State faces $6.3B budget shortfall as COVID-19 craters revenues

Michigan Capitol | Susan J. Demas

The state budget is estimated to be $6.3 billion short in the next two fiscal years as state revenues fall due to the COVID-19 pandemic, and state leaders are hoping for a massive bailout from the federal government to help ease the damage.

State budget experts called the state’s economic forecast “sobering” and “unprecedented” at Friday’s Consensus Revenue Estimating Conference (CREC), where top officials from the Treasury Department and the nonpartisan House and Senate fiscal agencies agree to economic and revenue forecasts.

“To say that the numbers that we just saw are sobering is probably the understatement of my career,” said state Budget Director Chris Kolb, a former state lawmaker. “There’s no playbook that’s on the shelf to really address the loss of revenue of this size this quickly.”

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Preliminary projections made in recent weeks pegged the two-year budget hole between $4 and $7 billion, so Friday’s estimate falls on the higher end.

Michigan has two main discretionary spending accounts, the School Aid Fund that’s primarily for K-12 education and the General Fund, which funds a variety of priorities, including roads, higher education, environmental protection, the Michigan State Police and safety net programs.

The General Fund is estimated to see a $2 billion drop in tax revenue for Fiscal Year 2020, which ends on Sept. 30, while the School Aid Fund will see an almost $1.2 billion decrease.

The per-pupil funding for K-12 students, which sits at a minimum of $8,111 per district for this fiscal year, is expected to see a cut of about $650 per student. 

State Rep. Camilleri (D-Brownstown Twp.) said that a slashed budget could be even more detrimental to school districts amid a health crisis when parents may be pulling students from school based on health concerns. 

“We want to maintain a level of funding for our school districts, but if all of a sudden not only are we seeing a budget shortfall, but then we see enrollment drop, then some of these school districts just won’t be able to survive,” Camilleri said. 

Michigan has an extra $321M in 2020, is almost $12B below Headlee tax limit

Back at the January CREC, the state had a somewhat optimistic fiscal outlook with an overflow of about $700 million. The state was forecasted to have $321 million more in revenue for Fiscal Year 2020 and about $412 million more for Fiscal Year 2021. 

Michigan’s annual budget is roughly $60 billion.

But now, the budget hole is so deep that Kolb said he could completely eliminate 12 state departments and the budgets for the Legislature and judiciary branch, and the state still couldn’t come up with  $2 billion.

Michigan has about $1 billion set aside in a rainy day fund, but Kolb noted that won’t cover the shortfall, even for the current FY 2020 budget. 

“And what we’re seeing is potentially as bad, if not worse, than the Great Recession,” Kolb said. “And we were only able to make it through that, because the federal government provided us resources, so we could backfill our losses.”

The Democratic-led U.S. House is expected to vote Friday on another COVID-19 relief package, the HEROES Act, that would include $1 trillion in aid for states and local governments, as the Advance previously reported.

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However, President Donald Trump shot down the Democrats’ package Wednesday, calling the relief proposal “dead on arrival.”

But many lawmakers and stakeholders in Michigan are holding onto hope that the feds will provide aid.

“Just like every other state that’s been ravaged by COVID-19, we will need a national solution to address this national problem,” Senate Minority Leader Jim Ananich (D-Flint) said in a statement. 

Gov. Gretchen Whitmer has until September to work with the Republican-controlled Legislature to decide on budget cuts for the current fiscal year if Michigan doesn’t receive enough financial assistance from D.C. to cover revenue losses.

The Legislature also only has until July 1 to get the Fiscal Year 2021 budget to Whitmer under a law signed after last year’s rough budget fight.

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“We are delayed in terms of receiving some of the information that makes us most comfortable in terms of making these forecasts,” said Jim Stansell, a House Fiscal Agency senior economist.

Typically, CRECs take place in January and May. However, Stansell called for another revenue estimating conference in August or September to get “one last estimate … after we have a chance to review the delayed returns to ensure we have a Fiscal Year ‘20 budget in line.”