State budget decisions coming on surplus, less revenue

The state is expected to budget many millions in response to lead crisis in Flint, while keeping an eye on expected revenue declines. (Photo courtesy of MLive)

LANSING — Gov. Rick Snyder and lawmakers will have tough choices to make about how to spend a $575 million budget surplus as they start to prepare a spending plan for 2017.

Flint will get some of the extra money, left over from unspent departmental funding and strong income tax collections, as it tries to contain a public health crisis over high levels of lead in the city’s drinking water and a possible outbreak of Legionnaires’ disease. The water trouble started after a state-appointed emergency manager decided to switch water sources from Detroit’s system to the more corrosive Flint River.

The state’s budget director, John Roberts, told reporters last week that a state budget amendment strictly related to Flint will be out within weeks. That amendment may be impacted by President Obama’s announcement on Saturday declaring a federal emergency in Flint and setting aside at least $5 million for immediate assistance.

Costs are still being calculated in Lansing, Roberts said, but the state budget revision is likely to address immediate needs — activation of the state’s emergency operations center, deploying the National Guard, the costs of distributing bottled water — rather than longer-term infrastructure upgrades.

Some of the money will be set aside to cover unexpected costs this fiscal year, which started Oct. 1. The rest could wind up in the 2017 fiscal-year budget Snyder presents to the Legislature in February.

But where?

Roberts said Snyder will disclose his spending priorities with his proposal, adding that the administration prefers to use surplus funds on one-time expenses.

Yet there are some likely choices — infuse the money into road or infrastructure projects, cover high-priced specialty drugs the state buys for Medicaid and incarcerated patients, or perhaps to bulk up the state’s reserves.

“The biggest pressure for the administration and the Legislature to talk about is the specialty drugs,” he said. “That’s something we’ll continue to keep an eye on.”

Revenue projections

General fund revenue is expected to be down this fiscal year before rising again in 2017, according to consensus estimates reached last week by the state’s Treasury Department and economic analysts with the House and Senate.

This year, Michigan’s general fund is expected to have revenue of $9.8 billion, down nearly 2 percent from $10 billion in 2015. The state’s School Aid Fund is expected to have revenue of $12.1 billion, up 3.3 percent from the 2015 fiscal year.

Michigan’s anticipated revenue problem this year is partly due to a drop in sales tax collections, the state said. Even though income tax collections were good, the state took a 1.5 percent sales tax hit last year due to lower gas prices, said David Zin, chief economist with the Senate Fiscal Agency.

Gasoline purchases contributed $603.6 million in sales tax revenue in 2015, almost 27 percent less than the year before.

The state also expects more companies to claim tax credit refunds under the old Michigan Business Tax in 2016 — an issue that caught the state off guard last year when the amount of credits under the now-defunct Michigan Economic Growth Authority program ballooned, prompting a $325 million midyear budget cut.

Snyder’s administration recently negotiated caps on the value of credits that can be claimed by the Detroit 3 automakers, whose rising payroll costs contributed to the problem.

In the 2017 fiscal year, by contrast, general fund revenue is forecast to increase to $10.2 billion, a 3.8 percent increase over 2016. School Aid Fund revenue is expected to grow 2.9 percent in 2017 to $12.5 billion.

By 2018, general fund revenue is forecast to grow 3.8 percent to $10.6 billion, while School Aid Fund revenue is projected to climb 2.8 percent to $12.8 billion.

Economic trends

The reality of these estimates, however, depends on economic trends.

Signs are indicating that the state’s post-recession recovery might be starting to mature, Gabriel Ehrlich, an economist and associate director of the University of Michigan’s Research Seminar in Quantitative Economics, said during last week’s revenue conference.

Job growth, led by manufacturing and especially the U.S. auto industry, is expected to temper in the next few years. UM economists predict job gains in the manufacturing sector will steadily erode until it ultimately sheds positions — to the tune of 2,000 — between 2017 and 2018.

Even domestic auto sales, while continuing to flirt with record highs, are projected to slow down. Automakers tallied nearly 17.5 million light-vehicle sales in the U.S. in 2015. Analysts predict light-vehicle sales will reach 18 million within the next year or two before leveling off.

Michigan should be able to recover 73 percent of the jobs lost during the last decade by 2018, UM economists said.

If it happens as they predict, Michigan will have regained 624,700 jobs between the third quarter of 2009 and the end of 2018 — nearly three quarters of the 858,400 jobs lost between 2000 and 2009.