State Revenue Picture Coming Into Focus, $6.2 shortfall in 2020 and 2021
The Directors of the House & Senate Fiscal Agencies met with the State Treasurer in mid-May for the bi-annual Consensus Revenue Estimating Conference (CREC), utilized to update state revenue estimates for the current and upcoming fiscal years, and as predicted the news is not pretty. Overall, state revenues are estimated to be down $6.2 billion in Fiscal Years 2020 and 2021, compared to previous projections. Fiscal Year 2020 General Fund (GF) revenue, reflecting the state’s main checkbook from state funds, is projected to be $2 billion lower than estimates, or down 18.8%. Fiscal Year 2021 GF is projected to be $1.9 billion lower than previous estimates. Put another way, state GF revenue in January was estimated to be just north of $11 billion, we are now looking at available revenue of $9 billion, meaning policymakers will be forced to resolve the $2 billion shortfall when we are already 2/3 through the budget year. Additionally, the state School Aid Fund is predicted to be short $1.2 billion and $1.1 billion in FY 2020 and 2021, respectively.
There were already significant pressures on the state General Fund pre-crisis, including the transportation earmark of personal income tax ($468 million in 2020 and $600 million in 2021) and inflationary growth in Medicaid costs. Revenues are projected to resume growing in FY 2021 and FY 2022, but based on the staggering reductions noted above, it could be years before we get back even to a level of state revenue seen in 2019. While Michigan will see over $3 billion in federal funding for COVID-19 response, as of this writing most of that money is not allowed to be utilized to backfill shortfalls in the state budget. State leaders are asking the federal government for flexibility and additional resources to meet the current budgetary challenges which far exceed shortfalls experienced during the 2008-2020 Great Recession. In terms of context, the state theoretically could eliminate up to 12 entire state Departments, including the entire DNR, and still not fully resolve the current shortfall. Obviously that is an extreme example, but it is worth preparing for unprecedented cutbacks in every area of the state budget, possibly up to 20% reductions based on certain Departments, without federal assistance.
Obviously this is grim news, but we now at least have preliminary data on the revenue side of the budget equation, which will now allow policymakers to move on to the expenditure side. While we expect another CREC possibly in August to refine these estimates given the unprecedented times we are experiencing, budget work can now begin in earnest with a number of variables still to be determined.
Governor Whitmer and legislative leadership continue to disagree over the scope of authority for the Governor to keep in place a statewide state of emergency and associated Executive Orders, with attorneys for both parties actually arguing their cases in court as of this writing (May 15). Michigan’s COVID-19 infection curve continues to significantly flatten, with associated deaths declining as well. Multiple sectors of the state economy are reopening, including a specific reference by the Governor to forestry earlier this month, and the current stay-at-home order has not yet been extended beyond May 28. However, the Governor and legislative leaders appear to remain far apart with respect to overall strategies to manage the scope and speed of the reopening of the economy.