• The Citizens Research Council presented a webinar on the financial future of state and local governments in Michigan this week.
• A growing reliance on federal funding, shrinking discretionary dollars, and the long-term underfunding of the state’s public health system leaves Michigan especially vulnerable to this pandemic.
• Michigan has a difficult road ahead – barely recovered from past recessions, governments in Michigan will once again be asked to do more with less.

Eric Lupher, Research Council president, began with an overview of economic projections shared with the Research Council by the University of Michigan’s Research Seminar in Quantitative Economics (RSQE).

Jordon Newton, Research Associate for State Finance, looked at those projections and the history of the state’s rainy day fund balance.

“The legislature and executive office will have a slightly greater challenge in addressing the state’s budget problems because Michigan came into this crisis under-prepared,” he said, pointing out that a study by Moody’s Analytics found Michigan state reserves were below what was necessary to prevent General Fund cuts in a moderate recession. “Our current situation is worse than the analysis identified because it didn’t factor in the School Aid Fund, which also has a hole to fill with declines in sales, income, and wagering taxes,” he added.

Tim Michling, Research Associate for Health Policy noted that around three-quarters of the state’s $58.5 billion budget is for health- and education-related expenditures.

Craig Thiel, Research Director, discussed the ways these funds largely pass through the budget to various local entities, whether as allowances to school districts, revenue shared with local governments, or payments to health care providers. Thiel went on to provide a comprehensive overview of school finances, noting that one-third of districts (250 of 768) have less than 10 percent of their budgets in reserve.

Jill Roof, Research Associate for Local Government, then examined parallel problems that would be faced by Michigan’s counties and municipalities. Although property tax revenues are expected to remain fairly stable, local governments can expect less income tax revenue and state revenue sharing. 

Roof also touched on transportation funding, noting that, while the exact impact remains uncertain, revenue from taxes on gasoline will be substantially reduced, affecting local and state roads alike.

Michling returned to tie the current budget situation to the pandemic, sharing findings from the Citizens Research Council’s 2018 report on public health. Low levels of public health funding for decades had left the state especially vulnerable to the pandemic, he said

“While an influx of fiscal resources may bolster the capacity for testing and contact tracing in the short term, long-term investments in Michigan’s public health workforce and systems are needed for us to move forward responsibly as a state,” Michling said.

Lupher offered closing remarks, pointing out the inherent uncertainty and limitations in economic modeling. He also noted that answers to many important questions remain unknown at this time. Has the economic outlook changed in the weeks since the UM projections? How will the CARES Act funding allocated to Michigan for COVID-related expenses be allocated? Will there be additional federal funding for state and local governments? And most urgent: How soon will the economy reopen, and might it be closed once again by a second wave of the pandemic?