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Michigan’s
Financial Forecast
CorNet Michigan Chapter
January 14, 2010
Mark P. Haas
Chief Deputy Treasurer
Michigan Department of Treasury
Treasury Responsibilities
 Tax Administration
 Tax and Debt Collection
 Financial Management
 Local Government Services
 Financing Higher Education
 Investing All State Funds
1
Treasury Customers
Colleges and Universities
Hospitals
Public Schools
Local Government Units
Public Retirees
Higher Ed Students
Michigan Taxpayers
2
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.
3
2010 Treasury Budget
All Funds $1,548,257.3
/
General Fund (GF) $135,597.7
($s in millions)
Grants
Operations Funding
Debt Service
Revenue Sharing
Revenue Generation
PILT
Operations
Pass Through Funds
Revenue Sharing
Grants
$1,133.7
$103.8
Student Financial
$37.5
Investments
$16.7
Local Government
$17.4
Customer Service
$12.1
State Banking
$7.1
$1.5
Debt Service
$82.2
Revenue Forecasting
Payments in Lieu of Taxes
$14.4
Bond Finance
_________
$1,334.1
$120.6
$1.3
________
$214.2
4
Overview
How bad was the recession?
Is it over?
What about Michigan?
Real estate turn around?
How does the State budget look?
What does Michigan need to do?
5
How Bad is the Recession?
6
Current Recession Longest
Since Great Depression
Number of Months from Peak to Trough
U.S. Recessions
16
13
11
8
19371938
1945
10
8
10
19
16
11
1948- 1953- 1957- 1960- 1969- 19731949 1954 1958 1961 1970 1975
6
1980
Source: NBER, Assumes recession ends beginning of 3rd quarter 2009
8
1981- 19901982 1991
8
2001
10
Avg.
Post
War
2007
Thru
Jun
09
7
Current 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
8
U.S. Employment Decline
Third Steepest
Percent Change, Economy Peak to Trough
-1.1%-1.2%
-1.2%-1.6%-1.1%
-2.3%
-2.9%
-3.1%
-3.1%
-4.0%
-4.9%
-5.0%
-7.9%
1945 1948- 1953- 1957- 1960- 1969- 1973- 1980 1981- 1990- 2001 Avg. 2007
1949 1954 1958 1961 1970 1975
1982 1991
Post Thru
War
Oct
09
Source: Bureau of Economic Analysis, U.S. Department of Commerce. Data not avail for 1937-38 recession.
9
Net Worth Drops
19 Percent From Peak
Net Worth Outstanding, Households and Nonprofit Organizations
(billions)
$70,000
$66,007
2007Q2
$60,000
$50,000
$40,000
$53,423
2009Q3
$30,000
$20,000
$10,000
$0
1
3 1
3 1
3
1 3
1 3
1
3 1
3
1 3
1 3
1
3 1
3 1
3
Q 4Q 7Q 9Q 2Q 4Q 7Q 9Q 2Q 4Q 7Q 9Q 2Q 4Q 7Q 9Q 2Q 4Q 7Q 9Q 2Q 4Q 7Q 9Q
2
5
5 5
5 6
6
6 6
7 7
7
7 8
8
8 8
9 9
9
9 0
0 0
0
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20
Source: freelunch.com (Federal Reserve Bank Flow of Funds).
10
One for the Record Books
Calendar 2009 Estimate
April
2008
Forecast
Light Vehicle Sales (millions)
15.2
Housing Starts (million units)
1.131
US Unemployment Rate
5.8%
US Payroll Employment (% chg) 0.4%
US Personal Income (% chg)
3.6%
Jan 2010
Forecast
10.3
0.558
9.3%
-3.7%
-1.4%
Comments
Lowest Since 1970
Lowest Back to 1959
Highest Since 1983
Lowest Back to 1940
Lowest Since 1938
Source: Estimates Compare April 2008 and January 2010 Global Insight Forecasts
11
Is the Recession over?
12
Leading Indicators Point to
National Recovery
Weekly Leading Index, Smoothed Annual Growth Rate
40.0%
30.0%
01/01/10
24.2%
20.0%
10.0%
0.0%
-10.0%
-20.0%
-30.0%
-40.0%
07
08
09
07
07
07
08
08
08
09
09
09
0
0
0
0
0
0
0
0
0
0
0
0
2
2
2
2
2
2
2
2
2
2
2
2
5/
5/
5/
5/
5/
5/
5/
5/
5/
5/
5/
5/
/
/
/
/
/
/
/
/
/
/
/
/
1
4
7
1
4
7
1
4
7
10
10
10
Source: Economic Cycle Research Institute.
13
Recovery Observed in 3rd
Quarter 2009
Real GDP Growth
6.9%
3.0%
Growth
5.4%
3.5%
2.7%
3.2%
2.1%2.0%
1.4%
4.1%
3.6%
3.5%
3.0%
2.9%2.9%
3.1%
1.7%
1.6%
5.1%
0.1%
3.0%
3.6%
3.2%
2.2%
2.1%
2.1%
1.2%
1.5%
1.5%
2.5% 2.3%
2.0% 2.2%
0.1%
-0.7%
-1.3% -1.1%
-1.0%
2009Q3
-2.7%
-5.4%
-6.4%
2001 Q1
2002 Q1
2003 Q1
2004 Q1
2005 Q1
2006 Q1
2007 Q1
2008 Q1
2009 Q1
2010 Q1
Figures are annualized percent change from preceding quarter in 2005 chained dollars.
Source: Bureau of Economic Analysis. Forecast quarters in red are the December 2009 Global Insight forecast.
14
U.S. Has Lost 7.2 Million Jobs
Since December 2007
215
120
4
(72)
(111)
(139)
(154)
(122) (137) (128)
(144) (160)
(161) (175)
(303)
(321)
(380)
(85)
(304)
(463)
(519)
(597)
(652)
(681) (681)
(741)
Nov 07
Jan 08
Mar 08
May 08
Jul 08
Sep 08
Nov 08
Source: U.S. Bureau of Labor Statistics, U.S. Department of Labor
Jan 09
Mar 09
May 09
Jul 09
Sep 09
Nov 09
15
Stock Market Up 68 Percent
From March 9th Low
S&P 500 Closing Level
1600
1565
10/09/07
1400
1200
1136
01/12/10
1000
800
677
03/09/09
1/
2/
20
7/ 01
2/
20
01
1/
2/
20
02
7/
2/
20
1/ 02
2/
20
03
7/
2/
20
03
1/
2/
20
04
7/
2/
20
04
1/
2/
20
05
7/
2/
20
1/ 05
2/
20
7/ 06
2/
20
06
1/
2/
20
7/ 07
2/
20
07
1/
2/
20
08
7/
2/
20
08
1/
2/
20
7/ 09
2/
20
09
600
Source: freelunch.com, reuters.com
16
Blue Chip Economists’
Take on the Recovery
 Consensus predicts real GDP will grow slightly exceeding
its trend rate (2.8% to 3.1%) over the next five quarters.
 Although with growth better than predicted six months
ago, the projected rate of growth still falls well short of
that typically seen after steep recessions.
 Labor markets are expected to improve, but modestly,
keeping the unemployment rate from falling back below
10% on a sustained basis until the final quarter of this
year.
Source: December 2009 Blue Chip Indicators.
17
GDP Generally Strong
in Year After Recession
Recession
Trough
Peak to
Trough
Change
Y-O-Y
GDP Growth
4 Qtrs
Later
1949Q4
-1.6%
13.4%
1954Q2
-2.5%
7.9%
1958Q2
-3.1%
9.5%
1961Q1
-0.5%
7.5%
1970Q4
-0.2%
4.5%
1975Q1
-3.2%
6.2%
1980Q3
-2.2%
4.4%
1982Q4
-2.6%
7.7%
1991Q1
-1.4%
2.6%
2001Q4
0.7%
1.9%
2009Q2
-3.7%
??
Source: BEA and Dept. of Treasury calculations. Peaks and trough are as designated by NBER for economy .
18
Government
Federal Outlays and Receipts
(last obs. September 2009)
3500
$ billions, 12-month sum
3000
Outlays are far
outpacing receipts.
Outlays
2500
2000
Receipts
1500
1000
500
Jan-89
Jan-92
Jan-95
Source: US Treasury; Encima Global
Jan-98
Jan-01
Jan-04
Jan-07
19
Government
U.S. Federal Government
Debt Outstanding
(last obs. 2009, projected by CBO 2010 to 2019)
$ trillions
20
Rise in national debt (marketable debt held
by the public) is likely to be much higher
than current estimates.
More likely
15
current
10
law
5
debt held by public
0
21916 23377 24838 26299 27760 29221 30682 32143 33604 35065 36526 37987 39448 40912 42376
Source: Department of Treasury; CBO; Encima Global
20
Government
Federal Government Debt
as % of GDP
(last obs. 2009, forecast 2010 to 2019)
80
Debt to GDP ratio heading toward
80% even with optimistic GDP
growth assumptions.
70
OMB forecast of
President's FY2010
budget
% of GDP
60
50
40
CBO
baseline
30
20
1950
1960
1970
Source: OMB; CBO; Encima Global
1980
1990
2000
2010
21
Government
Social Security and
Medicare/Medicaid Spending
12
Medicare and Medicaid outlays much
bigger than Social Security’s.
% of GDP
10
Medicare & Medicaid
expenditures
8
Social Security
6
expenditures
2025
4
2015
2
CBO projections
0
1960
1970
1980
Source: CBO; Encima Global
1990
2000
2010
2020
2030
2040
2050
22
Prices and Markets
Volatility in Headline CPI
6%
(-1.3 year-over-year for last obs. September 2009, projected to December 2009)
0
5%
y/y % change
4%
3%
2%
1%
0%
-1%
-2%
-3%
Jan-95
Jan-97
Jan-99
Jan-01
Source: Bureau of Labor Statistics; Encima Global
Jan-03
Jan-05
Jan-07
Jan-09
23
What about Michigan?
24
Difference from Peak (%)
Michigan Employment Never
Recovered in Past Expansion
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
Note: Peak is calculated from Michigan’s June 2000 Peak.
Source: Bureau of Labor Statistics
25
Worst Michigan
Employment Drop on Record
Ten Year Change
50%
40%
30%
20%
10%
0%
-10%
Nov 1999 – Nov 2009
-20%
-16.5%
6
8
0
2
4
6
8
0
2
4
6
8
0
2
4
6
8
0
2
4
6
8
-6 n-6 n-7 n-7 n-7 n-7 n-7 n-8 n-8 n-8 n-8 n-8 n-9 n-9 n-9 n-9 n-9 n-0 n-0 n-0 n-0 n-0
n
Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja
Source: Bureau of Labor Statistics. Non-seasonally adjusted data.
26
Michigan Loses Nearly 1 Million Jobs
88.0
Michigan Wage and Salary Employment Y-O-Y Change
(In Thousands)
-17.0
-76.7
-112.7
-71.0
-9.2
-63.2
-34.0
-58.7
-85.0
-109.2
-283.0
91- 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
00
Avg.
Forecast
Note: Bureau of Labor Statistics. 2009-2011 estimates are from the January 2010 Consensus forecast.
27
Michigan Unemployment Rate
To Rise Sharply
Michigan November Rate was 14.7%
15.7% 15.3%
14.1%
8.4%
5.2%
6.2%
7.1% 7.1% 6.8% 6.9% 7.1%
3.7%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Forecast
Source: Bureau of Labor Statistics and January 2010 Consensus Forecast
28
Michigan Personal Income
Falling Relative to U.S.
Michigan per Capita Income as a Percent of U.S. Per Capita Income
1.25
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
0.85
Source: Department of Treasury calculations from Bureau of Economic Analysis data.
29
Forecast of Michigan Real Disposable
Income Growth
(1982–1984 $), 2009–2011
2%
1.3
0.7
1%
0.2
0.4
0%
- 1%
- 2%
– 1.9
- 3%
2007
RSQE: January 2010
RSQE: January 2010
2008
2009
2010
2011
30
Wage and Personal Income Growth
2001– 2008
U.S.
Michigan
Total personal income
37.7%
16.6%
Per capita personal income
29.1%
16.6%
State rank, Michigan per capita income
RSQE: January 2010
2001
2008
20
37
31
Industry Restructuring
25-Year Recovery Cycle
1960
New England Textile Industry
1980
Pittsburgh Steel Industry
2000
Michigan Auto Industry
32
Real Estate Turnaround?
33
Home Prices Fall Sharply
Year-over-Year Pct Change
U.S. Prices Fall After Sharp Run Up
30.00%
U.S. 10 City
20.00%
10.00%
0.00%
-10.00%
-20.00%
Detroit Area
Oct 09
-15.1%
-30.00%
Jan-92
Jan-94
Jan-96
Jan-98
Jan-00
Source: Case Shiller 10-Metro Area Home Price Index.
Jan-02
Jan-04
Jan-06
Jan-08
34
U.S. Home Sales Turning
Swung by Homebuyers’ Tax Credit
(Millions of units)
(Millions of units)
1.4
7.5
1.2
7.0
1.0
6.5
0.8
6.0
0.6
5.5
0.4
5.0
0.2
4.5
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
New Home Sales (Left scale)
Source: Global Insight
Existing Home Sales (Right scale)
35
Record Low U.S. Housing Starts
Down 75% from Peak
Jan 06
2,273
2500
2000
1500
1000
Nov 09
574
500
0
Jan-90
Jan-92
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Source: New Privately Owned Housing Units Started (thousands), U.S. Dept of Commerce
Jan-08
36
Michigan Home Building
Falls 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 YTD
1,223
187
721
219
6,503
Source: U.S. Department of Commerce.
2009YTD through November.
37
Overall Michigan Property
Value Growth Slowing
Yearly Percent Change
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010est
2011est
Multiplier for
Property
2.8%
2.7%
1.6%
1.9%
3.2%
3.2%
1.5%
2.3%
2.3%
3.3%
3.7%
2.3%
4.4%
-0.3%
2.5%
Total SEV
Growth
8.2%
9.5%
9.9%
9.0%
10.0%
9.8%
7.5%
6.3%
5.9%
5.0%
3.8%
-1.3%
-5.4%
NA
NA
Source: State Tax Commission and January 2010 Consensus Conference.
Taxable Value
Growth
5.7%
6.1%
6.0%
5.5%
7.1%
6.7%
4.8%
5.7%
5.6%
5.8%
5.2%
1.4%
-0.8%
-8.0%
-4.3%
38
Michigan Real Estate
Transfer Tax Falls
Year-over-Year Change in 6 Month Trailing Average
Sep 04
24.0%
30.00%
20.00%
Dec 09
-1.2%
10.00%
0.00%
-10.00%
-20.00%
-30.00%
-40.00%
Jan- Aug- Mar- Oct- May- Dec- Jul- Feb- Sep- Apr- Nov- Jun- Jan- Aug- Mar- Oct- May- Dec00
00
01
01
02
02
03
04
04
05
05
06
07
07
08
08
09
09
Source: Michigan Department of Treasury
39
Michigan Building Permits
1963 – 2008
and Forecast 2009 – 2011
80,000
Forecast
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
'63 '67 '71 '75 '79 '83 '87 '91 '95 '99 '03 '07 '11
'65 '69 '73 '77 '81 '85 '89 '93 '97 '01 '05 '09
RSQE: January 2010
40
Mortgage Delinquency
Rates Double
Source: Economy.com using Mortgage Bankers Association Data
41
Real Estate Market Rebound
Depends on Interest Rates
8
Actual
Forecast
Conv. Mortgage
10 Year T-Note
6.2
3-Month T-bill
6
5.7
5.6
5.9
Percent
4.9
4.3
4
4.1
3.9
3.4
3.5
3.2
2
1.3
0.3
0.3
0.1
0
4
’07
1
2
RSQE: January 2010
3
2008
4
1
2
2009
3
4
1
2
2010
3
4
1
2
2011
3
4
42
How Do State
Revenues Look?
43
Difficult Economic Times
Reduce Revenue Growth
Cause
Effect
 Recession
Employment Loss and
Income Loss
 Housing Boom/Bust
Credit Crisis and
Consumption Drop
 Auto Industry/
Relative Decline in
Personal Income
Restructuring
44
GF-GP Revenues Drop Sharply
in FY 2009 and FY 2010
GF-GP Revenues
Year-Over-Year Pct. Change
12.5%
7.5%
3.3%
3.0%
1.0%
1.0%
0.6%
-0.5%
-8.2%
-6.3% -5.6%
-6.3%
-21.3%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
45
State GF-GP Revenue at FY ‘91 Level
Down 19% Since 2000
Billions of Dollars
$12.0
$10.0
$8.0
$6.0
1991
$6.9B
2000
$9.8B
2010
$6.9B
$4.0
$2.0
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
$0.0
Note: GF-GP figures are presented on a Consensus basis. 2009 and 2010 are estimates.
46
GF-GP and School Aid Revenue
Baseline Growth Rates Before Tax Changes
8.3%
8.0%
6.5%
7.9%
6.0% 6.1%
5.9%
6.1%
5.5%
3.8%
2.9%
4.0%
2.6%
1.9%
1.0% 1.1%
1.1%
0.9%
0.0%
-1.3%
-1.7%
-4.0%
-0.9%
-2.7%
-4.7%
-8.0%
-10.5%
-12.0%
1990
1993
1996
1999
2002
2005
2008
2011
Average Agency
Forecasts
47
Balancing FY 2011 GF/GP
Will Be Difficult
Billions
Consensus Revenue Estimate
$7.0
Other Resources
$1.0
Total Estimated Resources
$8.0
Expenditures: Current Services Estimate
$9.6
Projected Year End Balance*
($1.6)
* ARRA funding available to offset GF expenditures will decline from $1.2 billion in FY10 to $0.2 billion in FY11.
Source: Michigan Department of Treasury
48
Balancing FY 2011 SAF Budget
Tough on Schools
FY 2011
(billions)
Beginning Balance
Consensus Revenue Estimate
$0.1
$10.5
Fed Aid and GF Grant (assume FY 10 Amt)
$1.6
ARRA Funds
$0.2
Total Estimated Resources
$12.4
Expenditures Current Services Estimate
$12.8
Projected Year End Balance
($0.4)
Source: Michigan Department of Treasury
49
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.
50
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
51
Three Types of State Spending:
Grants, Services, and Tax Breaks
Grants - $15.3 Billion
Services - $13.1 Billion
Federal Funds - $14.9 Billion
Tax Expenditures - $35.8 Billion
___________________________
Pensions and Retirement Benefits
52
Tax Breaks / Expenditures
Larger Than Tax Credits
Tax Breaks
Tax
Collections
Lisa M Winans
Source: House Fiscal Agency
53
Conclusion
U.S. recession worst in decades.
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.
Michigan real estate market likely at bottom but
slow recovery ahead.
54