The size of the state budget is a big number, and a misleading one; most state revenues are earmarked, due to the growing role of federal allocations for specific purposes.

FOR IMMEDIATE RELEASE

Contact: Nancy Derringer, nderringer@crcmich.org, 734-548-0033; or Eric Lupher, elupher@crcmich.org, 734-542-8001

What we found:

• Michigan has become more dependent on federal dollars to fund state programs since the turn of the millennium.
• This has coincided with a slowdown in the growth of state discretionary dollars – which have shrunk from 40 percent of the state budget to less than 20 percent.
• State funding used to match federal funding has drawn increased amounts of the limited discretionary dollars collected by the state, furthering the impact on the state budget.

Over the last 30 years, a steady shift has been occurring in the state’s accounts, unbeknownst to average citizens, as Michigan has navigated stormy economic seas: Where once the state’s General Fund, i.e., the pool of state dollars not allocated to any particular program or service area, was the largest share of the budget, today the situation is reversed. Thanks to the increasing role of the federal government in funding health care (in the form of the Medicaid expansion), as well as other fiscal issues, today those dollars are the largest share of the state’s budget.

“We generally think of the state budget as a means of prioritizing spending,” said Eric Lupher, President of the Citizens Research Council. “But the high levels of restrictions on the use of money the state receives means that the budget is mainly a tool for connecting the restricted dollars to their designated purpose.

“Michigan’s ongoing efforts to deal with the coronavirus pandemic and the consequent stay-at-home orders are deeply affecting the economy,” continued Lupher. “As a result of the federal, constitutional, and statutory restrictions on revenues, the amount of dollars that can be redirected is quite small relative to the overall budget.”

In the past, we’ve compared the budget to a swimming pool. What looks like a deep pool of $60 billion, free to be enjoyed by all, is really more like a municipal park in high summer, with a large area roped off for children (the School Aid Fund), and another for water aerobics (Medicaid) and the smallest for open swimming. It’s an imperfect metaphor, but to understand state finances, the ropes are more important than the water.

Generally speaking, state spending comes from three primary financing pools:

• General Fund/General Purpose, revenue that is not legally dedicated to any specific program;
• Restricted funds, such as the School Aid Fund, revenue constitutionally and statutorily earmarked for specific programs; and
• Federal funds, almost always appropriated for a specific purpose

In the early 1990s, the biggest of these three was the General Fund, comprising 39 percent. Federal and restricted funds amounted to 29 and 32 percent, respectively. Proposal A of 1994 shifted responsibility for funding public schools from local property taxes to state-level taxes and with this change the state budget saw a massive uptick in restricted funds.

But it was the decade-long single-state recession, followed by the Great Recession and Medicaid expansion that really reordered the budget shares. By 2019, restricted funds and federal funds comprised almost equal shares of the budget at about 41 percent each, with the General Fund at 18 percent.

What does this mean for Michigan residents?

Fewer discretionary dollars to spend gives budget writers far less leeway in setting the state’s spending priorities. Many federal programs and funding come with a required match from the state, which consumes more resources. And the Great Recession hit Michigan harder than most; in inflation-adjusted amounts, 2019 revenue is $3 billion less than in FY2000.

These are grim realities, but vital for both the public and policymakers to understand as the coronavirus pandemic has upended Governor Whitmer’s initial budget plan. We don’t want to be doomsayers, but those entrusted with Michigan’s finance need to see the current situation with clear eyes.

“We set out to write this paper because of the road funding needs,” Mr. Lupher said. “While the goal of finding General Fund dollars for road funding is laudatory, the roles played by federal dollars and restricted state tax dollars complicate the effort. The pandemic happened in the meantime and the importance of this report took a turn. Instead of the goal of finding available resources for road funding, state budget makers are now tasked with finding available resources to keep the lights on, to keep prisons operational, to provide healthcare, and to keep state police on the highways. The anemic growth of revenue sources not tied to a specific service over the past 20 years leaves little latitude in this effort without causing significant pain to one or more services.”

Download the Report