Should Michigan tap its $1.2B rainy day fund for coronavirus crisis?

Michigan’s “rainy day” Budget Stabilization Fund swelled under former Gov. Rick Snyder. Will Gov. Gretchen Whitmer start spending?

LANSING — Michigan lawmakers are bracing for steep declines in tax revenue but have already approved $150 million in emergency spending to fight the coronavirus that has forced closures and ground the economy to a halt. 

That has prompted talk about tapping the state's "rainy day" Budget Stabilization Fund, a government savings account that has ballooned to nearly $1.2 billion.

Former Gov. Rick Snyder grew the fund and treated it like a sacred cow, but his two-term lieutenant is now suggesting Gov. Gretchen Whitmer’s administration consider opening state reserves to provide relief to businesses and workers impacted by the global pandemic. 

“Clearly, this is what the rainy day fund is for,” said former Lt. Gov. Brian Calley, who now serves as president of the Small Business Association of Michigan.

“There’s a reason the state has taken so many actions to reduce its overall debt load,” he said, referencing steps taken by Snyder administration. “It’s because things go up and down, and when you’re facing down times, it puts you in a better position to deal with them.”

Snyder, an accountant, took pride in building up the Budget Stabilization Fund, growing the balance from $365 million in 2012 to nearly $1.2 billion today. With interest accruing, the fund is expected to reach nearly $1.3 billion by 2022. 

The coronavirus has put unexpected pressures on the Michigan economy and state government, complicating plans to present a fiscal year 2021 budget to Whitmer by July 1, as required under compromise legislation adopted last year after a near shutdown. 

It's not clear if the spread of COVID-19 will force withdrawals from the rainy day fund, but the Whitmer administration is not ruling out the possibility. 

“The budget impact on both the revenue side and expenditure side means we have to look at all options,” said Kurt Weiss, a spokesman for the state Budget Office. 

Michigan would not be the first state to tap its reserves. Maryland lawmakers this month gave Gov. Larry Hogan the authority to use that state's rainy day fund to respond to the public health crisis. 

The pandemic is affecting state budgets across the country, "from pressure on public health systems to revenue losses from canceled events," according to a new analysis from the Pew Charitable Trust. 

"With such a high level of uncertainty, policymakers need to design contingency plans that begin with robust reserves," wrote Jeff Chapman, state fiscal health director for Pew. "If they don’t have such reserves, lawmakers may find that when they return to their capitols next year—or sooner if they need to hold emergency sessions—they will need to identify tax increases and spending cuts."

On Tuesday, Michigan lawmakers finalized their second supplemental spending bill in as many weeks, approving $125 million for coronavirus that includes $50 million in new health care spending, $40 million for other immediate actions and a $35 million deposit into a Coronavirus Response Fund for potential use in the future. 

The relief package follows $25 million in aid that state lawmakers approved last week. But the package didn’t include money for K-12 schools forced to end in-person instruction, which had also been debated. 

“I don’t have all the answers for where our state will go, but I will tell you, we will work deliberately in this body and we will work collaboratively within this body to ensure that we find the answers,” House Speaker Lee Chatfield, R-Levering, said earlier in the day. 

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The approval capped a long and unusual day in Lansing as lawmakers, anticipating a lengthy break because of the virus, rushed to approve dozens of other measures while staff wiped their desks and equipment down with sanitizer during lulls. 

They passed legislation to create a Michigan Reconnect job retraining program proposed by Whitmer more than a year ago.  The House also approved regulations for emotional support animals in apartment buildings, voted to designate a Cass County park as a dark sky preserve and OK'd a new $25 pheasant hunting license. 

A separate spending bill sent to Whitmer’s desk last week authorizes the administration to use $50 million in federal funding and spend $10 million in state revenue on monitoring, laboratory testing, contact tracing, infection control and continuation of critical state government functions.  It set aside $15 million for the Coronavirus Response Fund.

As Bridge Magazine reported, the first spending bill also included $37 million in “enhancement grants” for unrelated pet projects requested by individual lawmakers, which one critical lawmaker decried as unnecessary “pork spending.”

The coronavirus and closures ordered by Whitmer are expected to have a major impact on the Michigan economy. The duration of a downturn likely will depend on the duration of the pandemic, effectiveness of containment measures and how policymakers respond to the crisis. 

In the near term, state sales tax revenue is “going to get hammered” as consumers stop spending on restaurant meals, movie tickets and the like, said Jim Stansell, senior economist at the nonpartisan House Fiscal Agency. 

Michigan’s 6 percent sales tax is a major source of revenue for both the School Aid and general fund that had been projected to generate more than $10.5 billion for the 2020-21 fiscal year. 

Because sales tax reporting is delayed, the state is unlikely to finalize March collections until May, when officials will meet to recalibrate revenue projections for budget purposes.

U.S. Treasury Secretary Steven Mnuchin on Tuesday announced the federal government will postpone the April 15 deadline for most Americans to pay income taxes, giving them up to an additional 90 days.

That may force Michigan to delay collections as well since most filers complete their state and federal income taxes simultaneously, casting additional uncertainty over incoming revenue and the budget process. 

Calley is among a group of business leaders that had urged the Whitmer administration to delay a Friday deadline for small businesses to remit tax collections to the state. 

The Michigan Treasury agreed, announcing Wednesday that it has extended the small business deadline for sales, use and withholding tax payments by a month. 

The department will waive all penalties and interest for 30 days to provide some help to businesses as they navigate their way through this state and national emergency,” Treasurer Rachael Eubanks said in a statement.

Allowing small businesses to delay tax payments should free up cash for owners to pay bills or to continue paying employees during the coronavirus crisis, but it will also depress state cash flows.

That’s part of the reason Calley is open to tapping the rainy day fund, but he’s also urging caution.

“I would encourage policy makers, as they contemplate usage of the rainy day fund, to use it in a way that perpetuates sustainable operations, not in a way that simply prevents tough decisions from being made,” Calley said. 

Michigan Sen. Tom Barrett, R-Charlotte, said earlier Wednesday on social media that lawmakers were working with the administration to determine if the state could suspend business tax payment deadlines.

"The State of Michigan currently has over $1 billion in the rainy day fund for situations like this," he wrote. "It is my hope that a temporary reprieve will give those affected the means to avoid a permanent closure while the federal government works on a relief package that will take longer to arrive."

While $1.2 billion may sound like a lot of money, the rainy day fund amounts to 5 percent of the taxes that pour into the state’s general fund and school aid fund each year. 

As of 2019, Michigan could have run on its rainy day fund alone for 40.2 days, according to Pew. That is well above the state median of 27.9 days, but the reserves could go fast in an emergency.

Between 2000 and 2002, the state “blew through” most of what had been a $1.26 billion rainy day fund, leaving a balance of just $145 million, Stansell recalled.

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Don
Mon, 03/30/2020 - 11:51am

We are in the middle of a Pandemic, exactly what a rainy day fund is for. It should be used to help those displaced from the work force due to this pandemic as well as those who must work through this due to being deemed essential workers. Hazardous duty pay, if you will. Don't rob it and piss away the $.