Michigan finalizes state budget that isn't as tough as first feared

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Michigan’s revised August forecast that softened the near-term COVID-19 blow paved an easier road to balance the fiscal 2021 budget in a deal reached by Gov. Gretchen Whitmer and legislative leaders this week.

Lawmakers approved the budget bills that make up the nearly $63 billion all-fund budget package for the fiscal year beginning Oct. 1 and Whitmer is expected to sign them soon. The budget, which cuts about $250 million in spending, includes about $45 billion for general operations and $17.7 billion for education.

“Saying that the development of the 2021 budget has been difficult would be an understatement,” said Michigan Gov. Gretchen Whitmer.

“Saying that the development of the 2021 budget has been difficult would be an understatement, but I am very proud that we’ve been able to work together with the Legislature to put together a budget that moves Michigan forward,” Whitmer said of the package that avoided deep cuts officials had previously warned would be needed to manage the pandemic’s blows to tax revenue.

The state’s May revenue estimating conference projected revenues would tumble by $3 billion in the current year and $5 billion more in the next two fiscal years as the pandemic socked the state’s economy.

The state tapped federal CARES Act funds to cover eligible expenses, moved to 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 last month and reported good near-term fiscal news.

The state's revised revenue projections anticipated 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.

That smoothed the path for the governor, a Democrat, to reach agreement with the legislature’s GOP majorities to avoid wrangling with competing plans. The budget includes small increases in kindergarten through 12th grade funding and allocates more for Medicaid while holding higher education and local government shared revenue mostly steady.

The ability to carry over the fiscal 2020 fund balances into the next fiscal year along with the lower projected gap and a drop in Medicaid caseloads provided the “crux of how we were able to piece 2021 together,” said Kurt Weiss, spokesman for Budget Director Chris Kolb.

The new budget doesn’t include a draw on reserves which could provide a cushion should revenues tank or don’t improve for 2022.

“While the overall economic and revenue picture has improved since May, it’s important to remember that we are still down $4.2 billion combined for fiscal year 2021 and fiscal year 2022 when compared to the January consensus revenues” so pressures remain for 2022, Weiss said.

The improved picture was due in part to the various forms of federal relief from the CARES Act signed March 27 and other programs. The estimates don’t bank on any new federal relief for lost revenue with hopes dwindling of action before the November election.

Between April and July key economic indicators like payroll jobs declined but income tax withholding actually increased by $130 million due to an “unprecedented” withholding on unemployment benefits. Sales taxes dropped $270 million or 9.6%.

While sales taxes were down from April to July, the numbers were not as bad as expected. Restaurants have recovered slightly since the early stages of the crisis and the spring months have seen strong growth at stores that sell building materials and garden supplies while sales tax from remote sellers accelerated after the pandemic.

“Risks surround how Michigan’s economy, population, and workforce recover from the recession,” the revenue report warned.

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.

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State budgets Coronavirus State of Michigan Michigan Gretchen Whitmer