In A Nutshell
- Once again, state revenue forecasts anticipate very large increases in General Fund/General Purpose (GF/GP) revenue; the state is likely to have a one-time fund balance of $3.5 billion available to start FY2023
- Projected growth in ongoing GF/GP revenue means there is room to include up to $1 billion in new GF/GP investments in the FY2023 budget
- While the revenue picture is bright, it’s important to remember Michigan just exited a 20-year period of stagnant GF/GP revenue. The FY2023 budget presents an opportunity to re-examine some of the difficult budget decisions the state was forced to make during that period.
In just a few weeks, Governor Whitmer will release her Fiscal Year (FY)2023 Executive Budget recommendation, and for the first time in a long while, there is a lot of revenue on the table for either new investments or potentially for tax relief. Earlier this month, state fiscal officials revised their official economic and state revenue forecasts; and once again, tax revenue estimates were up sharply. The revised forecast anticipates an additional $5.8 billion above the projections from last May across the state’s two major revenue funds. And those May projections were already $5.3 billion above the estimates from January 2021.
Last week, we explained how strong revenue growth and a slower than expected rebound in K-12 pupil enrollment has the School Aid Fund on pace for a $3.6 billion revenue surplus at the close of FY2022.
Today, we analyze the projections for the General Fund/General Purpose (GF/GP) revenue, which will drive the bulk of budget decision-making outside of school funding. As with the School Aid Fund, GF/GP revenue projections are way up – exceeding last May’s forecast by $3.1 billion across FY2021, FY2022, and FY2023.
Budget deliberations over the next several months between the legislature and Governor will determine how all this money will be utilized. As those deliberations commence next month, here are three key things you should know about the State of Michigan’s financial situation.
$3.5 Billion GF/GP Balance Remains Available
First, the upgraded projections mean the state coffers will likely have $3.5 million in GF/GP revenue in reserve to start FY2023, thanks largely to very strong revenues during the last half of 2021. The chart below summarizes updated GF/GP revenue revisions by fiscal year. Notably, more than half of the expected revenue jump ($1.7 billion) is attributable to FY2021, the fiscal year that just ended in September. As we’ve noted previously, strong federal stimulus impacts along with pandemic-induced shifts in consumer spending toward taxable goods (and away from non-taxable services) helped to prop up state revenue during the last half of FY2021.
That extra $1.7 billion simply adds to the year-end GF/GP balance that carries into FY2022. A recent Senate Fiscal Agency analysis now estimates the carry forward balance to be $4.2 billion.
General Fund Revenue Estimates
May 2021 and January 2022
Source: Consensus Revenue Agreement Executive Summary, January 2022
Despite revenue growth, that year-end balance will get smaller by the end of FY2022, as the legislature and Governor agreed to tap another $1.1 billion in GF/GP revenue by enacting two supplemental appropriation bills in December – with the largest component being $1 billion to support economic development incentives. While GF/GP revenue growth is estimated to yield another $777 million in FY2022, the projected year-end GF/GP balance for FY2022 falls to $3.5 billion after factoring in this supplemental authorization. All of this $3.5 billion will be available for appropriation in FY2023, but it’s important to note that this balance effectively represents one-time funding for the state. Tapping any portion of the year-end balance to support permanent, ongoing programs creates a budget “cliff” once the balance is depleted. These one-time resources should most appropriately be directed toward one-time purposes. (One great option we’ve noted: draw on this revenue to match new federal infrastructure funding).
Up to $1 Billion Available for Additional Ongoing Budget Investments
Beyond the fund balance, however, the formal revenue estimates do leave significant room for new, ongoing budget investments. Our analysis of the numbers suggest that estimated revenue now supports an additional $1 billion in ongoing GF/GP appropriations for FY2023.
The new revenue estimates peg FY2023 GF/GP revenue at $12.9 billion – $621 million above last May’s estimate. On the spending side, the Senate Fiscal Agency analysis helps define baseline spending needs in FY2023 by taking FY2022 ongoing GF/GP appropriations and adjusting them for known other cost pressures (most notably, Medicaid and human services caseload costs). Comparing the projections for ongoing revenue and ongoing spending needs suggests that appropriators will have the flexibility to add up to $1 billion in GF/GP appropriations to the state budget without sacrificing long-term structural budget balance.
However, new budget investments are just one option available for state budget writers. The other option would be to use the extra revenue to support tax relief. Media accounts have already indicated Governor Whitmer will ask lawmakers to support a boost in the state’s Earned Income Tax Credit and the repeal of 2012 income tax changes that removed certain exemptions for pension income. Similarly, some Republicans have also advocated making tax relief part of the budget conversations. The ultimate allocation of the $1 billion in ongoing resources will ultimately be determined during budget deliberations.
Historical Context: Twenty Years of Stagnant GF/GP Growth
Without a doubt, there are many reasons to feel good about Michigan’s revenue picture. Between FY2010 and FY2020, GF/GP revenue grew by an average of 3.4 percent per year. That’s significantly faster than inflation, as the Detroit Consumer Price Index (CPI) grew by only 1.5 percent over the same period. On the other hand, revenue growth lagged behind Michigan personal income growth of 4.3 percent per year over that period. Still, GF/GP revenue now seen 10 years of real growth, and the new forecasts expect that trend to continue for several more years.
However, as bright as the revenue picture seems, it is easy to forget that Michigan has just recently pulled itself out of a sustained budget hole for its GF/GP-funded programs.
The chart below tracks both actual and inflation-adjusted GF/GP revenue back to FY2000. Note that in FY2000, Michigan realized GF/GP revenue collections of just under $10.7 billion. However, Michigan’s “single state recession” over the next decade drove tax revenues down. Federal data show wage and salary employment in Michigan fell almost 18 percent during that period. This slow economic growth combined with tax policy changes resulted in GF/GP revenue cratering to just $7.7 billion in FY2010 – a 28 percent decline from FY2000.
General Fund Revenue History
Following the Great Recession, Michigan’s tax revenues began a slow rebound, but it took until FY2018 for GF/GP revenue to get back to its FY2000 level. Further, GF/GP revenue declined again by FY2020 due to redirections of GF/GP revenue for road infrastructure and other tax relief initiatives. In short, then, Michigan had virtually no GF/GP revenue growth over the first 20 years of the new century. Factoring in inflation, even with the strong growth projections, GF/GP revenue would remain 22 percent below its FY2000 level in FY2024.
The sharp decline in GF/GP funding resulted in severe budget constraints for GF/GP-funded state programs during this 20-year period. Impacts were particularly significant for higher education, social services, and revenue sharing payments to local governments– all of which receive large discretionary allocations from state-sourced revenue.
As FY2023 budget deliberations move ahead, budget writers would be wise to look back to this period and re-examine some of the difficult budget decisions that were made for these and other state programs. Healthy ongoing revenue growth presents a real opportunity to re-assess these budget tradeoffs of the past.