Download Michigan Economic and Budget Outlook

Michigan Economic
and Budget Outlook
Robert Kleine
State Treasurer
Bloomfield Hills School District
April 19, 2011
1
Summary

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2

U.S economy doing better than expected
10-year recession in Michigan is over
Michigan has revenue problem not spending
problem
State revenues running well above projections
Required spending cuts could do more damage than
tax increases
Business tax cuts not likely to create many new jobs
Schools districts expected to cut costs and deliver
better results
Local govts. facing fiscal crisis- rev. sharing cuts will
push many over edge
Recent U.S. Economic Developments
3
Six Quarters in a Row of
GDP Growth Observed
Real GDP Growth
3.0%
Growth
6.9%
5.4%
3.5%
2.7%
1.4%
3.2%
2.1%2.0%
4.1%
3.6%
3.5%
2.9%2.9%3.0%
1.6%
3.1%
1.7% 2.1%
0.1%
-1.3%
3.0%
1.4%
0.1%
3.2%
2.9%
2.3%
0.9%
1.6%
0.6%
-0.7%
-1.1%
5.0%
3.7%
3.2%2.8%3.0%3.5%3.6%
2.6%
1.7%
-0.7%
-4.0%
-4.9%
-6.8%
2001 Q1
4
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.
ISM Indices Show Expansion
65
ISM
Manufacturing Index
May 2011= 53.5
60
55
50
45
40
35
30
5
Source: Institute for Supply Management.
ISM
Non-Manufacturing Index
june 2011 = 53.3
U.S. Has Gained Nearly 1.5 Million
Jobs Since February 2010
458
127
84
277
192
235 232
194
171 152
93
68
54
13
-55 -39-35
-130
-83-72
-185 -178
-233 -231
-267
-221
-231
-236
-300
-49-59-29
-192
-386
-434
-509
-502
-619
-660
-726
-802 -820 -796
Nov 07
6
Feb 08
May 08
Aug 08
Nov 08
Feb 09
May 09
Aug 09
Nov 09
Feb-10
Source: U.S. Bureau of Labor Statistics, U.S. Department of Labor; 4/1/2011
May-10 Aug-10 Nov-10
Feb-11
11-May
U.S. Retail Sales, % change,
year-ago month, 2007-2010
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
-6.0%
-8.0%
-10.0%
-12.0%
7
Corporate Profits Up Sharply in
2009 and 2010
2010 Q4: $1678.3
(Billions of Dollars)
$2,000
$1,500
$1,000
$500
$0
1980Q1
8
1985Q1
Source: Bureau of Economic Analysis
1990Q1
1995Q1
2000Q1
2005Q1
2010Q1
Key Economic Concerns
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
9
Rising oil prices
Slow recovery of housing market
Deep cuts in government spending
Continued high unemployment
Slow growth in incomes of middle class
Higher Income Groups Capture
Most Income Gains
Average After-Tax Income by Income Group
1979-2007 (in 2007 dollars)
Income Category
10
Percent
Change
1979-2007
Dollar
Change
1979-2007
1979
2007
Lowest fifth
Second fifth
Middle fifth
Fourth fifth
Top fifth
$15,300
$31,000
$44,100
$57,700
$101,700
$17,700
$38,000
$55,300
$77,700
$198,300
16%
23%
25%
35%
95%
$2,400
$7,000
$11,200
$20,000
$96,600
Top 1 Percent
$346,600
$1,319,700
281%
$973,100
Income Inequality
Louis Brandeis: "We
can either have
democracy in this
country or we can have
great wealth
concentrated in the
hands of a few, but we
can't have both."
Recent Michigan Economic Developments
12
Michigan’s 10-year recession
Comes to an End
Michigan Wage and Salary Employment Year-Over-Year Change
(In Thousands)
Avg.
13
Cons. Forecast
Note: Bureau of Labor Statistics. 2009-2011 estimates are from the May 2010 Consensus Forecast.
Michigan’s Recent Job Gains
Have Been Strong
Wage and Salary Employment
Manufacturing
Private nonmanufacturing
Government
14
Dec 2008 June 2009
-216.7
-104.9
-114.1
2.3
Mar 2010Mar 2011
89.0
38.4
66.3
-15.7
Source: RSQE, Michigan Forecast April 2010, and Bureau of Labor Statistics.
Sept 2010Mar 2011
97.1
29.1
77.0
-9.0
Michigan Unemployment Rate,
Monthly, 2008-2011
Unemployment Rate
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
10.4%
2008
15
2009
2010
2011
Auto Sales Recovering
16
Big 3 Sales Improving
17
Michigan Vehicle Employment
Transportation Equipment Employment Increases
(Thousands)
18
Source: Bureau of Labor Statistics.
Michigan Payroll Employment and
Vehicle Production
6 Month Moving Average – Year over Year Percent Change
60.0%
2.0%
40.0%
0.0%
20.0%
-2.0%
0.0%
-4.0%
-20.0%
-6.0%
-40.0%
-8.0%
-60.0%
-10.0%
Jan99
19
4.0%
Jan00
Jan01
Jan02
Jan03
Jan04
Jan05
6 Month Vehicle Prod
Source: Bureau of Labor Statistics & Michigan Department of Treasury
Jan06
Jan07
Jan08
6 Month Payroll
Jan09
Jan10
Jan11
Employment Growth
Vehicle Production
80.0%
State Government Revenue
20
Michigan Cut Taxes Significantly
from 1995 to 2005
FY Tax Cuts in Millions
IIT Rate Increase
& MBT Surcharge
21
Source: Michigan Department of Treasury; does not include Proposal A property tax cut
Michigan Taxes Decline as
a Percent of Personal Income
Michigan State Tax Revenue as a Percent of Personal Income
22
Note: FY 2010 tax estimate based on May 2010 Consensus.
FY 2010 personal income based on ORTA and consensus estimates May 2010.
FY ‘10 GF-GP Revenue at FY ‘88 Level
Down 32% Since 2000
Billions of Dollars
1988
$6.7B
23
Note: GF-GP figures are presented on a Consensus basis. 2010 estimated.
2000
$9.8B
2010
$6.7B
FY ’10 Inflation Adjusted
GF-GP Lowest Since 1965
Billions of 2010$
1999
$14.3B
1965
$6.5B
24
Note: GF-GP figures are presented on a Consensus basis and adjusted for inflation to 2010 dollars using
the state and local government price deflator. FY 2010 is the May 2010 Consensus estimate.
2010
$6.7B
School Aid Revenues
FY 2010 Total Earmarked Resources: $10.7 Billion
Almost half of the School Aid revenues come from the Sales and Use Tax.
25
Source: May 2010 Consensus
SAF Revenues Grow
in FY 2011 and FY 2012
SAF Revenues
Year-Over-Year Pct. Change
26
Source: May 2010 Consensus Conference.
SAF Revenue Below FY 2005
Level
27
Consensus Estimate
FY ’11 Inflation Adjusted SAF
Lowest Since Proposal A Adopted
Billions of 2011$
2011
$10.8B
1995
$11.6B
Consensus Est.
28
Note: SAF figures are presented on a Consensus basis and adjusted for inflation to 2011 dollars using
the state and local government price deflator. FY 2010 & FY 2011 are the May 2010 Consensus estimates.
How Does The State
Budget Look?
29
Total State Spending
FY 2011 Total Spending: $47.1 Billion
30
Over 75% of total budget devoted to health,
human services and education spending.
Source: OBDGG, CM, 3/10/10
FY 2012 GF/GP Budget Recommendation
(Millions of $)
GF/GP Revenue
$8,197
Current Services Spending
$9,608
Projected Funding Gap
-$1,411
Proposals to Close Funding Gap
31
Tax Reform & Revenue Adjust.
$849
Spending Reductions
$659
Structural Reforms
$324
Investments
-$260
Total
$1,571
Proj. Year-end Balance
$160
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
$272.6
$10,979.1
$184.3
$2,042.0
$13,478.0
FY 2012
$523.8
$11,193.7
$0.0
$1,688.4
$13,405.9
Expenditures **
$12,915.9
$12,954.2
$12,995.6
$163.3
$523.8
$410.3
Balance
32
* Ongoing Revenue equals consensus estimate for FY10 & FY11.
** Expenditures in FY12 are increased from FY11 by inflation.
Source: Michigan Department of Treasury.
Proposed Budget Reductions, FY
2012 (Millions)
33
Program
Amount
Higher Education- 15% reduction
$222.4
Community Health, Corrections,
Human Services
$209.6
Statutory Revenue Sharing
$292.1
County Revenue Sharing
$51.8
Employee Compensation
$180.0
Other
$226.9
School Aid
$781.0
Michigan Expenditure Growth
Lowest Among States
GF Expenditures
% Growth
Growth
2001 to 2009
Rank
34
Total Exp. Less Federal Aid
% Growth
Growth
2001 to 2009
Rank
Illinois
10%
47
14%
49
Indiana
40%
19
34%
42
Michigan
-13%
50
0%
50
Ohio
29%
35
29%
45
Wisconsin
15%
43
25%
46
Missouri
9%
48
47%
48
U.S. Avg.
30%
47%
Source: Office of Revenue and Tax Analysis, Michigan Dept. of Treasury, 07/27/10, based on
NASBO State Expenditure Surveys 2001 and 2009.
Michigan State Government
GF/GP Appropriations
Dollars in Millions
Spending Categories:
35
% Chg
% Chg After Inflation
FY 2001
FY 2010
Universities & CC
School Aid
Corrections
Community Health
Human Services
State Police
Other
$2,101
386
1,620
2,674
1,216
321
1,427
$1,551
30
1,920
2,303
897
268
942
-26.2%
-92.2%
18.5%
-13.9%
-26.3%
-16.6%
-34.0%
-65.5%
-131.5%
-20.8%
-53.2%
-65.6%
-55.9%
-73.3%
Total
$9,745
$7,911
-18.8%
-58.2%
Revenue Sharing
$1,600
$992
-38.0%
-77.3%
Source: State Budget Office.
Michigan State Government Total
Appropriations
Dollars in Millions
Spending Categories:
Universities & CC
School Aid
Corrections
Community Health
Human Services
Transportation
Revenue Sharing
Other
Total
36
Federal Aid
Source: State Budget Office.
% Chg
% Chg After Inflation
FY 2001
FY 2010
$2,236
10,892
1,700
8,572
3,720
3,026
1,601
5,252
$1,912
12,707
1,996
13,414
6,104
3,227
992
4,813
-14.5%
16.7%
17.5%
56.5%
64.1%
6.6%
-38.0%
-8.4%
-53.8%
-22.7%
-21.9%
17.1%
24.8%
-32.7%
-77.4%
-47.7%
$36,998
$45,164
22.1%
-17.3%
9,566
18,816
96.7%
57.4%
Michigan State Government
10,700 Fewer Employees than 2000
Fiscal
Year
Governor
1973
1978
1989
2000
2010
2011
Milliken
Milliken
Blanchard
Engler
Granholm
Snyder
Number
State
Employees
% Change 1978-2011
% Change 2000-2011
37
Source: Michigan Department of Treasury
Non-Corrections
State
Employees
Corrections
Employees
52,673
64,456
64,560
61,493
50,615
47,607
50,316
59,990
52,038
43,841
35,672
33,141
2,357
4,466
12,522
17,652
14,943
14,466
-26%
-23%
-45%
-24%
235%
-18%
Government Not Large
Compared to Other States
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
State
38
Source: Bureau of the Census, 2008 State and Local Government Employment Survey
Proposed Changes to FY 2012
Budget
Strengths of Proposal
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Treats tax expenditures as spending- finally
Improves horizontal equity
$200 million for OPEB funding
Addresses structural budget deficit
Simplifies business tax
Weaknesses of Proposal
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

Increases income inequality
Shifts burden from business (particularly well off
professionals) to seniors and low income
families
Employee concessions excessive- requires 8.5%
pay cut plus 20% payment for health care
Increased taxes on individuals will offset benefits
of lower business taxes
Revenue sharing cuts will be devastating
Weaknesses of proposal
(cont.)


Corporate income tax is unstable and easy to
manipulate
Education cuts will hurt economic future
Priorities
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
Retain all or most of EITC
Reduce revenue sharing cuts
Reduce tax burden on low-income seniors
Reduce tax cuts for non-corporate
businesses
Reduce education cuts
Proposed Changes

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

Extend 6% corporate income tax to business
income with a possible exemption of $250,000raises $550-$700 million
Retain a 0.1% gross receipts tax on all businessraises $250 million
Impose a tax on selected services such as
sports tickets and service contracts
Provide a $20,000 pension exemption for
individual returns and $40,000 for joint returns,
or at minimum phase out exemption
Proposed Changes (cont.)




Leave the income tax at 4.35%- saves average
taxpayer less than $1 a week- raises $165 million
Retain or possibly reduce EITC to 10 or 15% for two
years
Use revenue in excess of estimates to restore
revenue sharing cuts or cut in EITC- revenues likely
to be at least $200 million higher in both FY 2011
and FY 2012
Add one tax credit for all charitable contributions$150/$300
Michigan Business Tax
• A Business Income Tax at 4.95%
• A Modified Gross Receipts Tax at 0.8%
• Surcharge added at 21.99% capped at $6 million per
•
•
•
•
46
taxpayer.
Provides over 30 tax credits.
Increases reliance on profits, so revenue will be more
volatile than SBT.
Revenue: $2.3 billion in FY09 and an estimated $1.9 billion
in FY10 & $2.2 billion in FY11.
Businesses with gross receipts of < $350,000 do not have
to file a return and businesses with < $20 million in gross
receipts only pay a tax of 1.8% of profit.
State Business Taxes as % of
GDP
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
48
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.
Business Tax Cuts Will Not Create
Many New Jobs



49
Business tax cuts offset by tax increases on
individuals and families and spending cuts
Most of tax relief goes to non-mobile retail
and service businesses
Business taxes are only 5% of state GDP
and tax cut amounts to only 0.5% of GDP
Business Tax Cuts by Sector









50
Services- $575 million
Prof.& Tech services- $181 million
Manufacturing- $279 million
Retail Trade- $153 million
Wholesale trade- $139 million
Real Estate- $110 Million
Construction- $90 million
Finance & Ins.- $75 million
Other- $112 million
Business Tax Options
6% Corporate income tax
$778 million
3.5% Business income tax
$780 million
2.5% BI tax plus 0.1% gross rec. tax
$830 million
6% Business income tax
$1,.4 billion
4% BI tax plus 0.1% gross receipts tax $1.2 billion
6% BI tax with $250,000 exemption
$1.25 billion
Potential Revenue Sources




Sales tax on services- up to $0.8 billion
Change business tax proposal- up to $0.6
billion
Keep income tax rate at 4.35%- $160 million
Increased revenue growth- $0.4-0.5 billion
Major Taxes: Revenue Growth
Improving
FY 2008
FY 2009
FY 2010
3.4%
-10.3%
1.3%
2.9%
1.5%
7.0%
Use Tax
-0.2%
-6.8%
5.2%
3.7%
4.3%
3.7%
Withholding
10.4%
-6.0%
-1.7%
3.1%
1.5%
8.1%
SBT/MBT
35.8%
-6.2%
-17.6%
10.4% 17.7%
11.7%
RETT
-28.5%
-32.3%
1.4%
10.2% 10.2%
3.9%
SET
-0.1%
-1.9%
-7.2%
-3.2%
5.2%
Sales Tax
53
FY 2011 FY 2012 Last Three
Est.
Est.
Months
-3.2%
Note: FY 2008 large increase in MBT due to surcharge and because the MBT is also replacing some
local property taxes and large increase in income tax withholding payments due to the tax rate increase.
Source: ORTA, Michigan Dept. of Treasury; FY 2011 & FY 2012, January 2011 consensus
Revenue Sharing Cuts for
Selected Cities








Detroit- $176 million
Lansing- $6.3 million
Grand Rapids- $6.1 million
Pontiac- $6 million
Saginaw- $4.8 million
Highland Park- $2 million
Hamtramack- $1.7 million
Ecorse- $0.84 million
Michigan Property Values
Continue to Decline
55
Year
Total SEV Growth
Total TV Growth
2005
5.9%
5.6%
2006
5.0%
5.8%
2007
3.8%
5.2%
2008
-1.3%
1.4%
2009
-5.4%
-0.8%
2010
-9.2%
-6.6%
2011 est.
NA
-4.0%
2012 est.
NA
-1.3%
Public School Teachers Average
Annual Salaries, 2008-09
Avg. Public School
Teachers Pay
2008-09
56
California
New York
Connecticut
Illinois
Michigan
Ohio
Minnesota
Wisconsin
Indiana
10 Most Populous States
10 Least Populous States
$66,986
$65,234
$63,976
$62,787
$57,327
$54,925
$51,938
$50,424
$49,198
$56,034
$50,544
US Average
$53,910
Source: National Education Association
Rank
1
2
3
5
10
15
19
20
24
10-Year Increase in Teachers
Salaries
57
Rank
State
% Increase
1
Mississippi
46.5%
2
Louisiana
45.4%
3
Arkansas
44.8%
4
North Carolina
44.4%
5
Illinois
43.4%
19
Ohio
33.0%
23
Minnesota
31.3%
38
Indiana
25.4%
43
Wisconsin
21.5%
49
Michigan
16.9%
50
Alaska
7.9%
Retirement Contribution Rates
as a Percentage of Payroll
58
FY09
FY10
FY11
FY12
State Emp. Retirement System
Defined Benefit Pension
Defined Benefit Health Care
Total Defined Benefit Costs
18.84%
11.80%
30.64%
21.36% 23.98%
11.90% 13.40%
33.26% 37.38%
37.15%
14.00%
51.15%
Defined Contribution Pension
Defined Contribution Health Care
Total Defined Contribution Costs
5.91%
11.80%
17.71%
5.91% 6.00%
11.90% 13.40%
17.81% 19.40%
6.00%
14.00%
20.00%
Public School Employees Retirement System
Defined Benefit Pension
9.73% 10.13% 12.16%
Defined Benefit Health Care
6.81%
6.81% 8.50%
Total Defined Benefit Costs
16.54% 16.94% 20.66%
15.96%
8.50%
24.46%
What Does Michigan
Need to Do?
59
What Does Michigan Need to Do?




60

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 pensions
60
Gasoline Tax Revenue Declines
Over Time
FY 2002 - $938.9 million
FY 2011 - $826.0 million
61
Forecast
Source: Michigan Department of Treasury.
Too Many Units of Government



62
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
Ingham County School Districts
School District
East Lansing
Lansing
Dansville
63
Students
Fall 2009
3,445
14,148
904
Haslett
2,722
Holt
5,902
Leslie
1,380
Mason
3,030
Okemos
4,016
Stockbridge
1,668
Waverly
2,992
Webberville
668
Williamston
1,906
Total
Source: Michigan Department of Education
42,782
Maryland School Districts
Are Large
School District
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
64
Students
Source: Maryland County Public Schools, various websites
Federal Finances
65
Total Tax Revenue as % of GDP,
selected OECD Countries, 2009
66
Rank
Country
% of GDP
1
Denmark
48.2%
2
Sweden
46.4%
3
Italy
43.5%
4
Belgium
43.2%
5
Finland
43.1%
20
Canada
31.1%
31
United States
24.0%
32
Chile
18.2%
33
Mexico
17.5%
Federal Spending Increases
During Recessions
67
Years
Expenditure Increase
1971-1973
16.7%
1974-1976
38.0%
1980-1982
26.2%
1990-1992
10.2%
2000-2002
12.4%
2008-2010
15.9%
Spending Cuts Needed to Balance Federal
Budget (with & without Bush Tax Cuts)
billions of dollars
Spending Cuts Needed When:
Tax Cuts Are Not Extended
Tax Cuts Are Extended:
Revenue Loss
Spending Cuts Needed
68
Source: Congressional Budget Office
FY 2015
FY 2020
($650)
($817)
($453)
($1,103)
($753)
($1,570)
Federal Government Spending –
FY 2010
69
Source: Office of Management & Budget
Federal Deficit as a Percent
of GDP Spikes in 2010
70
Source: Congressional Budget Office, March 2010. Deficit based on President Obama’s proposed budget.
Deficit totals are the total budget deficit.
Federal Budget:
FY 2010 and FY 2020 Projection
billions of dollars
Spending Item:
Mandatory
Social Security
Medicare
Medicaid
Other Health
Income Security
Federal Retirement
Veterans Programs
Other Mandatory Programs
Offsetting Receipts
71
Discretionary
Defense
Other NonDefense
Interest on Debt
Total
Source: Congressional Budget Office
FY 2010
$701
$519
$273
$18
$435
$140
$58
($38)
($179)
$692
$666
$202
$3,487
FY 2020
$1,191
$929
$542
$149
$293
$192
$83
$68
($306)
$880
$742
$778
$5,541
History of Recessions
# of Business
Cycles
Average
Duration
Average
Expansion
1854-1919
16
22 months
27 months
1919-1945
6
18 months
35 months
1945-2001
10
10 months
57 months
Addendum:
Duration
Peak
Unemployment
GDP Decline
Great Depression
43 months
35.3% (1933)
-26.7%
19 months (?)
10.1% (?)
-3.7%
Great Recession
72