Download Michigan Department of Treasury

Michigan Economic and Budget
Outlook
IMA Conference
Michigan State University
East Lansing, MI
October 25, 2010
Mark P. Haas
Chief Deputy Treasurer
Treasury Responsibilities
 Tax Administration / Tax and Debt Management
 Financial Management / Banking Services
 Local Government Services
 Financing Higher Education
 Investing All State Funds
 Casino Gambling / Lottery
 Housing Development for Low/Moderate Income
2
Treasury Customers
Colleges and Universities
Hospitals
Public Schools
Local Government Units
Public Retirees
Higher Ed Students
Michigan Taxpayers
3
Treasury’s Commitment
● Maintain the State’s financial integrity.
● Fair and consistent administration of tax laws.
● Provide efficient and effective professional services.
● Provide access to financial resources for higher
education, K-12, local government, and hospitals.
4
2011 Treasury Budget
All Funds
$1,975.4
General Fund (GF) $201.4
($s in millions)
Operations Funding
A ut hor i t i e s & Ot he r
22. 57%
R e v e n u e Sh a r i n g
D e b t Se r v i c e 6 . 8 3 %
52. 25%
Gr a nt s 6 . 5 0 %
Ope r a t i ons 1 1 . 2 0 %
Revenue Generation
Student Financial
Investments
Local Government
State Banking
Revenue Forecasting
Bond Finance
$139.8
$ 36.9
$ 17.1
$ 15.8
$ 8.6
$ 1.7
$ 1.3
P I LT 0 . 6 6 %
$221.3
Authorities, Funds & Commissions
Pass Through Funds
Revenue Sharing
Grants
Debt Service
Payments in Lieu of Taxes
$1,032.1
$ 128.4
$ 134.9
$ 13.0
$1,308.4
Lottery
Gaming
MSHDA
MSF
LBFTA
$ 26.2
$ 25.3
$ 223.7
$ 168.7
$ 1.9
$445.8
5
Overview
● U.S. and Michigan Economic Outlook
● State and Local Budget Situation
● Federal Fiscal Situation
● What Michigan Needs to Do
6
How Bad was the Recession?
7
2008-2009 Recession Longest
Since Great Depression
Number of Months from Peak to Trough
U.S. Recessions
16
8
10
11
6
8
8
10
A
1
19 945
48
-1
94
19
9
53
-1
95
19
4
57
-1
95
19
8
60
-1
19 961
69
-1
97
19
0
73
-1
97
5
19
37
-1
93
8
8
10
2
vg
20
. P 001
07
os
Th
tW
ru
Ju ar
ne
09
11
1
19 980
81
-1
98
19
2
90
-1
99
1
13
18
16
Source: NBER
8
2008-2009 Recession GDP Decline
Steepest on Record
Percent Change, Economy Peak to Trough
0.7%
-0.5%
-0.2%
-1.4%
-1.6%
-2.2%
-2.5%
-3.1%
-1.7%
-2.6%
-3.2%
-3.7%
1948- 1953- 1957- 1960- 1969- 1973- 1980
1949 1954 1958 1961 1970 1975
1981- 1990- 2001
1982 1991
Source: Bureau of Economic Analysis, U.S. Department of Commerce.
Data not avail for 1937-38 and 1945 recessions.
Avg.
Post
War
2007
To
09Q2
9
One for the Record Books
Calendar 2009 Estimate and Actual
April
2008
2009 Actual
Forecast
Level
Light Vehicle Sales (millions)
15.2
10.4
Housing Starts (million units)
1.131
0.55
US Unemployment Rate
5.8%
9.3%
US Payroll Employment (% chg) 0.4%
-4.3%
US Personal Income (% chg)
3.6%
-1.7%
Comments
Lowest Since 1970
Lowest Back to 1959
Highest Since 1983
Lowest Back to 1940
Lowest Since 1938
Source: April 2008 Global Insight Forecasts and 2009 actuals compiled from various sources by
Michigan Department of Treasury.
10
Is the Economy
Looking Better?
11
Leading Indicators Show
National Recovery Struggling
Weekly Leading Index, Smoothed Annual Growth Rate
47.2%
23.6%
0.0%
-23.6%
09/10/10
-9.2%
1/
1/
20
4/ 07
1/
20
7/ 07
1/
20
07
10
/1
/2
00
7
1/
1/
20
4/ 08
1/
20
7/ 08
1/
20
08
10
/1
/2
00
8
1/
1/
20
4/ 09
1/
20
7/ 09
1/
20
09
10
/1
/2
00
9
1/
1/
20
4/ 10
1/
20
10
7/
1/
20
10
-47.2%
Source: Economic Cycle Research Institute.
12
GDP Growth Observed
Four Quarters in a Row
Real GDP Growth
3.0%
Growth
3.5%
2.7%
3.2%
2.1%
2.0%
1.4%
6.9%
5.4%
4.1%
3.6%
3.5%
3.0%
2.9%
2.9%
2.1%
1.6%
1.4%
0.9%
0.1%
0.1%
3.7%
3.0% 3.2% 2.9%
2.3%
3.1%
1.7%
1.6%
5.0%
0.6%
-0.7%
-0.7%
-1.3% -1.1%
3.6%
2.7%
2.3%
1.9% 2.2%
1.6%
1.3%
-4.0%
2010Q2
-4.9%
-6.8%
2001
Q1
2002
Q1
2003
Q1
2004
Q1
2005
Q1
2006 Q1
2007 Q1
2008 Q1
2009 Q1
2010 Q1
2011 Q1
Figures are annualized percent change from preceding quarter in 2005 chained dollars.
Source: Bureau of Economic Analysis. Forecast quarters in red are the September 2010 Global Insight forecast.
13
U.S. Has Gained Over 600,000 Jobs
Since December 2009
432
313
208
128
70
64
(10) (33)
(50)
(149)
14 39
(57)
(95)
(175)
(109)
(193)
(231) (210)
(334)
(211) (224)
(225)
(347) (344)
(458)
(554)
(504)
(582)
(673)
(726)
(728)
(779) (753)
v
No
07
n
Ja
08
ar
M
08
ay
M
08
l
Ju
08
p
Se
08
v
No
08
n
Ja
09
ar
M
09
ay
M
09
l
Ju
Source: U.S. Bureau of Labor Statistics, U.S. Department of Labor
09
p
Se
09
v
No
09
n
Ja
0
-1
ar
M
0
-1
0
-1
ay
M
l
Ju
0
-1
10
pe
S
14
Stock Market Moving Sideways
S&P 500 Closing Level
1565
10/09/07
1600
1400
1125
09/16/10
1200
1000
800
677
03/09/09
Source: freelunch.com, reuters.com
20
10
1/
1/
20
09
1/
1/
20
08
1/
1/
20
07
1/
1/
20
06
1/
1/
20
05
1/
1/
20
04
1/
1/
20
03
1/
1/
20
02
1/
1/
20
01
1/
1/
20
00
1/
1/
19
99
1/
1/
1/
1/
19
98
600
15
Federal Outlays and Receipts
(last obs. June 2010)
Outlays are far
outpacing receipts.
3500
Outlay s
$ billions, 12-month sum
3000
2500
2000
1500
Receipts
1000
500
Jan-89
Jan-92
Jan-95
Jan-98
Jan-01
Jan-04
Jan-07
Jan-10
16
Source: US Treasury; Encima Global.
Federal Government Debt
as % of GDP
Government
Latest CBO Estimate
90% 
(last obs. 2009, forecast 2010 to 2019)
80
OMB forecast of
President's FY2010
budget
70
% of GDP
60
50
40
CBO
baseline
30
20
1950
1960
1970
1980
1990
2000
2010
2020
17
Source: OMB; CBO; Encima Global
Federal Spending Increases
Outpaces Income Growth
18
Source: Heritage Foundation, 2009 Federal Revenue and Spending Book of Charts, WSJ.
Implications of Federal Deficits
● Growing deficits will require:
● Higher federal taxes
● Federal budget cuts
● More federal borrowing
● Tax hikes and budget cuts will slow economy.
● Federal borrowing will squeeze out private
borrowing.
● Deficits could adversely affect currency, exchange
rates, and inflation.
19
What about Michigan?
20
Michigan Employment Never
Recovered in Past Expansion
Difference from Peak (%)
Note: Peak is calculated from Michigan’s June 2000 Peak.
8%
4%
0%
U.S.
-4%
Indiana
-8%
Ohio
-12%
-16%
Michigan
-20%
Jun
00
Jun
01
Jun
02
Jun
03
Jun
04
Jun
05
Jun
06
Jun
07
Jun
08
Jun
09
Jun
10
21
Source: U.S. Bureau of Labor Statistics and Michigan Department of Treasury.
Michigan Loses Nearly
850,000 Jobs
Michigan Wage and Salary Employment Year-Over-Year Change
(In Thousands)
88.0
53.6
4.9
-16.9
-76.8 -71.1
-112.7
-9.3
-34.7
-63.3 -58.7
-105.7
-285.6
9100
Avg.
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Note: Bureau of Labor Statistics. 2009-2011 estimates are Treasury Forecast.
Treasury Forecast
22
Michigan Personal Income
Falling Relative to U.S.
Michigan per Capita Income as a Percent of U.S. Per Capita Income
1933*
Michigan’s Rank
19
1.25
1945*
12
1970
1980
2000
2009
12
15
18
37
122%
1.2
1.15
1.1
1.05
1
0.95
93%
0.9
87%
19
29
19
33
19
37
19
41
19
45
19
49
19
53
19
57
19
61
19
65
19
69
19
73
19
77
19
81
19
85
19
89
19
93
19
97
20
01
20
05
20
09
0.85
Source: Department of Treasury calculations from U.S. Bureau of Economic Analysis data.
*Alaska & Hawaii data not available.
23
Industry Restructuring
25-Year Cycle
 1960
New England Textile Industry
 1980
Pittsburgh Steel Industry
 2000
Michigan Auto Industry
24
How does the State
Budget Look?
25
Total State Spending
FY 2011 Total Spending: $47.1 Billion
Human Services
15%
Security
6%
General
Government
13%
Health
30%
Natural
Environment
2%
Jobs & the
Economy
3%
Education
31%
Over 75% of total budget devoted to health,
human services and education spending.
Source: OBDGG, CM, 3/10/10
26
Michigan GF-GP Revenues
Turning Corner
GF-GP Revenues
Year-Over-Year Percent Change
12.5%
7.5%
6.6%
3.3%
3.0%
1.0%
0.6%
-0.5%
-8.2%
-6.3% -5.6%
-9.6%
-21.3%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: May 2010 Consensus Conference.
27
General Fund Budget Outlook
FY 2010
FY 2011
FY 2012
Beginning Balance
Ongoing Revenue 1)
Other Revenue
Total Revenue
$177.2
$6,654.9
$939.9
$7,772.0
$1.9
$7,096.7
$1,154.1
$8,252.7
$10.9
$7,130.1
$897.0
$8,038.0
Expenditures 2)
$7,770.1
$8,241.8
$9,684.8
$1.9
$10.9
Balance
($1,646.8)
1) Ongoing Revenue equals consensus estimate for FY10 and FY11.
2) Expenditure increase in FY12 due to loss of restricted ARRA funds and increase in cost to maintain services.
Source: State Budget Office, FY10 & FY11; Michigan Department of Treasury, FY12.
28
Michigan School Aid Fund
Revenues to Stabilize
SAF Revenues
Year-Over-Year Pct. Change
5.8% 6.2%
5.7%
3.2%
2.8%
1.6%
1.1% 1.4%
0.8%
0.6%
-0.9%
-1.6%
-5.1%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
29
Source: May 2010 Consensus Conference.
Cons. Forecast
School Aid Fund Budget Outlook
(dollars in millions)
Beginning Balance
Ongoing Revenue *
ARRA
Fed Aid & Other
Total Revenue
FY 2010
$238.2
$10,749.9
$450.0
$1,641.1
$13,079.2
FY 2011
$163.3
$10,832.9
$184.3
$2,047.0
$13,227.5
FY 2012
$93.3
$11,200.9
$0.0
$1,693.7
$12,987.9
Expenditures **
$12,915.9
$13,134.2
$13,370.6
$163.3
$93.3
Balance
* Ongoing Revenue equals consensus estimate for FY10 & FY11.
** Expenditures in FY12 are increased from FY11 by inflation.
Source: Michigan Department of Treasury.
($382.8)
30
Major Components of FY 2011
Budget Agreement
●
●
●
●
●
●
Tax Amnesty: GF $68.1 million, SAF $26.1 million.
Unclaimed Property: GF $168.0 million.
Liquor Reforms: GF $9.1 million.
State Pension Reforms: GF $60 million.
Debt Refinancing: GF $77.3 million, SAF $40.0
million.
Reduce spending about $270 million from the
Governor’s adjusted original recommendation.
31
How do Local Budgets Look?
32
State To Local Revenue Sharing
Cut 33% Last Eight Years
Fiscal Year
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011 proj.
(Millions)
Constitutional Statutory
$642.8
$649.3
$660.3
$653.1
$668.7
$680.1
$666.0
$688.2
$649.1
$629.1
$633.5
$912.7
$868.0
$791.1
$651.6
$443.3
$422.4
$404.9
$388.0
$391.0
$309.7
$307.1
Total
$1,555.5
$1,517.3
$1,451.4
$1,304.7
$1,112.1
$1,102.5
$1,070.9
$1,076.2
$1,040.0
$938.8
$940.5
33
Source: Office of Revenue and Tax Analysis, Michigan Department of Treasury.
Most Local Own Source Revenue
From Property Taxes
FY 2008 Own Source Revenue Plus State and Federal - $25.3 Billion
State Revenue
Sharing 6%
Federal 4%
Local Property
Taxes 47%
Current
Charges &
Misc. Revenue
39%
Other Local
Taxes 4%
34
Year-over-Year Pct Change
Home Prices Fell Sharply
Beginning to Turn Around
30.00%
U.S. Prices Fall After Sharp Run Up
20.00%
U.S. 10 City
June 10
5.0%
10.00%
0.00%
-10.00%
June 10
0.8%
-20.00%
Detroit Area
-30.00%
Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10
35
Source: Case Shiller 10-Metro Area Home Price Index.
Michigan Home Building
Fell Precipitously
New Private Housing Units Authorized in Michigan
Year
Detroit
PMSA
Ann Arbor
Grand
Rapids
Lansing
Total
2004
22,990
2,708
6,886
2,206
54,721
2005
17,326
1,676
5,826
2,121
45,328
2006
9,592
775
4,278
1,231
29,191
2007
4,325
565
1,866
768
17,767
2008
2,590
347
1,064
383
10,911
2009
1,346
209
810
246
6,884
2010YTD
1,539
180
560
304
4,978
Change 2004-2009
Note: 2010 YTD through July
Source: U.S. Department of Commerce.
-87.42%
36
Overall Michigan Taxable
Property Value Growth Slowing
Yearly Percent Change
8.0%
6.0%
7.1%
6.1% 6.0%
5.7%
5.5%
6.7%
4.8%
5.7% 5.6% 5.8%
5.2%
4.0%
1.4%
2.0%
0.0%
-0.8%
-2.0%
-4.0%
-4.3%
-6.0%
-6.6%
-8.0%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
est
37
Source: State Tax Commission and May 2010 Consensus Conference.
What does Michigan
Need to do?
38
Michigan State Government
Already Has Fewer Employees
Fiscal
Year
Governor
1973
1978
1989
2000
2009
Milliken
Milliken
Blanchard
Engler
Granholm
Number
Non-Corrections
State
State
Employees
Employees
% Change 1978-2009
% Change 2000-2009
Source: Michigan Department of Treasury.
Corrections
Employees
52,673
64,456
64,560
61,493
51,699
50,316
59,990
52,038
43,841
35,937
2,357
4,466
12,522
17,652
15,762
-20%
-16%
-40%
-18%
253%
-11%
39
Government Smaller
Compared to Other States
State
State and Local
Govt. Employees
Per 10,000
of Population
Rank
Indiana
Ohio
Minnesota
Illinois
Wisconsin
Michigan
554
538
536
504
504
475
27
32
34
42
42
48
U.S. Average
549
Source: U.S. Bureau of the Census, 2008 State and Local Government Employment Survey.
40
State Government Average
Annual Salaries – 2008
State
Avg. State Gov't
Employee Pay
2008
California
Connecticut
Minnesota
Illinois
Wisconsin
Michigan
Ohio
Indiana
10 Most Populous States
10 Least Populous States
$70,950
$65,763
$60,843
$58,968
$57,364
$56,955
$55,617
$48,871
$53,960
$49,479
US Average
$53,344
Source: Bureau of the Census
Rank
1
3
5
7
11
13
15
27
41
What Does Michigan Need to Do?
 Consolidate government services at both the state and local
level.
 Reform the state’s tax structure so that it will grow with the
State’s economy and not discourage economic growth.
 Slow the growth of government healthcare and tax
expenditures.
 Maintain or increase the investment in education.
 Reform local government pensions.
42
Too Many Units of Government
 Local Governments




83 Counties
275 Cities
258 Villages
1,240 Townships
 K-12 Schools
 551 Local School Districts
 230 Charter Schools
 57 Intermediate School Districts
 Colleges and Universities
 15 Public Universities
 29 Community Colleges
43
Ingham County School Districts
School District
Students
Fall 2009
East Lansing
Lansing
Dansville
Haslett
Holt
Leslie
Mason
Okemos
Stockbridge
Waverly
Webberville
Williamston
3,445
14,148
904
2,722
5,902
1,380
3,030
4,016
1,668
2,992
668
1,906
Total
42,782
Source: Michigan Department of Education.
44
Local Colleges and Universities
School
Students
Fall 2009
Michigan State University
45,520
Lansing Community College
20,394
45
Source: Stateuniversity.com
Maryland School Districts
Are Large
School District
Students
Montgomery County Public Schools
141,777
Prince George's County Public Schools
129,723
Anne Arundel County Public Schools
74,200
Howard County Public Schools
49,748
Note: Montgomery County Public Schools is 16th largest in the US
Source: Maryland County Public Schools, various websites
46
Michigan’s Tax System
Needs to be Restructured
47
175%
-25%
Wyoming
Alaska
Nevada
North Dakota
New Mexico
Louisiana
Montana
Hawaii
West Virginia
Massachuset
South Dakota
North
Tennessee
New Jersey
Texas
New York
Mississippi
New
Indiana
Connecticut
Maryland
Arkansas
Nebraska
Delaware
Virginia
Kansas
Idaho
Rhode Island
Ohio
Minnesota
Oklahoma
Utah
Kentucky
Alabama
Florida
Iowa
Washington
Pennsylvania
Vermont
Georgia
Oregon
Maine
Illinois
California
Arizona
South
Wisconsin
Colorado
Missouri
Michigan
General Fund Revenue by State
Michigan Only State with a Decline
Percent Change Between 2000 and 2009
125%
75%
25%
48
Source: Michigan Department of Treasury
Inflation Adjusted GF-GP Revenue
Down 50.4% Since 2000
$15,000
Millions
$10,000
$9,788
$8,990
$9,788
$8,668
$9,359
$8,427
$7,989
$7,959
$7,245
$8,042
$8,309
$8,266
$8,319
Current Dollars
$7,366
$7,097
$6,655
$7,077
$6,888
$5,000
$6,475
$6,224
$6,598
$5,187
$4,623
$4,851
Inflation Adjusted
$0
2000
2001
2002
2003
2004
2005
2006
2007
Note: FY 2010 and 2011 are May 2010 Consensus Estimates
Source: Office of Revenue and Tax Analysis, Michigan Department of Treasury.
2008
2009
2010
2011
49
Inflation Adjusted SAF Revenue
Down 25% Since 2000
$15,000
Current Dollars
Millions
$10,000
$9,889 $9,994
$10,134
$10,715 $10,615
9,889.30 9,636.90 9,607.30 9,753.50 9,342.40
$10,910
$11,082
$11,153
$11,513
9,044.00 8,680.70
8,344.50 8,115.80
$5,000
$10,922 $10,750 $10,833
7,692.00
7,467.40
7,405.30
Inflation Adjusted
$0
2000
2001
2002
2003
2004
2005
2006
2007
Note: FY 2010 & 2011 are May 2010 Consensus Estimates
Source: Office of Revenue and Tax Analysis, Michigan Department of Treasury.
2008
2009
2010
2011
50
Real State GDP
Declines 3.3% since 2000
$350,000
$345,000
Millions
$340,000
$337,235
$341,109
$335,000
$336,862
Inflation Adjusted
$339,872
$337,851
$334,843
$330,000
$331,036
$326,869
$325,000
$326,123
$320,000
2000
Source: House Fiscal Agency
2001
2002
2003
2004
2005
2006
2007
2008
51
Michigan GF-GP & SAF Taxes Falls
as a Percent of Personal Income
7.0%
6.5%
6.0%
5.5%
5.0%
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
4.5%
If revenues were still 6.8% of personal income, FY 2011 revenue would be $6.3 billion larger.
52
Note: FY 2010 and FY 2011 estimates based on Jan 2010 Consensus.
Tax Structure Needs to Keep Pace
With Changing Economy
Personal Consumption Expenditures by Percentage
80%
Services - 67.7%
60%
40%
Goods - 32.3%
20%
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
53
Source: U.S. Bureau of Economic Analysis.
Tax Breaks / Tax Expenditures
Larger Than Tax Collections
Tax Breaks
Tax
Collections
54
Source: House Fiscal Agency.
Recent Tax Changes
Reduce Future Revenue
 Generous film production credits enacted to
encourage production in Michigan.
 Battery Credits enacted to encourage production
of batteries for hybrid cars in Michigan.
 Earned Income Tax Credit provides $325 million
in 2010 and $338 million in 2011.
55
Significant Tax Cuts
Will Cut Future Revenues
FY 2009
Reducing Michigan IIT Rate
Alternative Energy Credits IIT
Michigan EITC
$0.0
($16.0)
($140.0)
FY 2010
$0.0
($46.0)
($325.0)
Eliminating MBT Surcharge
MBT Battery Credits(1)
MBT Film Credits & Infrastructure(2)
Photovoltaic Technology - Facility & Manufacturing
Polycrystalline Manufacturing Credit
FASB 109
MEGA Legislative Changes
MBT Gross Receipt Changes
Decouple bonus depreciation/production activities
Historic preservation credits
Promise Zones - SET
IFT Exemption for Commercial Real Land
Use Tax Bad Debt Deduction Change
Exempt supplies for Cobo Center
Totals
FY 2011
$0.0
($47.0)
($338.0)
FY 2012
($150.0)
($42.0)
($358.3)
FY 2013
($329.0)
$0.0
($379.8)
FY 2014
FY 2015
($522.5)
$0.0
($402.6)
($728.6)
$0.0
($426.7)
Eliminated in Tax Year 2017
$0.0
$0.0
$0.0
($40.0)
($268.0)
($278.0)
($234.0)
($37.5)
$0.0
$0.0
$0.0
NA
($115.8)
$172.5
$0.0
($100.0)
($0.8)
$0.0
$0.0
NA
($80.5)
$23.4
$0.0
($125.0)
($9.8)
$0.0
$0.0
NA
($93.4)
$19.2
($5.0)
($125.0)
($12.5)
$0.0
$0.0
NA
($117.8)
$45.3
($8.6)
($125.0)
($12.5)
($25.0)
$0.0
NA
($129.9)
$52.3
($9.6)
($125.0)
($12.5)
($25.0)
$0.0
NA
($132.7)
$60.0
($10.6)
($125.0)
($12.5)
($25.0)
($31.3)
NA
($135.6)
$68.8
($10.6)
$0.0
($2.0)
$0.0
$0.0
($1.0)
($2.0)
($25.5)
$0.0
($4.0)
($2.0)
($16.6)
($2.5)
($10.0)
($2.0)
($17.1)
($2.5)
($15.0)
($2.0)
($17.7)
($3.5)
($20.0)
($2.0)
($18.4)
($1.5)
($20.0)
($2.0)
($19.1)
$0.0
($138.8)
($557.4)
($624.1)
($840.5)
($1,264.7)
($1,490.8) ($1,701.6)
56
Why Do We Have
A Revenue Problem
 Michigan economy declining for 10 years.
 Tax System does not keep up with economy.
 Phased-in tax cuts eroding revenue.
57
Most Revenue Losses
Due to Tax Cuts
School Aid Fund
GF-GP Revenue
Economy
Tax Structure
-15.7%
Revenue Loss 2000 to 2009
Tax Cuts
-43.4%
58
Source: Michigan Department of Treasury
Key Characteristics of a
Good Tax System
● Stable – Stable level revenue:
● Broad based taxes.
● Balanced group of taxes (don’t rely on just one major
tax).
● Fair – Similar taxpayers pay similar taxes.
● Efficient – Simple to administer and comply with,
and should not distort economic decisions.
59
Corporate Income Tax
Pros & Cons
PROS
● Only corporations making a profit would pay.
● Widely used, therefore multistate companies would have lower
compliance costs.
● Longer legal history provides more certainty
CONS
● Revenue stream is extremely volatile (federal corporate
income tax revenue declined 55% in FY 2009).
● Many businesses (noncorporations) avoid the tax.
● No direct relationship between profitability and dependence on
government services.
60
Local Governments
Have a Pension Problem
● Pension liabilities exceed assets and costs are
growing faster than assets.
● Local pensions are very generous—average
multiplier 2.7%.
● Local pensions are subject to abuse, which raises
future costs.
● Reform needed.
61
Balanced Approach:
Hybrid Retirement Model
1/3
Social
Security
Defined
Benefit
Defined
Contribution
1/3
1/3
62
Retirement Model Characteristics
● Equal contributions from employer and
employee into all three plans.
● Benefits based on lifetime earnings – will
greatly reduce abuses.
● Raise retirement age as people live longer.
● Investment risk shared – one-third each.
● May require changes to P.A. 312.
63
Consolidation / Shared Services
● Do for business reasons, not political.
● Important to look at all costs, as transition
costs can be larger than savings.
64
Conclusion
● Recession worst in decades, but it appears U.S. economic
recovery is beginning to take hold.
● Michigan has been in a recession since 2001 due to auto
sector restructuring and U.S. recession.
● Michigan recovery will require U.S. recovery, stability in the
auto sector, and time.
● Funding for schools, state and local government depend on
economy growing and tax restructuring.
● Government changes needed to reflect new economic reality.
65
Questions
www.Michigan.gov/Treasury
66