CHICAGO - As lawmakers around the Midwest return to work in coming days, Michigan finds itself sorely unprepared to deal with the economic crisis because of ongoing structural budget imbalances and the lack of reserves, according to a new report.
"While Michigan's structural budget problems have been apparent for some time ... policymakers have been reticent to take the necessary steps to bring the two sides of the budget into alignment," according to the Citizens Research Council of Michigan, a nonprofit government research organization. "Failure to do so in advance of the current economic recession makes the job of addressing the cyclical budget obstacles all the more difficult."
The state managed through the 2001 economic recession with significant reserves of $3.9 billion. Its rainy-day fund carried a balance of $1.2 billion in 2000 but was down to just $2 million in 2007.
Today, Michigan faces a $400 million cash deficit, and its major funds have lost more than $3 billion in fund equity since fiscal 2000, while debt levels have nearly doubled, according to the report.
The council urged state policymakers - whether through revenue increases, spending cuts, or one-time measures - to adopt policies that help move Michigan towards a structurally balanced budget, and a stronger balance sheet and cash position.
"Policymakers must take care to adopt policies that will not deal with the cyclical deficit at the cost of worsening the structural deficit," said CRC director of state affairs Craig Thiel. "The approaches that have been used for much of this decade will no longer work. Tactics aimed at achieving only short-term balance in fiscal 2009 will simply compound the problem for future years."
Without significant policy and planning changes, Michigan will face average annual deficits of $840 million through 2017, the report adds. The depletion of reserves has hurt the ability of the state's school aid fund to meet its obligations without borrowing to smooth out cash-flow.
"As a result of exhausting its reserves, the SAF no longer has the cash on hand to satisfy immediate obligations and therefore must borrow from other funds ," the report said. "After the beginning of each fiscal year, the amounts are effectively repaid with the proceeds from short-term general obligation notes, another form of borrowing." The 2008 cash levels in the SAF improved but are still well below 2000 levels.
As the state faced an increasing cash strain in recent years, it has turned to borrowing, driving debt levels up by 82% between fiscal 2001 and fiscal 2007.
"In some cases, debt was issued to provide needed resources to support ongoing operations, such as the sale of future tobacco settlement revenues in 2006 and 2007," according to the report.
The level of debt devoted to primary governmental operations stood at $8.2 billion at the end of fiscal 2007, including $1.5 billion of GO bonds and $6.67 billion of revenue-supported debt. Michigan carried just $4.5 billion of debt in fiscal 2001.
"Incurring additional debt requires greater annual debt service obligations, which can add to the state's cash flow problem," the report warned.
State officials did not return calls to comment.
On Friday, legislative and economic officials will hold a revenue estimating conference to revise estimates for the current fiscal year that began Oct. 1 and to set projections for fiscal 2010 ahead of lawmakers' new session that begins next week.
Last month, the Legislature approved $146 million in budget cuts suggested by Gov. Jennifer Granholm, including the closure of two local prisons, in a bid to bring down an estimated $240 million shortfall in the current $44 billion budget. The cuts also include trimming $63 million from state welfare programs, $40 million from other programs and policies, and $10 million in administrative cuts.
At the time, budget director Bob Emerson said the administration likely would hold off on additional cuts until details of an expected federal stimulus package become clearer.
"The question for us was, 'What can we get done before the end of the year?' " he said. "We thought it was important to do something and make a down payment on what we thought the deficit was going to be."
The spending cuts spare state revenue sharing as well as higher education funding and the school aid fund.
While warning that Michigan's economic problems are likely to continue through 2009, rating analysts generally have praised the state for conservative fiscal management. In fact, some said because the state has struggled with a weak economy and faltering automobile industry for at least a decade, it could be better prepared than most to address dwindling revenues.
Standard & Poor's analyst Jim Wiemken wrote in a recent report that the state may escape a free-fall in revenues. "As the Michigan economy has remained subdued since the early part of the decade, many consumers and businesses have already been spending on a more restrained basis," he said.
Fitch Ratings and Standard & Poor's rate the state's GOs AA-minus, with Fitch assigning a negative outlook and Standard & Poor's a stable outlook. Moody's Investors Service assigns a Aa3 with a stable outlook.
Lawmakers in Iowa and South Dakota join Michigan in convening next week, while Indiana reconvenes this week. Illinois members will return early this week as Gov. Rod Blagojevich likely faces an impeachment vote. North Dakota, Nebraska, Missouri, Minnesota, Ohio, and Wisconsin lawmakers also formally convene this week.
Ohio faces a $7.3 billion budget deficit while Wisconsin is grappling with a $5.4 deficit. Iowa faces a gap of between $600 million to $700 million at the same time it is under pressure to jump-start an economy that suffered from $8 billion to $10 billion of damage from devastating floods last spring. Minnesota faces a $4.8 billion deficit, Illinois is grappling with a shortfall between $2 billion and $2.5 billion, and Missouri faces a $340 million deficit. North Dakota, a surprise success story, expects to enter the new biennial budget cycle this year with a $1.2 billion surplus.
Yesterday, Indiana Gov. Mitch Daniels outlined plans for a lean two-year budget of $28 billion that provides minimal increases to public safety of $100 million and education $80 million, while cutting many other areas of spending by 8%.
"Things could be a heck of a lot worse," Daniels said in an address before the Rotary Club of Indianapolis. "Public education is being cut, and I mean dramatically, in other states."
He said that while the state is feeling the effects of the recession, its balance sheet remains sound with $1.4 billion in cash and reserves. He added that he believes Indiana can manage through the current recession without tapping reserves.
Daniels will formally present his budget to the State Budget Committee on Thursday, one day after lawmakers return to work. The governor late last year cut $763 million in spending after fiscal analysts warned that revenues were down about $1 billion. Budget officials yesterday warned that revenues fell a further $33 million short in December.
