New Michigan revenue surge sets stage for budget debate

Michigan heads into its next budget season with billions more in anticipated revenue to spend along with remaining federal coronavirus relief, setting the stage for debate over where to direct the windfall amid warnings that the stellar growth won’t last.

The state’s revenue estimating conference on Thursday lifted projections for the current fiscal year that runs through Sept. 30 by $1.72 billion to $28.53 billion compared to the previous estimating conference in May. The group raised fiscal 2023 estimates by $1.4 billion to $29.14 billion.

The state’s general fund accounts for nearly $800 million of the current-year uptick and the school aid budget more than $900 million, with the general fund accounting for $600 million of the fiscal 2023 increase. Nearly $30 billion of revenue is anticipated for fiscal 2024 between both accounts.

“Our revenues are in a great position however most of the strength of those revenues is transitory,” said State Treasurer Rachael Eubanks. “We must be thoughtful and deliberative about our policy choices.”

Income tax revenue surged by 17% in fiscal 2021 and sales taxes by 13% after diving in fiscal 2020. Eubanks called uptick “historic” and reflective of upward revisions seen in state tax collections nationally.

Conference participants called the numbers astounding but cautioned against relying on extraordinary growth going forward.

Members are Eubanks, Senate Fiscal Agency Director Kathryn Summers and House Fiscal Agency Director Mary Ann Cleary.

“The swing has been… absolutely unbelievable. I’m very optimistic. I think we are in a very good position and it gives us a lot of things to consider as we go forward,” Gov. Gretchen Whitmer's budget director, Christopher Harkins, said during a question-and-answer session following the conference.

“We are still recovering from a pandemic so these numbers can and will fluctuate as we go forward," he said. Given the status of the pandemic and the likely one-time nature of the revenue surge the money should be spent accordingly, he said.

Harkins said Whitmer’s budget that will be released in the coming weeks will prioritize education, clean water, and jobs. The State of the State address is set for Jan. 26.

In addition to the higher revenues expected in the current and next fiscal year, the state still has about $5.3 billion is available discretionary funds to allocate from its share of the American Rescue Plan Act and another $1.8 billion related to programmatic spending. The state additionally is receiving $563 million for roads and bridges from the federal government’s infrastructure package.

“I think it’s fair to say there is a lot of revenue available but again as we’ve talked about …a lot of it is one time in nature” and need to “align our policy decisions” with that fact, Harkins said.

The conference projects growth rates of between 2% and 3% in fiscal 2025 and 2026.

Modest deposits into the state’s rainy day fund are expected between $32 million and $78 million in both fiscal 2022 and fiscal 2023 and up to $154 million in fiscal 2024.

“Uncertainty from the path of the pandemic remains the largest risk” to projections, the report said. “The transition from expansionary fiscal policy to ‘normal’ fiscal policy” also could impact revenue performance without the flood of relief to prop up the economy.

Labor force participation could remain low and large increases in fiscal 2021 taxable consumer spending also puts the forecast at risk. Supply chain issues and inflation could also drive up state costs which would chip away at the revenue hikes.

Vehicle sales pose some difficulty in predicting.

In 2021, light vehicle sales rose slightly to 14.9 million units. With the current semiconductor shortage expected to ease in 2022, light vehicle sales are forecast to strengthen. Sales are expected to increase to 16.5 million units in 2022, 17.5 million units in 2023 and 17.7 million units in 2024.

Manufacturing revenue in the state, which is home to the traditional Big Three automakers — General Motors, Ford Motor Co., and the American base of Stellantis, the multinational owner of the Chrysler, Jeep and Ram brands — is disproportionately concentrated in motor sales, conference documents say.

“Demand for new vehicles will be high this coming year, which could drive sales much higher than predicted. However, the semiconductor shortage has already limited vehicle production for several months and may continue to depress the number of vehicles for sale,” conference documents caution.

Whitmer is a Democrat and Republicans hold a legislative majority. Republicans agreed that the state should move ahead cautiously on spending with a focus on one-time appropriations such as tax cuts.

“As we look at making long-term investments, we must continue to be wise and guarded with state spending. The last two years have illustrated that change can happen quickly and dramatically, so we need to be as prepared as we can be to meet any future challenges,” Sen. Jim Stamas, R-Midland, who chairs the Senate Appropriations Committee, said in a statement.

The latest projections provide a stark contrast to the gloomy numbers released in 2020 as the pandemic’s toll cut billions in estimated revenues. The projections began to turn the tide a year ago at this time.

Rosier revenue projections last May continued and helped ease tensions between Whitmer and the GOP leaders as they agreed to a budget framework in the spring. Michigan entered fiscal 2022 in October with a $70 billion budget.

The spending plan included an $11.8 billion general fund and $17 billion school aid budget, the two key pieces of the $70 billion package that is up 11.8% from the previous budget.

The budget made a $500 million deposit into the rainy day fund that restores a $350 million draw early in the pandemic. The deposit brings the balance to $1.38 billion.

The May conference raised fiscal 2021 revenue estimates by $2 billion from the previous conference in January 2021 and lifted fiscal 2022 projections by $1.48 billion and fiscal 2023 by $1.8 billion.

The state’s brighter economic prospects drew two rating outlook boosts in June when Fitch Ratings lifted the outlook on its AA rating to positive from stable and S&P Global Ratings raised the outlook on its AA rating to stable from negative. Moody’s Investors Service rates Michigan Aa1 with a stable outlook.

"The outlook revision reflects improved economic prospects, which have generated better-than-budgeted financial results, and which we believe will contribute to stable or improved budget stabilization fund balances over our two-year outlook horizon," said S&P analyst David Hitchcock.

S&P affirmed the state’s AA general obligation rating and AA-minus rating on appropriation debt and Michigan State Building Authority fixed-rate revenue bonds.

The outlook action also impacted transportation fund gas tax and truck line fund bonds that carry AA-plus ratings and Detroit Convention Facility Authority debt rated AA. All have ties to the state’s rating.

S&P had shifted the outlook to negative in July 2020 over concerns that the financial beating from the pandemic would be prolonged given its high concentration in the service and manufacturing sectors with a recovery that would possibly lag other states.

“Revision of the outlook to positive from stable reflects Michigan's success in achieving structurally balanced budgets and Fitch's expectation that the state's improved fiscal and budgetary resilience will be sustained,” Fitch analysts wrote. “The state was able to limit draws on reserves in fiscal 2020 and avoid draws in fiscal 2021 as it worked to contain the pandemic and the related fiscal and economic fallout."