Notes from the state Consensus Revenue Estimating Conference: COVID-19 tears apart state budget

Each May, the state holds its traditional Consensus Revenue Estimating Conference. Held on May 15 this year, the conference provides guidance to the House and Senate Appropriation Committees as they determine how much revenue is available for the upcoming state fiscal year.

There was nothing traditional about the discussion this year. It concluded that there is a $2.1 billion deficit in the current year’s General Fund and a $875 million deficit in the current School-Aid Fund. For Fiscal Year 2020-2021, General Fund Revenues will only increase $180 million above the current year’s adjusted numbers. The School-Aid Fund will increase $500 million, but still be more than $1.1 billion below the amount presented in the governor’s budget recommendation just a few months ago.

The COVID-19 pandemic is tearing apart the state budget, which must be balanced under constitutional requirements. These budget changes will undoubtedly reach down to local government budgets. The plunge in revenues has come on so quickly that solid numbers are very difficult to formulate. To that point, the state will hold another revenue conference in August to discuss changes in revenues once again.

Below are charts for the state’s General Fund and School-Aid Fund. In both cases, the charts show how much revenue was actually received last year (FY 2018-2019), how much the state originally projected they would collect based on the January 2020 revenue conference, and the latest projections from the May conference. The January numbers were used to formulate the budget bills introduced for FY 2020-2021.

Michigan General Fund Estimated Revenues (in millions)

While the state’s General Fund budget accounts for less than 20 percent of overall state spending, it is the only revenue that can be used to fill any state budget hole. The General Fund has not grown over time, in part because the legislature regularly converts General Fund revenues into restricted funds. For example, remember when the state took a phased approach to shifting $600 million of income-tax revenue into PA 51 road funds? Well, those funds are scheduled to be fully shifted to transportation purposes in next year’s budget.

The compound problem for the State General Fund budget is that cutting $2 billion out of an $11 billion budget is extremely difficult – because it is being cut from a budget for a fiscal year that is already two-thirds complete. The governor will present her budget cuts through an Executive Order within the next few days. Any state program that receives General Funds or is derived from revenues that can be diverted back into General Funds (statutory revenue sharing or the extra road funds) is extremely susceptible to budget cuts.

The School-Aid Fund budget may be an even bigger problem. All schools complete their fiscal years on June 30, so all of the deficit accrues to school budgets that conclude in six weeks. While cities and other local governments also have June 30 fiscal year endings, reductions in state payments between July and September will impact their next fiscal year. This accounting issue will present significant problems for schools. Hopefully the governor’s Executive Order will help mitigate this problem.

Michigan School-Aid Fund Estimated Revenues (in millions)

The state budget that begins on October 1 is now in the hands of the legislature. Again, they will be looking to cut $2 billion out of the General Fund, compared to where they were when they stopped work on the budget in March. They must also take into account spending pressures on the budget created by COVID-19 and the related budget impacts. Health-care costs associated with persons without other means are expected to spike into next year. Don’t expect the state to complete work on their budget much before October 1.

The state does have $3 billion in federal CARES Act funds that can only be used to offset additional costs associated with COVID-19. The money may not be used to offset revenue losses due to CARES Act language. A change in the CARES Act language at the federal level could free up those funds to mitigate the state’s budget deficit.

What isn’t covered under the deficit

While the Revenue Estimating Conference focused on General Funds and School-Aid Funds, there was also discussion of other state revenues that pass through the state to local governments.

Sales Tax (Constitutional Revenue Sharing)

Economists from the Michigan Department of Treasury and the House and Senate fiscal agencies concluded that sales-tax revenues in the current state fiscal year (ending September 2020) would be 10-12 percent below the revenues from last year. Numbers are currently plummeting, but will then begin to rise. Local governments should look at each bimonthly payment that is part of your particular fiscal year to properly budget for the changes in revenue. If this is confusing, check out my blog from earlier this week that sheds some light on this. The updated bi-monthly estimated payments by community can be found here.

Property taxes

Economists from the University of Michigan were projecting a 4-5 percent one-year drop in single-family home sales prices, followed by a quick rebound the following year. Economists from the Department of Treasury and the legislature were looking at two issues related to property taxes. The first was a small drop in the consumer price index next year. They also presented a Detroit CPI of 0.4 percent for the current year and a drop of -0.5 to -0.9 percent for 2021. That being said, the revenue conference is still projecting a 0-1 percent increase in property-tax revenues from the State Education Tax for 2020, 2021, and 2022. This reflects their belief that property values, as a whole, will remain reasonably sound.

PA 51 Transportation Funds

At a webinar on May 18, a Michigan Department of Transportation representative presented estimates in revenue that will impact Public Act 51 distributions to local road agencies. Based on the latest projections, county road agencies should expect a $91.8 million reduction in this fiscal year; cities and villages should expect a $51.2 million reduction. In both cases, that is a 7.4 percent reduction below appropriated amounts for the year. The economy will continue to impact revenues to local road agencies into 2021. Current projections are for a loss of $57 million for county road agencies and $31.7 million for cities and villages.

This is what we know as of today. We’ll continue to follow and will update when more information is available.