CHICAGO — Michigan Gov. Jennifer Granholm yesterday unveiled a $47 billion all-funds fiscal 2011 budget that eliminates a $1.8 billion shortfall in part by imposing a tax on services and cutting state employee retirement and health care benefits.

Granholm, a Democrat, also proposed reducing the state’s sales tax rate to 5.5% from 6% and phasing out an unpopular 22.5% surcharge to the Michigan Business Tax.

In presenting what is her eighth and final budget to lawmakers yesterday, the governor said the state needs to change its budget process to avoid the kind of last-minute battles that have led to brief government shutdowns the last two years.

Granholm proposed that Michigan craft a two-year budget beginning in 2012, as well as increase the number of revenue-estimating conferences held every year and impose a final budget deadline of June 30 — months ahead of the fiscal year’s start on Oct. 1.

The 2011 spending plan is the latest in a series of budgets that have needed to cover large deficits amid dwindling revenue and rising unemployment. The state relied on nearly $2 billion in federal stimulus funds to balance its 2010 budget. Granholm’s 2011 budget relies on roughly $722 million in federal stimulus funds, assuming that Congress follows through on President Obama’s proposal to enhance state Medicaid matching rates through 2011.

“The budget brings revenue and spending in line with Michigan’s harsh economic realities,” Granholm told a joint hearing of the Senate and House appropriations committees yesterday morning.

“The fiscal year 2011 budget that I’m presenting today is balanced, and it will reduce the structural deficit in the general fund, and effectively solve it in the school aid fund. It changes our tax structure to help all Michigan businesses, large and small, grow jobs … and protects people from the transition from old Michigan to the new.”

As in previous years, Michigan is heading into a new fiscal year with a significant shortfall. The 2011 deficit is expected to total $1.8 billion, state budget director Bob Emerson told lawmakers yesterday. Revenue estimates for 2011 project that the state’s general and school aid funds will total $17.4 billion, down $839 million, or 4.6%, from 2009.

“Last year we all lived through a process that seemed to be never-ending, in which we had a great deal of difficulty coming to a conclusion on a budget,” Emerson said. “On top of cutting $1 billion out of the budget, you also used more than $1 billion in the general fund of federal stimulus money.” 

“Much of that stimulus money is going away, so fiscal 2011 faces many of the same problems we faced in 2010, with the continuing unavoidable spending pressures,” he said. “Combined with those pressures, we have less federal money, and we have a $[1.8] billion shortfall in the general fund.”

By expanding the 5.5% sales tax to cover a host of consumer services, the state expects to raise $554 million in fiscal 2011, which would be used to cover a shortfall in the school aid fund, Granholm said. By the end of 2013, revenue from the new service tax would almost completely offset revenue declines from the sales tax rate reduction and elimination of the MBT surcharge, she said.

“These changes — lowering the sales tax hike, spreading it to services, and eliminating the MBT surcharge — have been recommended to us by job providers and by almost every economist and expert that has reviewed Michigan’s tax structure,” Granholm told legislators, saying Michigan’s tax structure is based on an industrialized economy that no longer exists.

The budget proposes cutting $566 million in general fund spending, including $140 million by easing sentencing standards in the Department of Corrections and $116 million in cuts to state employee retirement and health care benefits.

The state would begin to address its $3.1 billion unfunded pension liability by asking employees to contribute 3% to their pension plans.

The spending plan includes a $2.7 billion Department of Transportation budget that assumes major losses in federal aid, saying the state lacks the match funding needed to secure the federal dollars. In total, the state expects to lose $528 million in federal funds in 2011 unless new revenue sources are found, as recommended by a statewide transportation task force, according to budget documents.

“Lack of legislative action on the task force proposals will significantly affect the transportation budget for fiscal year 2011,” according to the budget document.

Granholm’s budget calls for $1 billion in revenue-sharing aid, which would preserve the amount of aid currently going to cities, villages, and townships, but would cut the amount of aid that goes to counties until they have exhausted their revenue-sharing reserve funds. The budget estimates that 38 counties, out of the state’s total of 83, would be eligible for aid in 2011.

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