State policymakers’ recent efforts to stabilize Michigan state government finances are showing dividends. Actions taken to address the long-standing structural budget deficit and recent deposits to the state’s rainy day fund have resulted in a marked improvement in the state’s cash position compared to Fiscal Year 2007 (FY2007), when the State of Michigan had to restructure its monthly payments to local schools to avoid running out of money to satisfy its obligations. While the final FY2011 figures are not available, early reports suggest that the state has erased the accumulated year-end cash deficit in its major funds – the first time since FY2002.
In the spring of 2007, CRC drew attention to the state’s deteriorating cash situation. That report highlighted the state’s unfettered cash burn in the early 2000s that was the direct result of ignoring the structural budget problem that plagued the General and School Aid Funds. From FY2000 to FY2003, the state exhausted over $2.9 billion in major fund cash reserves and turned a sizeable cash surplus into a $1.3 billion cash deficit by FY2006; a net change of more than $4.2 billion in six years (see table).
Manageable Common Cash Year-End Balances (Millions of Dollars)
General Budget Fiscal and School Stabilization Year Aid Fund Fund Other* Total
2000 $1,631.6 $1,264.4 $1,966.1 $4,862.1
2001 1,091.5 994.2 1,782.5 3,868.2
2002 454.7 145.2 1,776.3 2,376.2
2003 (490.1) 0.0 1,915.8 1,425.7
2004 (897.6) 0.0 2,077.2 1,179.6
2005 (856.4) 2.0 1,873.3 1,018.9
2006 (1,300.5) 2.0 2,159.3 860.8
2007 (1,004.4) 2.1 2,396.9 1,394.6
2008 (616.6) 2.2 2,088.7 1,474.3
2009 (762.3) 2.2 1,843.8 1,083.7
2010 (373.7) 2.2 1,742.1 1,370.6
2011** 1,012.2 2.2 NA NA
* Other includes Special Revenue, Enterprise, Internal Service, Trust and Agency Funds
** Based on unaudited financial report.
Gradually, policymakers have been able to address the underlying causes of the state’s cash problem; first by addressing the structural budget issues and aligning ongoing spending with the amount of ongoing revenues. This was accomplished through a combination of tax increases (income and business) as well as spending reductions over the years. The end result, at the end of FY2011, the major funds are sitting on just over $1 billion in cash. Also contributing to the solution, the use of substantial amounts of nonrecurring resources and other short-term budget fixes finally ceased with the development of the FY2012 budget.
More recently efforts have been made to rebuild the previously depleted cash reserves in the state’s rainy day fund. The FY2012 budget contains a scheduled $256 million deposit. Assuming these funds remain in reserve through the end of FY2012, the deposit will improve the year-end cash position.
Governor Snyder’s FY2013 Executive Budget is careful not to disrupt the improved cash position of the state. Although his proposal calls for spending down large portions of projected FY2012 year-end surpluses in the General and School Aid Funds, he designates much of the spending as one-time in nature and does not commit nonrecurring resources for ongoing purposes. This will safeguard the structural balance the budget has achieved. Furthermore, the budget recommendation calls for another deposit to the rainy day fund ($133 million), which will increase the cash reserves to nearly $400 million going into FY2014.
State policymakers have a ways to go before the year-end cash picture looks like it did at the end of FY2000, but clearly they are on their way. The recent improvement sends a positive signal to Michigan’s creditors as well as prepares the state budget for the next economic downturn or for changes in state/federal fiscal relations. Budget writers should take notice of the progress made to date and use the FY2013 budget as another opportunity to build upon the improving cash position.