broader impact of kind of tariffs on the auto sector might cost about 13,000 jobs statewide. That's not huge, but it's enough where now...

you know, in January, employment was forecast to grow in Michigan by a little over half a percent. Now, you know, in 26 and 27, that's down to just a couple of tenths of a percent. So a slowing of employment, which is important. And I think, you know, I think one discussion point that I found interesting today, I think this next quarter, the next like four months,

June, July, August, September are going to be really telling as to upside, downside, and even we'll know a little more about what's really happening with tariffs and trade deals and the like. But we're reaching the point where those supply chain impacts, the disruptions are starting to hit. There was an expert from the Federal Reserve that spoke on the auto industry today, and she noted,

Bob Schneider (06:01.346)
both anecdotal evidence and data are suggesting supply chains are getting tighter and we're gonna start seeing those impacts soon. And I think we'll know more about the broader impacts on the economy in this next quarter. But as you opened with lots of upside and lots of downside risk, which gives this.

economic forecast a lot more margin of error than there would be in a typical one, I think.

So potential for wide swings one way or the other. as we know, we pick up the paper every day and we hear about threatened tariffs. And the next day we hear that there's a trade deal and everything's kind of been at least take a step away from the cliff, so to speak. And perhaps that may be the same going forward.

The side of the economy maybe that might be seeing some job growth, did economists talk anywhere there? I assume it might be in like non-cyclical sectors of Michigan. if we're trying to cover all the bases there, what's going on there with employment?

That's all of, so when we talk about slow growth, all of that growth is really coming from those, they call it, non-cyclical sectors of the economy. If you look across recessions, those are the ones that the big job losses. don't, unfortunately, they don't include a lot of the highest wage sector industries, manufacturing, construction.

Bob Schneider (07:51.134)
financial and business services, those do tend to react cyclically. know, retail trade and with the exception of COVID, of course, which was unique. You know, some of those, you know, service sector jobs, those are going to be driving, those are what's really driving the slow growth that is there in employment. Unfortunately, probably some of our higher wage sectors, you know, will be down.

So obviously the economy and the forecast then kind of feed into what we expect and project for state revenues. State revenues in the way of sales tax collected on the goods that consumers purchase, employment in the form of income taxes that are collected. I saw that revenues are still growing.

period of revenue contraction, but there may not be growing as much. And this revenue forecast kind of marks a first, at least in a while, estimators have come back and kind of pulled back from their previous growth expectations. Can you talk a little bit across the state general fund what the picture is there for the current year revenues?

also important looking out to next fiscal year. And then as well, we have a lot of listeners who are interested in school finance, whether they're parents of youngsters, of the 1.4 million public school students in the state, or people working in schools. What does it mean for the school aid fund? Yeah.

You mean you're right, it's probably the first time where we've had, and the revenue adjustments, I don't think this time were dramatic in size, but there was a downgrade and it was really on the general fund side. Our general fund general purpose revenue is the state's discretionary revenue. It's the focus of...

Bob Schneider (10:06.798)
95 plus most of the budget deliberations along with the school aid fund. They make up 95 percent plus of the real debates and deliberations on the budget because you know the the state does have a significant discretion on how they're spent. So that general fund general purpose revenue is is down from the January for growth overall in the trend but down from what they were forecasting in January and importantly that also then means down from

the revenues that were built into the February budget recommendation from the governor that's still being discussed. basically about a $220 million drop in general fund in our current fiscal year, fiscal year 2025, that's about a one and a half percent. And then the two next years closer to two and a half percent, maybe each year, 360 million down in the fiscal year 2026, the budget that's...

being discussed right now and deliberated in about almost 400 million in fiscal year 2027. Not huge, but two and a half percent is not, it's not nothing either, right? It's enough to require some budget adjustments. The school aid fund continued to grow. The forecast there was upgraded, but very modestly, not even a half percent. Some small upgrades to the school aid fund.

In the discussion, sounds like we know a key factor in that was an important piece of why revenues were adjusted down was the income tax and particularly income tax refunds. So when we have a lot of refunds, that refund revenue that's given back comes out of the general fund. The regular revenue that's from withholding and quarterly payments goes up.

of the general fund, but also the school aid fund. Well, it was the refunds that were driving some of the revenue losses. And I think that's why you see the emphasis on a downgrade for the general fund, general purpose revenues, and how that factored in. Nothing dramatic, but the general funds down. And we already have some challenges with completing this fiscal year 2026 budget. It'll just make those challenges.

Bob Schneider (12:31.439)
a little bit more challenging, I guess.

Yes. And we are kind of near the end of the current year budget, 24, 25. I heard you mention some reduction in general fund revenue. No legislators aren't going to have to revisit the current year budget, make any cuts to accommodate those revenue reductions that you can know.

Yeah, no, because we do still have a general fund balance. The governor's budget recommendation for next for the oncoming year and in fiscal year 26 uses that, but it's still available. So we have a buffer now. It's it'll all factor into 2026 and what remains available kind of in 2026. So we're OK today. But these 26 budget deliberations will be impacted, you know, marginally by this.

And so the governor brought her proposal forward to the legislature earlier in the year. And as you just commented, of spent all the money that was in savings. So obviously with the downgrade in the current year revenue and the downgrade for next year's revenue suggests that the governor's budget would have to be pared back. I know the Senate passed its budget this week. I assume

and those bottom line numbers were kind of in line with the governor's. So probably reworking some of the governor's proposals, some of the Senate proposals to get things in line for next year's budget.

Craig Thiel (14:11.264)
On the budget, where do things stand at least procedurally where we're at and with these kind of increased challenges, what's your suspicion about getting this done by a July 1 deadline that a lot of the entities that rely on the state budget really hope that that deadline's met?

Yeah, I don't have a lot of confidence that we're going to be done by July 1. You know, as you said, the Senate has passed budget bills for the departments and they were in line generally, especially on the state funded side. General fund, it was very, very close to what the governor proposed. So that's there.

The House has not advanced any bills out of subcommittee yet. And then, you know, whether it's the House or the Senate, we know the road funding discussions continue. And we've talked about it several times, you know, in our research and in testimony to the legislature. That's going to really frame how this budget can look. Because if we, whether it's the House proposal,

or the governor's proposal that's kind of outlined a bit. Both call on redirecting revenue to different degrees, but both call on redirecting revenue, the budget that was just, you know, that the governor introduced, the budget that the Senate passed, those can't be the final budget if you're gonna redirect a billion, two billion, three billion, you know, to roads.

So there's gonna need to be some adjustments to what the Senate passed. And then we don't have anything yet for the House to give us their roadmap. to me, the first thing is what happens with roads? it gonna raise 3 billion or less? What's the split between new taxes and redirected revenue?

Bob Schneider (16:27.214)
That's going to set the framework for finishing the budget and we kind of need to know what that is before we finish the budget and I don't see that happening anytime soon. And you know, so that's the, you know, $100 million question, I guess. And you know, and then, you know, we could talk about these two. There are some other factors hanging out there, you know, that the state needs to, you know, be looking at too at the federal level.

Yeah, and exactly, federal budget and federal dollars make up about 40 % of the statewide $82 billion figure. Substantial funding that is paired with the state resources to provide everything from healthcare services, public assistance services,

The uncertainty around federal budget being driven by cuts in the federal outlays, lot of attention on Medicaid and the federal US House budget resolution called for $880 billion cuts in Medicaid really got a lot of the

interest groups in Michigan concerned rallying around protecting Medicaid.

you know, do you think resolution at the federal level will impact the state budget, maybe with some insights here on the Medicaid portion?

Bob Schneider (18:06.414)
I think the more likely outcome now, first is not, there's no resolution yet. We'll need to, but the framework that's out in the house, the US House plan contains kind of less worrisome proposals than maybe were considered at some point in terms of Medicaid. There were talk about raising

you know, direct state support for certain Medicaid programs, which in Medicaid for listeners, it's, you know, it's a shared federal state funded program. Those seem to have the idea of increasing state contributions for Medicaid or the Healthy Michigan Plan or Medicaid expansion don't seem to be as prominent now, perhaps because of some of the public pushback on it.

the idea of, nixing all putting harsh limits on provider taxes. the most, burdensome to the States, least, proposals seem to have, been put pulled back on a little bit. think it, it, seems like Medicaid work requirements are going forward, at least in the house. and that that will be a key piece of those savings.

those probably won't hit right away. From what I read in 2027 is probably a likely start date if that actually goes forward. The state is gonna probably be, it seems like at least the House plan has started to focus on having states contribute a little bit more towards food assistance, SNAP, the Supplemental Nutrition Assistance Program, which is benefits are now.

entirely federally funded. The states may have to make a contribution tied to some error rate measures on payment errors and that will be part of those savings. But in terms of the House bill, it looks a little better for states than kind of the worst fears might have been. I do want to, you know, we talked about it before, I'll raise one issue that's a more recent development.

Bob Schneider (20:30.892)
Michigan has an insurance provider assessment. This is our latest tax in a long line of different taxes on health plans, particularly Medicaid health plans. And with the insurance provider assessment, it includes private health plans, non-Medicaid health plans as well. Some new federal rules that the US HHS just proposed.

appear to be might be the day if they were to advance and become final rules, they may be the death knell for that tax. And just for background, that's we collect over 600 million from the insurance provider assessment. And it basically helps us save probably 400 $500 million in general fund. So if not for the tax,

we'd have another four or $500 million in general fund that we'd need to support our Medicaid programs. This looks like a real proposal and one that's probably likely the Trump administration appeared supportive and is going to reach the finish line and down the road. And this could be sooner rather than later too. It's the timing is still very unclear. But yeah, if that advances, would be a big, that would be a big budget hit to Michigan and

and a handful of other states that have kind of used creative tax measures to help finance Medicaid.

Yeah, so perhaps getting the $80 billion cuts out of Medicaid at the federal level have shifted to basically cutting Medicaid spending at the federal level by cutting off the ability of states to levy this tax. so the federal government, the administration is probably going to get the budget.

Craig Thiel (22:32.84)
it wants and it's largely going to come at the expense of states in some way, especially with the combination financing responsibility for Medicaid, think, is kind of what I'm hearing here.

And we should we should be clear that that's today. So in a I think the IPA thing in the rule, I think I think that's it seems likely that's going to happen with the rest of it. It looks like it's it's coalescing kind of around a less burdensome hit on states, burdensome on recipients of Medicaid, but not not on the states.

financially at least. But that could change too. And then there's going to be more negotiations with the Senate as well on what that ends up looking like.

Well, again, it sounds like a lot of uncertainty here. And we're hoping that our discussion this afternoon might have provided some insights on that, the uncertainty that's at play, at least as it comes to state revenues and state budget. But I can tell you with certainty, I'm Craig Thiel with the Citizens Research Council, and I've been joined by Bob Schneider.

State Affairs Director here at the Research Council, and you've been listening to Facts Matter, the CRC podcast. Make sure you tune in, catch all of our research online at crcmish.org and on Twitter at crcmish. Again, this is Facts Matter, a citizens research podcast. Thank you for listening. Take care.