[00:00:00] Craig Thiel: Hello, and welcome to Facts Matter, the CRC podcast. My name is Craig Thiel, and I’m the Research Director at the Citizens Research Council. I want to wish everyone a happy new year, albeit a little cold here in Lansing. With the new year, as is a tradition in Lansing circles, we have, the kickoff of the state budget process.

The first step in that process is for legislators and the governor’s office to get an update on How the Michigan economy is doing, how state revenues are stacking up, and inform the budget decisions that are coming forward. We’re recording today on January 10th, just a couple hours after this most recent revenue.

Estimating conference held in Lansing and my colleague, Bob Schneider, is going to help us unpack some of the highlights from the presentations that he heard. The Revenue Estimate Conference happens twice a year, first in January, and that becomes kind of the base upon which the governor’s budget, which will be released in February, informs those proposals and recommendations.

And then the conference reconvenes in May to help, the legislature finalize its budget proposals, with updated numbers. Welcome, Bob.

[00:01:30] Bob Schneider: Thank you, Craig. Good to be here. Excited to talk about a new round of budget deliberations.

[00:01:36] Craig Thiel: Thank you. For our listeners, you know, we, we hear an update on how the national state economies are going. We get an update on, where revenues are and where they’re forecast to be. I heard listening in this morning that, you know, Michigan, and the national economies really looking at a soft landing, concerns that existed 18 months ago about a recession have really dissipated.

We’re looking at moderate growth. Employment growth, rising real incomes and growing state revenues. But with any forecast, there’s always going to be risks involved. And I understand that you picked up a few of those, and wanted to share those with us, today.

[00:02:16] Bob Schneider: There’s ~probably in, in this, uh, uh, in this.~

~Consensus revenue estimating conference, ~probably a greater degree of uncertainty and in kind of risk in the forecast than there normally are. Most of that comes from the fact that we have a new administration President Trump will be inaugurated, in the coming days. There’s uncertainty about what we know.

We’ve heard what President Trump was proposing on the campaign trail. What is his administration really going to propose, in February and in March, what are we going to hear, in terms of some important economic factors and just as importantly, what can pass a Congress that has Republican control, but a pretty slim margin in the U.

S. house, so whatever gets passed. He has talked about heavy tariffs on China. He’s talked about tariffs on Mexico, on Canada. I can tell you this forecast, the forecast we heard this morning assumes, significant tariffs, for China. Importantly, limited retaliatory tariffs. From China, and short term, limited tariffs, on other countries.

One big risk is what really happens. Do we have more retaliation from China? Does he, live up to some of the campaign talk about heavier tariffs on Canada and on Mexico, which generally have inflationary impacts, kind of contractionary impacts on the economy.

Immigration is what really happens with immigration. There was some built into the forecast we heard this morning with some tax relief. Corporate income tax is very likely going to come down. The administration has talked about significant, maybe even eliminating taxation of social security benefits.

I think this forecast today assumed limited, tax relief for social security beneficiaries, but not dramatic. So what really happens, as opposed to what was built into these forecasts, I think there’s a higher degree of variability, because all of those things will have economic impact, some positive, some negative, some inflationary, some not, and we still are waiting to see, you know, how quickly the Fed brings down interest rates more.

All of that, all the international stuff, Ukraine, Middle East, creates a lot of risk and a lot of variability and what might actually happen. I think that was the big, we always hear about those risks for every conference, but a greater degree, I think, of uncertainty, about, economic policy at the federal level.

[00:04:42] Craig Thiel: Yeah, is Michigan particularly impacted, with, some of these risks more so than other states? I’m thinking of our heavy reliance on manufacturing and the impacts, that, tariffs might have on our ability, to import, steel and other raw materials from outside the country.

[00:05:02] Bob Schneider: I think tariff policy, trade policy, is gonna have more of a ripple effect in states like Michigan with a heavy manufacturing base.

There was talk about the trajectory of what was seen at one time as this transition to electric vehicles? How does that play out over the coming years, with a new administration? That certainly is a factor that’s gonna, bear more heavily on Michigan than any other state perhaps.

[00:05:25] Craig Thiel: I am aware that we are under the gun, to look at possible changes to some automatic, increases in our minimum wage and our sick leave policies. Where is the economic forecast on those very Michigan specific policies and what they might mean for the forecast looking forward?

[00:05:48] Bob Schneider: I would assume that the forecasters probably took those into consideration.

And then again, that’s another good example that I had mentioned yet all the risk, to, you know, to the economic, to the economic conditions. We’ll see how that plays out. There’s going to be ongoing legislation, to perhaps make changes to what we see coming, down the road with minimum wage changes and the like.

I think to the extent they could, they would factor those in. But, even knowing what’s going to happen, there’s uncertainty and we’re not even sure what will happen with some of the elements of those changes.

Thanks.

[00:06:21] Craig Thiel: Well, with that background on the national and Michigan economy, Bob, those are the inputs that drive the state revenue picture. The two biggest and most important, funds that the state has at its discretion are the general fund, the school aid fund, last May when the conference met.

Things look pretty decent for the school aid fund, kind of an inflationary increase in the out years, the current 2025 fiscal year and the 2026 fiscal year, and that the general fund was pretty flat and not much room for, really any new programming or, tax, changes. What did the conference, update us with today in terms of the general fund and the school aid fund revenues?

[00:07:08] Bob Schneider: The news was good. As we talked about, the economic forecast was pretty solid. We had a little notion. This was coming. The fiscal agencies put out monthly revenue reports and for several months, they’ve been tracking up.

The year that we just finished fiscal year 24 in early fiscal year, 25 revenues had been exceeding what was expected effectively what happened is we, we discovered fiscal year 24. Just close the year that just finished, in September, in September ended up exceeding revenue, projections and the general fund by about 550 million, a sizable increase in the school aid fund, a little more than 300 million, so over 850 million of a budget.

So all of a sudden we have more revenue in the year that just closed. If you look at the growth rates that are forecast, they didn’t change very much, but that 850 plus million across the two funds carries forward. In fiscal year 25, the year that we’re in right now, we’re expecting growth in revenue

that new revenue realized in 24 carries forward into fiscal year 26. Fiscal year 24 revenues across those two big funds are up 850 million, almost 800 million in 25, and over 900 million in fiscal year 26. The fiscal year 26 budget deliberations are going to begin this coming May.

Kind of consistently carrying that new revenue into those years, what does that mean for February? If we look at the general fund side as you intimated, Craig, When we were looking at what was coming in February, based on last May’s estimates, it didn’t look very good for the general fund.

The budget that was passed, for fiscal year 25 was not going to leave any general fund balance like we have traditionally had money in the bank that we could use. For one time spending and appropriations in the budget, and there was going to be no room for growth.

If you want a new program, if you, if you want to, you know, provide for more tax relief, if there are spending pressures, which there always are human services, caseloads. Medicaid caseloads, any growth in the budget was going to have to come from somewhere else. That’s what we were looking at based on last May’s estimates.

These estimates improved the picture. Not in a, it’s not going to be a boom year like we’ve experienced maybe in some recent years. But we, it looks like basically, This new revenue, this new revenue is going to allow maybe less, probably less than 2 percent growth. So not even inflationary, probably a little below inflation, but there’s room for a bit of growth without having to cut something else in the budget on the general fund side.

The fact that we have new money. That hasn’t been appropriated for fiscal year, 24 and fiscal year, 25. Means we’ll have a half billion dollars or so of general fund balance available for one time spending or other things. We know the situation will make big budget increases difficult on the general fund side.

Incoming Minority Leader Matt Hall proposed redirecting some corporate income tax to roads. We were talking about, there was legislation that talked about, maintaining the redirection of corporate income tax revenues for the SOAR fund and, placemaking activities, maybe spending it in a different way, but keeping those going.

None of that’s in the budget yet. If any of that stuff happens, it’s going to have to come out of existing appropriations, school aid fund on the other side of things. Things look pretty good, even with the May estimates, and now they look better. I just a quick look at the numbers. If we had the old estimates from last May, we 3 percent growth in school aid fund appropriations.

Inflation plus a little room probably that’s pretty healthy. And then we maybe a 3 or 400 million dollar fund balance for one time stuff. That’s okay. Now it’s better. With these new revenue estimates. Plugging those in, if there’s a desire to increase ongoing school aid appropriations, maybe four and a half to five percent growth is achievable.

That’s well above inflation, and you’re probably going to have closer to a billion dollars in, one time money and going back to the road funding issue. There was some talk about, redirecting sales tax, to, move the sales tax on gasoline, from the school aid fund to roads.

It makes it a little more manageable, but, probably not enough money to do all that. The school aid fund should look pretty good. But again, not quite like some of the years we’ve seen more recently.

[00:11:53] Craig Thiel: That’s certainly going to be good news for our K 12 schools across the state. Especially when we look backwards, and see how the current budget was put together. A number of schools, last July when the legislature got done putting together, the state budget found out that they didn’t get a basic foundation allowance increase last year.

With. 3, 400 million of new ongoing revenue that equates to an inflationary increase in that foundation allowance, which would be about 300 to 400 per kid across the state of Michigan. Whether or not, the current divided government is going to, spend these additional resources on, Existing programs or provide some tax relief.

We don’t know yet. We do know, as you pointed out, the road funding issue has been laying in front of the legislature for a number of years, and it’s likely that this revenue improvement is going to bring that discussion back up to the forefront moving forward. Remind us again, Bob, the state budget process, with the revenue estimates now in place, what’s the next step and what’s the likely conclusion of the budget process in the coming months?

[00:13:20] Bob Schneider: So, we’ll be waiting for Governor Whitmer. To introduce her budget proposal, probably the second week of February. And that will kickstart legislative deliberations on the budget. These new revenue projections, certainly help. It converts the school aid side of things from sort of.

Kind of good. It’s actually pretty good. You have some room to do things and it takes what would have been almost a continuation. Budget on the general fund side and makes it, at least some growth with divided government now, in Michigan, that will make the whole process a little more challenging will require some compromise on both sides.

I think it will be interesting to see. I know Republicans were very interested in tax relief, Most were disappointed to see the income tax, which had temporarily fallen to, 4. 05 percent from 4. 25%. The interest in maintaining that at, 4. 25%. Again, not enough money to do that without making other cuts in the budget, but I think it will make the budget process very interesting because there’s going to be a need to compromise, with a democratic administration and Republicans, in control of the Michigan house, at least, you can react as well.

I think more resources, on the general fund side and the school aid side. Once that probably makes that a little easier. Not easy, but a little easier. I think having more resources available, to facilitate compromise is better than a really tight budget in trying to facilitate the same compromise.

We’ll see. I again, they, you know, the, there’s still, a hope that, you know, will we be done in June and July? Even with the with divided power, more resources. I think it makes it at least more likely. Yeah.

[00:15:12] Craig Thiel: Yeah. I agree. You and I have been watching the state budget process. Well, on 2 decades now and having more money compared to less money makes it easier for us to make decisions.

An easier proposition to getting, the budget over the finish line, which I’ll remind our listeners is a statutory deadline of July 1st. It’ll make it a little bit easier, but it won’t make it easy. Divided government, provides, a whole new set of, values and, priorities, as opposed to, the last 2 years where we had, Full Democrat control of the legislature and the governor’s office.

We will continue to keep our eyes on the state’s fiscal picture state budget, as well as the revenues as things move forward. Our listeners should be reminded that we’ll be doing a webinar, soon after the governor’s budget release to dig into that spending proposal, highlighting, Where, changes are being recommended, across state departments and programs.

Look for that notification from the CRC as well as, just staying in, in touch with us. We’d like you to follow us, on, Twitter, at CRC mech. And, stay tuned to, upcoming podcasts, wherever you might be getting your podcasts from, but, that concludes our discussion on the January, Consensus Revenue Estimating Conference.

Thank you for listening. Thank you, Bob, for your insights and attending the conference. Until we, have a new, podcast, for our listeners, stay warm, stay healthy and Happy New Year.