Michigan budget is good news for local governments, schools

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Michigan’s newly minted fiscal 2021 budget lifts some COVID-19 pandemic fiscal clouds for local governments and school districts, Moody’s Investors Service said.

Gov. Gretchen Whitmer last week signed a $63 billion budget for the fiscal year that began Oct. 1 holding funding levels steady for downstream governments that had worried the state would push its pandemic-inflicted revenue wounds on to them.

The state was able to absorb the 2021 revenue blow without deep cuts because the previously projected fiscal 2020 revenue hit wasn’t as bad as forecast in May.

“The spending plan is credit positive for Michigan local governments because it preserves their state funding amid coronavirus-induced revenue difficulties,” Moody’s wrote in its weekly credit outlook. “Preliminary state budget estimates had signaled local government funding cuts.”

State revenue-sharing is typically the second largest funding source after local property taxes for Michigan cities and counties, but state revenue sharing payments are made bimonthly, providing more regular cash flow for local governments than property taxes, which are usually collected once or twice a year.

While the stable funding level is a plus, the state budget doesn’t provide any additional aid, so some local governments hard hit by the pandemic’s especially harsh impact on income and gaming taxes are on their own to manage.

Michigan has 24 cities that impose an income tax, including Detroit, which carries a junk rating and also relies on gambling revenue.

“Cities with income tax exposure will continue to experience decreases in collections through the coronavirus-induced downturn and budgetary challenges will likely require tapping reserves or cutting spending,” Moody’s warned.

For the state’s kindergarten through 12th grade districts, the state budget eases the need for measures to offset what they had anticipated would be a cut for their fiscal year that began July 1. “The stable funding will likely allow districts to avoid draws on reserves, which most did the last time the state made a notable funding cut in 2012,” Moody’s said.

The budget provided a slight boost in a one-time supplemental $95 million per pupil allocation. About 95% of public districts receive a majority of their funding based on their individual per-pupil foundation allowance set annually by the state legislature.

Whitmer, a Democrat, signed the budget late last week after reaching agreement with the legislature’s GOP leadership. The budget, which cuts about $250 million in spending, includes about $45 billion for general operations and $17.7 billion for education. The state’s May revenue estimating conference projected revenues would tumble by $3 billion in fiscal 2020 and $5 billion more in the next two fiscal years as the pandemic socked the state’s economy.

Michigan Gov. Gretchen Whitmer signs the state's fiscal 2021 budget.

The state tapped federal CARES Act funds to cover eligible expenses, cut spending and used $350 million in reserves to restore balance in the current year — leaving about $850 million in the rainy day fund. The state’s CARES allocation totaled $3.9 billion including $3.1 billion for the state and $900 for eligible local governments.

The estimating conference met again in August and reported revised revenue projections to anticipate a drop of $5.106 billion for fiscal 2020, 2021 and 2022 from the formal January estimates, a $3 billion improvement from the May projection. Because the 2020 forecast was improved and the state had already erased the gap, it had fund balances that carried into fiscal 2021 and offset the 2021 hit.

S&P Global Ratings recently moved its outlook on Michigan’s AA rating to negative from stable. "Our negative outlook also reflects difficult fiscal decisions ahead for Michigan as it deliberates the fiscal 2021 budget and beyond," said S&P analyst Ladunni Okolo in the report. Fitch Ratings rates the state AA with a stable outlook. Moody’s Investors Service rates it Aa1 with a stable outlook.

Whitmer also last week announced a $500 million Michigan Clean Water investment program that will provide grants for clean and wastewater projects.

“The MI Clean Water investment will help us rebuild Michigan’s water infrastructure and will prioritize and invest directly into protecting our public health, environment, and economy,” Whitmer said in a statement.

The program is geared toward helping local governments replace lead-laden water service lines, deal with toxic contamination, undersized sewers, and failing septic systems while keeping water rates in check and softening the blow on their budgets. The program will be financed with $290 million in borrowing, a one-time general fund appropriation, and federal funding. The administration of former Gov. Rick Snyder came under fire for its role in allowing a lead contamination crisis in Flint to fester when the city shifted its water supply and failed to adequately treat the water.

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State budgets Budgets State and local finance Coronavirus Michigan