The state budget is facing a massive shortfall caused by the COVID-19 pandemic, with estimates of a roughly $7 billion revenue hit over the next two years.
And Michigan is far from alone, as states all over the country are grappling with soaring unemployment, plummeting tax revenue and a looming recession. The Washington, D.C.-based think tank the Economic Policy Institute (EPI) pegs the budget hole for state and local governments at $500 billion through 2021.
“Given balanced budget requirements for state and local governments, this revenue collapse will translate in coming months into extreme pressure to reduce spending,” write EPI’s Celine McNicholas, Josh Bivens and Heidi Shierholz. “This spending cutback will weigh heavily on recovery, just as public health restrictions are hopefully lifted — and we should be hoping for as rapid a bounceback as possible.”
Michigan Gov. Gretchen Whitmer and other governors have pushed President Trump for more aid. There’s been some limited help from Congress for COVID-19 expenses in the CARES Act, but Democrats are pushing for up to $1 trillion in aid to state and local governments, with U.S. Rep. Andy Levin (D-Bloomfield Twp.) introducing legislation for a $250 billion in “stabilization funds.”
“Like every state in the nation right now, Michigan is facing an unforeseen budget crisis,” Whitmer spokeswoman Tiffany Brown told the Advance Thursday. “We have urged Congress to allow the utilization of federal dollars to address our current budget challenges, but right now, the language in the CARES Act doesn’t allow states that flexibility. Congress must come together so Michigan and every other state across the country can account for the impacts to our existing budgets.”
However, there’s been resistance from Trump and U.S. Senate Majority Leader Mitch McConnell (R-Ky.), who have argued that state aid would be a “blue state bailout,” as the Advance previously reported. Many Republicans favor cuts to safety net programs and worker pensions instead.
State Senate Majority Leader Mike Shirkey (R-Clarklake) and House Speaker Lee Chatfield (R-Levering) on Wednesday announced the GOP-controlled Legislature would sue the Democratic governor to strip her of emergency powers used during the pandemic. The suit will use taxpayer dollars.
During the press conference, the Advance asked GOP leaders how they plan to address a potential budget shortfall of up to $7 billion over two years caused by the pandemic and if they’re seeking help from Republicans in Washington for aid to states and cities.
Republican leaders said they were ready to make budget cuts, but did not answer whether they have talked with their GOP counterparts in D.C. about aid.
“There’s no denying that we have a very, very rough budget process ahead of us — not just for the next budget year — but in particular, for this budget year,” Shirkey said. “We’re going to have to be able to roll our sleeves up quickly to address those revenue shortcomings.”
“I’ve repeatedly said that there’s no line item, no project, no budget and no person that’s immune from a prioritization process for us to be able to deliver a balanced budget by the end of September [when the fiscal year ends],” he added.
Shirkey noted that won’t be an easy process. Chatfield added that their lawsuit — which will be funded by taxpayer dollars — is one step toward ensuring a “constitutional structure” so budgets and other matters can be decided in the future.
Republican leaders also have floated the idea of refusing to allocate any more money for COVID-19 until Whitmer agrees to their demands about relinquishing her emergency powers.
Back in mid-April, Whitmer, Wisconsin Gov. Tony Evers and Pennsylvania Gov. Tom Wolf sent a letter to Trump. They requested he vamp up additional resources and funding for states and cities due to the crisis.
“Without this leadership, the damage to our state economies will be exacerbated by the cuts we know we will be forced to make,” the governors wrote.
Passing a balanced budget is one of the primary duties of the Legislature.
While the GOP-led Legislature has been primarily focused since April on checking Democratic emergency powers used to close businesses and restrict activities during the COVID-19 crisis, there’s been little work on Michigan’s budget for next year, Fiscal Year 2021.
The budget situation looks bleak.
“As Michigan’s economy screeched to a halt, state revenues began to drop. More people are out of work, so fewer are paying income taxes,” Michigan League for Public Policy (MLPP) senior policy analyst Pat Sorenson noted in a column in the Advance. “And, with unemployment high and many stores and other commerce shut down, sales tax revenues began to drop. Together, individual income taxes and sales tax taxes are the backbone of the state’s budget — representing over 60% of the state’s financial resources.”
Normally, the budget process dominates late winter and spring in the Capitol with dozens of Appropriations Committee hearings hashing out spending for every state department and priority, including prisons, parks, veterans, police, health care, safety net, municipalities, the environment and more.
Governors have to sign the a budget before Oct. 1, the start of the new state fiscal year. As a result of a compromise reached in 2019 after a tough first budget year in divided government, the GOP-led Legislature is supposed to have a budget on Whitmer’s desk by July 1.
The Fiscal Year 2020 budget is $59.4 billion, but big cuts are expected before the fiscal year closes. In March 2019, Whitmer had proposed $60.2 billion in spending for FY 2020 and a 45-cent gas tax increase to fix the roads — which had been her top issue. After Republicans refused to negotiate a final budget with Whitmer when there was an impasse on roads, Whitmer chopped almost $1 billion from the budget and shifted around $625 million for her priorities.
Whitmer and Republicans have come to two compromises over supplemental spending plans since that have restored funding for programs like autism services. However, Whitmer vetoed in March $80 million in previously agreed-to spending for areas like Pure Michigan, as spending to fight the spread of COVID-19 began to soar. This was agreed to by Democratic and GOP leaders in the Legislature.
Before the COVID-19 crisis, Whitmer introduced a $62 billion budget in February. The main controversy was that she had a big bonding plan to fix roads that only needed approval from a state administrative board, not the Legislature. Afterward, Republicans argued bonding should be under the Legislature’s purview.
Now both Whitmer and the Legislature are facing a looming fiscal crisis for both the current fiscal year and the next. Preliminary estimates indicate a two-year hole of $4 to $7 billion. On May 15, top fiscal officials from the Department of Treasury, House Fiscal Agency and Senate Fiscal Agency will give an official projection at the Consensus Revenue Estimating Conference (CREC).
Budgets are always challenging during tough economic times. Unlike the federal government, Michigan can’t run a deficit. During Michigan’s last recession in another fraught divided government situation, the state briefly shut down in both 2007 and 2009.
Handing down giant cuts isn’t as easy as you might think. Almost 40% of the budget already comes from federal funding with big strings attached for areas like roads, schools and health care, and another 18% is in other restricted funds.
So there are two main funds that lawmakers have control over totaling roughly $25 billion. The General Fund has been basically flat for two decades at $11 million. And the School Aid Fund is around $14 billion. If the Legislature has to chop roughly $3.5 billion per fiscal year, that’s one-third of the General Fund alone.
That’s a daunting task. And that’s why many Democrats and groups like the MLPP are hoping that Congress does agree on more aid to state and local governments soon.
“Without that relief, Michigan’s economy could be dragged lower than it was during the previous recession, with another slow recovery,” Sorenson said. “Michigan residents and businesses can’t afford that setback.”